Consumer staples companies are facing a host of headwinds today, including inflation and supply chain snafus. That has investors watching the industry closely for companies with slowing sales, rising costs, or trouble pushing through price hikes.
Industry titan General Mills (GIS -0.29%) 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 in.
Price hikes have helped
When food maker General Mills reported fiscal first-quarter 2023 earnings (for the period ended Aug. 28), the headline number was the 10% year-over-year organic sales growth it achieved. That's pretty impressive, but the real story is just below the surface. The company was able to push through 15% price hikes, which were offset by a 5% decline in volume.
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This is the normal trade-off for a consumer staples company when inflation is on the rise. As a company's costs go up, it either has to accept margin contraction or find a way to protect its margins via cost cutting and price increases. Cost cutting is pretty straightforward, but raising prices is complicated.
Companies like General Mills first have to work with their direct customers, like grocery stores, and then hope any changes made don't put off the end customers -- that is, consumers. It's normal for price hikes to push consumers toward cheaper products. The hope is that the price increases will more than offset the volume decline.
So far, that's exactly what has been happening at General Mills. Overall, the company was able to increase its year-over-year adjusted gross margin in its fiscal first quarter. The 0.2-percentage-point increase may not be huge, but it shows that General Mills is achieving at least some success in offsetting the hit from inflation.
Keeping up with demand
There are two businesses at General Mills that stand out today: Blue Buffalo, which makes pet food, and Totino's, which sells frozen pizza products. Neither of these billion-dollar businesses is keeping up with the demand they're seeing. That means General Mills is potentially leaving money on the table as customers have no choice but to buy other brands when Blue Buffalo and Totino's products are out of stock. Not giving customers what they want is not is big pitfall in the consumer products space. Put simply, General Mills could be doing even better.
During General Mills' fiscal Q1 2023 earnings conference call, management stressed that it's working on expanding capacity in the pet food business, specifically with regard to pet treats and dry food. For Totino's, the company is also building additional capacity. This business recently became a $1 billion brand, ranking it in the top tier of General Mills' portfolio.
Of course, costs will rise before General Mills can see any benefit from these investments. And construction takes time. So there's no quick fix here. However, spending money to make money by meeting demonstrated market demand is hardly a bad thing.
A long-term plus
In all, General Mills has nine businesses that do $1 billion or more in annual sales. These brands, which include icons like Cheerios, Betty Crocker, and Haagen-Dazs, represent a huge portion of the company's overall sales. So it is no small issue that pet food and Totino's are having trouble keeping up with demand.
But as the company invests in these growing businesses, there is an opportunity for even more growth ahead. If you are a shareholder, the positives of the current production constraints are what you should be focusing on.
