General Mills can’t follow its big opportunity

Consumer staples companies today face a host of headwinds, including inflation and supply chain issues. Investors are watching the industry closely for companies whose sales are slowing, costs are rising or struggling to push through price increases.

Titan of Industry General Mills (NYSE: GIS), hasn’t escaped these challenges, but a closer look at the company also shows some areas of opportunity, including two products in particular within its stable of brands. Let’s dive into it.

Price increases have helped

When food maker General Mills announced its results for the first quarter of fiscal 2023 (for the period ending August 28), the headline figure was organic sales growth of 10% year over year. other than he realized. It’s pretty impressive, but the real story is just under the surface. The company managed to push through price increases of 15%, which were offset by a 5% drop in volume.

Image source: Getty Images.

This is the normal compromise for a consumer staples company when inflation is on the rise. When a company’s costs rise, it must either accept a contraction in its margins or find a way to protect its margins through cost reduction and price increases. Cutting costs is fairly simple, but raising prices is complicated.

Companies like General Mills must first work with their direct customers, such as grocery stores, and then hope that the changes made will not put off the end customers, ie the consumers. It is normal for price increases to push consumers towards cheaper products. The hope is that the price increases will more than offset the lower volumes.

So far, that is exactly what has happened at General Mills. Overall, the company was able to increase its adjusted gross margin year over year in its first fiscal quarter. The 0.2 percentage point increase may not be huge, but it shows that General Mills is at least somewhat successful in offsetting the inflation hit.

Respond to the request

There are two companies at General Mills that stand out today: Blue Buffalo, which makes pet food, and Totino’s, which sells frozen pizza. None of these billion dollar companies are meeting the demand they are seeing. This means that General Mills is potentially leaving money on the table because customers have no choice but to buy other brands when products from Blue Buffalo and Totino are out of stock. Not giving customers what they want isn’t a big pitfall in the consumer product space. Simply put, General Mills could do even better.

During General Mills’ first quarter 2023 earnings conference call, management noted that it was working to expand capacity in the pet food business, particularly in pet treats. pets and dry food. For Totino’s, the company is also building additional capacity. This company recently became a billion-dollar brand, ranking it number one in the portfolio of General Mills.

Of course, costs will rise before General Mills can capitalize on these investments. And building takes time. So there is no miracle solution here. However, spending money to make money by meeting proven market demand is not a bad thing.

A long-term plus

In all, General Mills has nine companies with annual sales of at least $1 billion. These brands, which include icons such as Cheerios, Betty Crocker and Haagen-Dazs, represent a significant portion of the company’s overall sales. So it’s no small problem that pet food and Totino are struggling to keep up with demand.

But as the company invests in these growing businesses, there is an even greater opportunity for growth. If you are a shareholder, you need to focus on the positive aspects of current production constraints.

10 stocks we like better than General Mills
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*

They just revealed what they think are the ten best stocks investors can buy right now…and General Mills wasn’t one of them! That’s right – they think these 10 stocks are even better buys.

View all 10 stocks

* Portfolio Advisor Returns as of September 30, 2022

Reuben Gregg Brewer holds positions at General Mills. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.