By Nina Trentmann
General Mills Inc.'s finance chief plans to reduce the food maker's reliance on costly contract manufacturing once pandemic-driven demand for its products tapers off.
The Minneapolis-based company behind brands such as Cheerios, Häagen-Dazs and Betty Crocker ramped up its orders with existing external suppliers when people started stocking up their pantries during the pandemic. General Mills also signed up around 50 new contract manufacturers, having had 200 before the Covid-19 lockdown months, Chief Financial Officer Kofi Bruce said.
Mr. Bruce said he is planning for a time when consumption will normalize, and expects to reduce its orders from contract manufacturers quickly. Such additional production typically costs more and shaves off between 10% to 15% of a product's gross margin, analysts estimate.
"If demand starts to taper off, that is the capacity that we will shed first," Mr. Bruce said, adding that this can be done within weeks. "There is a fair amount of flexibility." Still, General Mills forecasts that consumer demand will remain robust, higher than before the pandemic. "I don't think our new normal is the old normal," Mr. Bruce said.
The company last month reported that net sales increased to $4.5 billion during the quarter ended Feb. 28, up 8% compared with the prior-year period. Net earnings attributable to General Mills rose 31% from the same period last year to $596 million. Its gross margin improved 80 basis points to 34.4% percent of net sales, General Mills said.
Other food and beverage makers will likely take similar steps, said Laurent Grandet, a managing director at Guggenheim Partners, a financial services firm. "They will review demand and costs and the exposure to contract manufacturers," Mr. Grandet said. This will over time help food manufacturers increase their margins, he said.
Mr. Bruce said he is also watching other costs, for example rising commodity prices and other inflation. Prices of grains, packaging materials, energy and transportation have gone up in recent months. Higher freight costs also have a greater impact as General Mills doesn't have fixed rates for the shipments from external suppliers. "That is costing us extra," Mr. Bruce said.
The company could raise prices to offset the increase in inflation, but doesn't have concrete plans to do so, Mr. Bruce said.
Consumers likely will accept slightly higher prices for branded products, as many of them flocked to known brands during the pandemic, Mr. Grandet said. It might however require slightly higher marketing budgets, he said.
Some food and beverage manufacturers dialed up their advertising spending in the second half of 2020 after reducing it during the onset of the pandemic.
General Mills reported advertising and media expenses of $691.8 million for fiscal 2020, up from $601.6 million during the previous fiscal year.
Write to Nina Trentmann at Nina.Trentmann@wsj.com
(END) Dow Jones Newswires