General Mills profit decline indicates industry-wide trend
in net profit this year, and again the blame goes on raw material
price hikes and fierce competition in the retail sector writes
Anthony Fletcher.
The US-based food giant reported earnings for the first quarter of fiscal 2005 (the 13 weeks up to 29 August) of $183 million, down 19 per cent from $227 million a year earlier. General Mills' stock fell 98 cents, or 2.1 per cent, to close at $45.35 yesterday on the New York Stock Exchange.
According to the UK's Financial Times, analysts had been expecting a drop of 60 cents.
In this respect, General Mills' follows the pattern of other food and beverage companies such as Coca-Cola and Unilever, all of which have warned of lower-than-expected profits in the last few days. It would appear that the manufacturers are being squeezed between very high raw material costs, and retailers who are reluctant to pass on price increases due to intense competition.
In the current climate it is manufacturers that are bearing the costs, and this being reflected in the squeeze on margins of some of the biggest companies in the industry.
Food makers and ingredients firms across the world have been affected by rising prices for basic food commodities. In each of the last four years world grain production has fallen short of consumption, forcing a draw-down of global stocks for wheat, rice, corn and soybeans. Soybean prices recently hit 15-year highs and wheat and corn 7-year highs.
As one of the largest cereal makes in the world, one of the biggest commodities used by General Mills is wheat. The price of wheat has risen as demand for other commodities, especially soyabeans, has soared.
Demand for soyabeans has had a knock-on effect on every other commodity. General Mills has had to pay more for wheat to ensure that farmers don't switch to soyabeans.
The price of corn has also been affected. Refined maize products, sweeteners, starch, and oil are abundant in processed foods such as breakfast cereals, dairy goods, and chewing gum.
The difficulty for manufacturers such as Unilever and General Mills is that they have been unable to pass on these higher costs, and are effectively being squeezed by an increasingly powerful retail sector. The Wal-Mart business model in which the goal of cutting prices relentlessly is the ultimate objective has been copied extensively in both North America and Europe and, from a retail point of view, has been a stunning success.
According to the McKinsey Global Institute, Wal-Mart company was so efficient that four per cent of the growth in the US economy's productivity from 1995 to 1999 was due to Wal-Mart alone. But to achieve all this, suppliers and manufacturers have been squeezed relentlessly to cut wholesale costs.
Both Coca-Cola, which issued a profit warning this week and Unilever, which lowered its year profit growth expectations to under five per cent from a previous estimation of over ten per cent, have reacted to poor financial results by promising boosting marketing spending. This approach has been met with approval from investors.
"The encouraging news is that at least the group (Unilever) has admitted to a requirement of higher investment behind its brands," said Goldman Sachs.
"For too long the market has been suspicious of Unilever's relatively low rate of investment behind its brands, fearing that unrealistic margin ambitions would jeopardise long term growth."
In the short term, General Mills plans to increase list prices on certainproduct lines and increase merchandised price points for certain products. The company has also set a target to capture at least $150 million in supply chain productivity during 2005.
