General Mills Reacts to Inflation in Food Industry

Shares of General Mills Inc. (GIS) plummeted earlier this week, bringing its packaged food industry rivals down with it on fears that higher costs will plague manufacturers already struggling to combat changing consumer preferences and shopping habits.

Trading up about 0.5% at $45.75, shares of General Mills reflect a 23% decline year-to-date (YTD) and 22.4% over the past 12 months compared to the SP 500's 0.3% and 13.5% return over the same respective periods. (See also: Major Trends Disrupting the Food Industry.)

On Wednesday, shares of the Minneapolis-based company crashed by nearly 9% as investors were disappointed with the firm's guidance  on fiscal full-year operating profit. The maker of Cheerios, Yoplait and Progresso expects adjusted earnings per share (EPS) growth to come in flat to 1% for the period, down from its previous forecast of 3% to 4% growth. 

A Vow to Cut Costs, Lift Some Prices

On a call with analysts following the report, General Mills, indicating that it should have spotted the trend of accelerating inflation earlier, said it would combat rising input costs by cutting costs, reconfiguring logistics networks and lifting prices on some of its products. 

The strategy is worrisome to many on the Street who doubt that traditional packaged food makers have any room to wiggle in terms of prices, as grocery wars between players such as Kroger Co. (KR), Walmart Inc. (WMT) and e-commerce giant Amazon.com Inc. (AMZN), with its hundreds of new Whole Foods locations, fight for market share and pressure suppliers to keep prices down. Further adding to concerns about General Mills' ability to pass costs on to consumers are shoppers' ability and willingness to compare prices online, as highlighted by a Wall Street Journal report. While just a few years back, food behemoths may have found it easier to make small price increases and quietly reduce the size of packages, the internet has limited this strategy. 

Moving Into New Growth Segments

While General Mills has touted a swing back to modest growth in organic net sales over the past two quarters, organic net sales guidance for the full fiscal year is still expected to come in flat. Further, as the WSJ notes, the company's multi-billion-dollar acquisition of pet food maker Blue Buffalo Pets Products, a move set to diversify away from waning businesses into new growth segments, could help boost overall sales growth but should weigh on costs due to the expense synergies that come with a new product segment. 

Shares of competitors such as Campbell Soup Co. (CPB) and Kellogg Co. (K) fell 2.2% and 4% on the news on Wednesday. Both shares have rebounded slightly on Thursday with cereal maker Kellogg up 0.9% and Campbell 1.5% higher. (See also: General Mills Buys Blue Buffalo Pet Prods. for $8B.)

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