The food industry is undergoing several problems; one of them is the lower consumer demand for certain food products. Also, costs have been increasing at an alarming rate, denting the retailers’ profit line. One such company is General Mills (GIS, Financial), which is having a tough time in controlling its costs and boosting its bottom line. This was clearly evident in its first quarter results, which could not meet analysts’ estimates. The disheartening numbers resulted in a sharp fall in its share price. Let us take a look.
Lackluster numbers
Net sales slipped 5% to $4.27 billion, as compared to the last year. This was mainly because of weakness in the U.S. market. Demand for snacks and especially breakfast food have declined over the previous year’s quarter. The market for cereals is going weak as people switch to other breakfast options such as egg sandwiches and smoothies. Thus, cereal sales dropped 9% over last year.
Further, stiff competition from other store branded foods, which are cheaper than the regular ones led to a drop in the top line. Since people are cost conscious, they opt for cheaper options than paying more for the branded ones.
Also, General Mills’ higher promotional activities also could not attract customers. The company spent a lot on advertising its products and to provide discounts to customers, in order to generate higher sales. However, such efforts fell flat.
In fact, marketing costs added to the increasing cost structure, resulting in a lower bottom line. Earnings for the quarter dropped to $0.61 per share from $0.70 per share in the year ago quarter. Nonetheless, the food retailer has undertaken various cost cutting initiatives to boost its bottom line.
By the divisions
Although the U.S. division was not up to the mark, due to lower demand in the region, the company witnessed growth in the International segment. Sales in the U.S. segment fell 5%, whereas revenue from the International segment surged 6% over last year. Among all the regions, Latin America was one of the brightest spots, wherein its sales jumped 20% during the period.
Even the Yogurt division did well with a 1 % increase in sales, as people switched back to having yogurts after a long time.
However, General Mills’ peers are also undergoing a similar phase of lower demand and higher costs. For instance, Kellogg (K, Financial) is also dependent on cereal sales for most of its revenue. Thus, customers’ decreasing interest in cereals and a shift to newer breakfast options have resulted in declining top line for the company. Also, increasing input costs is eating into its bottom line.
Some efforts made
But General Mills has made a number of strategies to fight the prevailing problems. First, it has launched around 250 new products to attract customers and each of them has been able to draw customer attention. It has also entered into a deal with McDonald’s in order to sell Yoplait yogurts at its outlets. This should help in selling more yogurts to customers.
Further, it has taken up a number of cost-cutting initiatives which is expected to save $100 annually by 2017. Another program is expected to reduce costs by $400 million next year. Thus, the company is set to have a sound bottom line in the future.
Finally
The food retailer has well made strategies up its sleeve. Its new products and higher promotions are expected to benefit in the near future. Also, its cost cutting program looks impressive. Moreover, it has recently announced its plans to acquire Annie’s in order to expand its organic food offerings. These initiatives, coupled with a reaffirmed guidance, make me optimistic about this company.
