“Investors have been waiting with bated breath and maybe more than a few members of management teams as well” for volumes across the packaged food landscape to recover after falling alongside rising prices in recent years and cutbacks in SNAP spending last March, acknowledged Harmening at Bernstein’s 40th Annual Strategic Decisions Conference yesterday.
And, they likely will need to wait a bit longer as consumers continue to pull back on spending in the face of higher prices due to a 30% increase in power cost inflation over the past three years, he added.
“The consumer is in kind of a tough place,” he explained. “It takes consumers awhile to adjust to pricing. And that is true not only in food, that is true of almost any category. And it is probably a 12-18 month process before consumers really land on ... what is the true price of this going to be,” at which point they should be able to better manage their budgets and may increase spend and the quantity of products they buy.
While volumes are not where Harmening says he would like them to be for General Mills, he said they are headed in the right direction and the company will implement many of the lessons it learned during the pandemic to support consumers and drive sales.
“The way the environment has evolved in the last six months has been kind of the way we thought it would evolve. And would we wish it to evolve faster in terms of volume improvement? Well, of course. But we never really expected a step change from any one event in volume recovery,” he said.
He explained that General Mills' category volumes were down about 3% in the first half of last year, but were down only 1% in the last three months. Likewise, volumes of the company’s own business were down about 4% in the last three months, but this is better than the 7% drop in the back half of last year.
“The business is going in the right direction – a better, [but] not step change pace,” he added.
What is holding volumes back?
Harmening said the delay in the desired volume step change is due in part to lapping the drop off SNAP benefits a year ago, price hikes that went into effect around the same time and a significant increase in private label and small brands returning to the shelf more regularly.
And while he does not expect a step change in volumes in the future, he said he does expect “gradual improvement over time” as “consumers get used to pricing and as they feel economically more sound.”
Is investing in brand building or cutting prices the key to rebuilding volumes?
As the industry waits for consumers to become more comfortable, Harmening said General Mills will continue to reinvest its digital and technology capabilities and brand building, which is up 40% over the last few years, to remind consumers of the value of its brands.
“It is very clear to us that we need to reinvest back in our business for growth. And we plan to do that and [maintain] gross margins at the same time, by reinvesting back, particularly in consumer spending to reestablish and revitalize our brand growth. That is the No. 1 objective that we get into next year,” he said.
He added, “Consumers in this environment, they really do not want to be able to throw away food that they have gone to purchase. And so, they are looking for brands they trust and something that they know their family will eat. So, the important job we have to do as we think about price and value is on the value side – which is one of the benefits we are bringing to consumers.”
With that in mind, he suggested the company will not roll back prices generally. However, he said, it will “adjust prices here or there,” especially when they get “out of line,” and consumers respond by significantly pulling back.
As an example, he noted, General Mills lowered the price on select dog food it makes because consumers let the company know the “value proposition was not right,” and when the price came back under a certain threshold “we saw a significant uptick in volume."