Consumers snub General Mills price rise
rising threat of private label competition on the cereal market,
making branded players work harder to justify higher prices to
consumers, writes Chris Mercer.
General Mills announced a 2.5 per cent sales rise to $2.7 million for its 2005 third quarter, yet net profits fell from $242,000 to $230,000.
The firm said the drop was largely down to a nine per cent fall in Big G cereal volume "as actions to raise merchandised prices resulted in significant declines in promoted volumes".
Both General Mills and its main rival Kellogg decided to increase their breakfast cereal prices last year after rising raw material and energy costs began putting their margins under pressure.
This move inevitably increased the price gap between private label cereals and these two firms' big brands at a time when private label was driving real growth across an otherwise fairly stagnant North American cereal market, worth around $8 billion.
The big players remain well ahead of the own-label competition in terms of market share - Kellogg (34 per cent), General Mills (32) and Kraft (15) - but value of the private label market still rose from $784.4 million in 2002 to $903.5 million in 2003, according to market research group Datamonitor.
General Mills has suffered worse than Kellogg because its prices have remained consistently higher at around $3.30. Both firms have suffered declining cereal volumes since 1999, yet Kellogg has managed to keep prices below the $3 mark and therefore more easily retain its consumer base.
A large part of the problem also rests on innovation and how a company uses this to justify higher prices to consumers.
General Mills may expect some success from its recent decision to tap consumer health trends by making its whole Big G cereal portfolio with whole grains - widely associated with reducing the risk of heart disease, obesity and certain cancers.
But the firm spent only half as much as Kellogg on research and development per category in the last fiscal year and the company has also suffered poorer sales than Kellogg from new cereal products launched in the last five years, according to financial analyst firm Goldman Sachs.
All this, together with difficulties absorbing costs in an environment where corn and wheat prices have hit seven-year highs, has made General Mills more susceptible to private label pressure.
Nevertheless, General Mills still has reason to be cautiously cheerful after the firm's nine-month profits remained broadly level with the year before, despite restructuring costs of $46 million.
And the firm has announced an encouraging performance from its greater focus on snacks, where third quarter sales rose by seven per cent, driven by new product launches such as Nature Valley Sweet and Salty Nut Granola bars.
Steve Sanger, General Mills chief executive, said the company would also be boosted by the proceeds of its decision to pull out of its Snack Ventures Europe joint venture with PepsiCo.
However, Sanger warned that: "Exactly where we finish the year will depend on the extent of our progress in better balancing net price realisation and unit volumes in our U.S. retail business. We also need to see another quarter of good profit stability from our Bakeries and Foodservice segment."
