General Mills big 2023, slow Q4
Years of supply chain investments are coinciding with high prices
General Mills ended 2023 with a down fourth quarter. For the year, America's eight largest food company posted approximately $20 billion in sales, a 6 percent increase compared to the previous year. The boost was driven almost entirely by price increases. Most promising, organic sales, excluding divested brands like Food Should Taste Good, Suddenly Salad, and Hamburger, increased 10 percent.
The most recent quarter was a less optimistic picture. Net sales declined 3 percent, amounting to $5 billion. Despite the decrease, operating profit remained steady at $889 million. Factoring in the above impact of divestitures, the year's adjusted operating profit saw an impressive 8 percent rise in constant currency, reaching $3.46 billion. "Fiscal 2023 was a tremendous year for General Mills," CEO Jeff Harmening said in a statement.
Looking ahead, executives at General Mills anticipate a return to normalcy, creating favorable conditions for the company to expand margins through efficiency programs. General Mills started a holistic margin management (HMM) productivity savings before the pandemic, which aimed to reduce production costs and allocate resources towards innovation and marketing.
The pandemic basically threw the execution of this to the wind. I'm sure the company kept laying the groundwork through technology and process change, but the cost savings were limited. Like most consumer goods companies, General Mills struggled to source raw materials and faced higher distribution costs, which eroded margins. Now that the supply chain is normalizing, the company plans to realign these resources to the historical benchmark of 4 percent of the cost of goods sold (COGS).
Four percent may not seem like a lot, but that's huge money for a $20 billion packaged food company. General Mill doesn't disclose COGS, but it does publish Cost of Sales—a reasonable enough proxy—which includes COGS and any indirect costs associated with production. Projecting into 2024, that's potentially a few hundred million dollars in savings. The company has already sold in double-digit price increases—meaning it's potentially facing a more efficient environment with higher shelf prices.
It’s not all roses though. The high prices have driven volume down significantly, and the company reduced guidance for next year. But the efficiency gains could help temper the profitability impact.
Supply chain stabilization:
Customer service levels in the U.S. have reached the low 90% range, a huge upgrade from the low 80% the company saw at the height of the pandemic.
Constraints in fruit snacks, cereal, and hot snacks prevent it from reaching the high 90s.
The company plans to internalize production volume and optimize warehouse and logistics networks.
Promotions and marketing are back:
General Mills increased marketing spend by 35% compared to pre-pandemic levels. Again, this is mostly driven by supply chain normalization and the successful HMM program.
While not providing specific growth figures, the company aims for marketing spend to align with sales growth in the long term.
Expects a slight increase in promotional frequency, coupled with improved display merchandising quality.
Inventory Blowback:
After over-ordering through COVID, retailers have prioritized getting their inventories in check. That means less sales and safety stock for General Mills products. General Mills is currently holding more inventory than normal because of this.
General Mills anticipates better distribution for its new products because retailers are right-sizing their inventories and supply chains. "We haven't had good innovation because some retailers were reluctant to bring it in because their own supply chains were pressured," Harmening said.
Pet Food update:
Supply chain constraints hampered Blue Buffalo's growth, but service levels are back in the 90s.
The dry pet food business improved, driven by effective advertising and double-digit growth in Life Protection Formula. However, the wet pet food segment lagged because it is a premium food product for a dog.
They said it:
CEO Jeff Harmening on the relationship between supply chain pressure, and innovation.
The reason is not because we haven't had good innovation is because some retailers were reluctant to bring it in because their own supply chains were pressured, our own supply chains were pressured. And so as I look at the I like our new product innovation network, we have to come. But I also think we're going to get better distribution on innovation we've had over the last couple of years where we didn't get full distribution even though it may have warranted given the quality of the innovation that we've had. And so I think that will be a driver.**
The same with distribution, and I look to our pet business, especially on our distribution levels of treats and wet because we haven't been able to supply the business. And so if you can't supply the business. That means that you're going to lack some distribution. You may have some distribution gaps. And so distribution growth across a couple of our key categories in North America Retail as well as Pet is certainly going to be an opportunity for us.