From General Mills most recent quarterly update this week, we learned the company is planning more promotions to drive volume growth and that the pet specialty channel has found a floor that it is starting to build off from.
The first point is encouraging for the consumer and retail in general (all of retail, including mass, discount, dollar, etc.), but we need to see everyday prices lower in packaged food for overall consumer confidence in the economy to improve and for a strong rebound in general merchandise sales for those retailers that serve the less affluent. For perspective, what consumers see in the grocery store from General Mills is its North American Retail division (which includes Cheerios, Progresso, Pillsbury, and other brands). For the March-May quarter, volume for that division declined -6% and pricing was down -1% (realized prices were lower due to increased targeted promotions, not lower everyday prices). Compared to 2019, volume is down -9%, where revenue is up +$2.7B (+28%), profits are up +$1.2B, and margin up +220 basis points. (No typo here, volume down -9%, but profits up +$1.2B). While some of that stems from portfolio changes made by General Mills--eliminating lower-margin SKUs and brands and building high-margin ones--the vast majority of the change is organic. As overall calorie consumption is not down 9%, the decline is the result of consumers: (1) channel shifting to Aldi, Grocery Outlet, and other value-oriented chains, where they purchase those brands/non-branded goods; (2) choosing private label products at grocery; and (3) changing to non-center store scratch cooking like bacon & eggs versus ready-to-eat meals like Cheerios. General Mills understands the need to build back volume, but management’s comments on the call was to hold price, add more marketing, and give consumers time to return to its brands, and not to lower everyday price.
On the pet category, General Mills’ Blue Buffalo brand pricing was down -1% (the first year-over-year quarterly decline since 2021) and volume was down -7%. Compared to 2019, price is +28% and volume is +16%. As we’ve written in the past, 2020 brought a large wave of pet adoption; however, most of that was by less-affluent households and when those households had to return to work (not in home offices) and find ways to afford spending on fun and essentials (that were highly inflationary), those pets were “second-handed.” In other words, there was a pandemic "super cycle" in pet, but that introduced fragility into the industry as a wave of households traded out of the pet specialty channel (PetSmart, Petco, etc.) and into the lower priced mass and club channels--as well as Temu (and the like)--for their pet needs. As such, the super cycle was deleterious to both the pet retail industry and the pet food industry. As such, it was encouraging to hear General Mills CEO Jeff Harmening describe the specialty channel as “less bad” and it’s even nicer to see foot traffic now increasing for the largest pet specialty retailers, as shown in the figure below. A lot of the visits will be for pet services (grooming and vet care), but those are not up to the level that it’s driving Petco up +2% year-over-year, driving that, is fill-in trips to refill dog and cat bowls.
From McCormick, we learned that the company is now lowering prices to drive volume growth. Their consumer segment--which includes products purchased at grocery stores--produced its first return to volume growth at +0.3% since 2021, which put volume 1.1% above, pre-pandemic levels. (Yes, 1.1% is not a typo.) For the fiscal year ending November 2024, volume is likely to be down low-single-digits compared to to 2019; revenue on the other hand will be higher by $440M (+13%) and profits will increase by $60M on all the pricing taken. (McCormick was far less aggressive on pricing than others in the industry, which raised prices by more than 30%; McCormick’s figure is +17%, or less than half the industry.) On the consumer segment, McCormick CEO Brendan Foley said, “Volumes on the retail side, particularly in the center of store, remained soft. Consumers continue to buy just for what they need and make more frequent trips to the store. On the other hand, they are increasingly shopping the perimeter and continuing to cook at home...We do see right now overall consumers shopping smaller sizes than maybe we did this time last year where we saw a lot of large-size purchasing going on...Recipe mix is a great value, especially when you just want to buy for a specific meal. It's a great convenience. There's no waste. It's a great way to explore new flavors at low risk, so you don't have to invest in, let's say, a whole bottle.” (These are all trends that we’ve written about this year, but it's nice to see other viewpoints affirm those consumer insights.)
McCormick also sells its flavoring to the nation's restaurants, both large chains and mom & pops. On that business division, results worsened with Foley stating, “Inflation in the foodservice channel is leading to softness in food away-from-home consumption and impacting restaurant traffic, particularly with QSRs across many of our regions." This is another topic we've discussed this year, although QSR visitation trends are starting to improve amid the Restaurant Value Wars of 2024.
In terms of what’s hot with consumers at the moment, Foley shared, “In 2024, we are launching nearly four times more grilling rubs and seasonings compared to 2023. Importantly, our grilling season, which kicked off at the end of the second quarter, is off to a great start. In addition to our grilling blends and rubs, we are excited about early results from Frank's Red Hot Dip'n Sauces and popular flavors in the squeeze bottle format that we launched this year. We are energized for the grilling season and expect our flame and flavor marketing campaign that launched in the second quarter to drive incremental consumer demand. Our Cholula Salsas and recipe mixes that launched in 2023 are driving new buyers to the category and have continued to exceed our expectations since launch. Cholula Salsas are driving strong incremental category growth, with their high repeat buy rates in our Cholula Recipe Mixes, our top recipe mix brand after just one year in the market. They are driving the second highest unit growth within the category.”
