Tags: General Mills | GIS | food | dairy

Higher Prices Keeps General Mills Afloat

By    |   Thursday, 01 Sep 2011 09:41 AM

It’s understandable why investors might get jittery when a company with nearly $15 billion in annual sales says that ingredients and energy costs during the next fiscal year are likely to rise. But if anyone can keep the situation under control, it’s General Mills (GIS).

Home to major food brands such as Green Giant, Betty Crocker, Pillsbury, and Häagen-Dazs, the company is a mainstay in most Americans cupboards with a growing share in international markets. During the fiscal year that ended on May 30, the company saw 7 percent sales growth internationally. That helped boost net sales growth 2 percent in an economy where grocery shoppers are looking for cheaper options.

To keep things afloat, General Mills has had to raise prices on most products in many markets, meaning that it is losing market share in some areas to competitors such as Kellogg (K), Kraft (KFT) and Smucker (SJM). That’s meant a hit in sales volume, and therefore sales growth, but higher prices have steadied the firm steady in some rough seas.

The trick for the year ahead will be holding the line on runaway prices for raw materials. Floods during planting time in the Midwest, droughts and hurricanes through the rest of the growing season, and pressure on global commodity markets mean higher wheat, corn, and sugar prices across the board.

With GIS’s acquisition in May of France’s Yoplait, the second-largest yogurt producer in the world, that’s going to mean an even heavier exposure to milk prices than it already had. But the company is prepared, and it has prepared its investors, so there shouldn’t be any real surprises.

Steam power

Meanwhile, General Mills is investing in projects to help offset energy costs. Earlier in the year the company began producing 90 percent of the steam it needs for Cheerios production in Fridley, Minn. from leftover oat hulls. Doing so reduced the plant’s carbon footprint by 21 percent and provides energy to 17,000 homes per year. It even brought GIS an innovation and creativity award from the Grocery Manufacturers Association.

Despite some hard times ahead, analysts seem pretty confident, with most putting a hold rating on GIS. Argus, UBS, and Goldman Sachs all recently downgraded to hold from buy. General Mills next reports near the end of September.

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It s understandable why investors might get jittery when a company with nearly $15 billion in annual sales says that ingredients and energy costs during the next fiscal year are likely to rise. But if anyone can keep the situation under control, it s General Mills...
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Thursday, 01 Sep 2011 09:41 AM
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