General Mills misses profit expectations as commodity prices rise

By Helen Glaberson

- Last updated on GMT

Related tags Fiscal year Generally accepted accounting principles General mills

Cereal and snack manufacturer General Mills posted lower than expected Q2 results yesterday as commodity prices increase and product prices become more competitive.

The company reported that its quarterly revenue was up by one per cent, rising to $4.07bn. The figure fell short of average analyst projects of $4.1bn.

Chairman and CEO Ken Powell said sales in the first half of 2011 were hurt by high levels of price promotion by food manufacturers and retailers.

In addition to cut product prices, the packaged food industry has also struggled to match up to last year’s earnings due to hikes in the cost of wheat, cocoa and milk.

Ildiko Szalai, a company food analyst for Euromonitor told that the​ company claims the drop in gross margin compares to strong prior year results, which reflects higher commodity costs.

"Given General Mills chief packaged food category is bakery products; this activity is composed largely of breakfast cereal sales, therefore severely impacted by wheat commodity prices,"​ she said.

Snack and cereal segment

General Mills operating profit in Bakeries and Foodservice reporting segment has dropped a near three per cent for the first six months of trading in the company’s 2011 financial year.

Big G cereals, the biggest segment within General Mill’s retail division posted sales that were two per cent less than the previous year.

Baking Products net sales declined one percent from last year and snack sales were also three per cent below year ago levels.

Net sales for the Small Planet Foods natural and organic business were up 15 percent, led by Cascadian Farm cereals and frozen vegetables, and Larabar fruit and nut energy bars.

Alexia Howard, an analyst at Sanford C. Bernstein said in a report to clients that the cereal category has remained sluggish in recent months, but that General Mills was the relative winner.

Increasing wheat prices

General Mills recently announced it was increasing the price of 'selected' product lines to reflect the impact of higher commodity costs on production and the broader supply chain.

According to reports, the company is expecting input cost increases of four to five per cent in the current fiscal year, compared with a three percent decline in the previous year.

Industry analyst Euromonitor said rising wheat and corn prices over the last year may prompt similar moves from other bakery manufacturers, particularly those with limited geographical reach beyond the US.

Global wheat prices have risen by 28 per cent over the last year (November 2009-October 2010) and have been rising steadily since August 2010 when widespread wildfires in Russia prompted a self-imposed ban on wheat exports from the country.

The move sent shockwaves through global commodity markets, with traders fearing scarcity of supply and an immediate escalation in commodity prices resulted.

More recently, price rises have increased due to poor prospects for wheat output this year in Canada.

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