Will Americans keep buying brands like Cheerios, Progresso and Yoplait if rising commodity costs force General Mills and its rivals to keep raising prices?
Some investors Wednesday showed they aren't willing to stick around and find out.
General Mills profits rose 18 percent from a year ago, in line with estimates, but fears about inflation and US growth prospects prompted a selloff of the company's stock .
"As we look forward to fiscal 2012, we currently anticipate that supply chain inflation will be higher than this year's estimated 4 to 5 percent rate," said Chairman and CEO Ken Powell in a statement before the company's conference call.
But during the call, Powell admitted that higher inflation is a real concern right now and not just in 2012.
"We believe (that) we are going to see generalized food inflation across all segments," he said, adding thatit could actually benefit General Mills."The relative value of food purchased from retail outlets and retail stores will continue to be very compelling for consumers."
The logic is that if all food companies have to deal with it, the playing field remains even. And it will likely make eating out a less attractive option for cash-strapped consumers.
Having said that, there is concern about sales volume. Retail volume, which measures the number of products sold without the impact of price and foreign exchange changes, was basically flat overall, and it was actually down in the cereal category.
Several price increases helped neutralize the cost headwinds, but to keep up with earnings forecasts, price increases likely will need to continue.
General Mills backed its earnings forecast, but the stock's reaction suggests that investors are wary about the company's ability to keep up with rising costs and a possible consumer slowdown.
And Powell's comments may not have helped.
He suggested the American consumer is, perhaps, more fragile than during the financial crisis in 2008, mainly because the economic recovery is still ongoing.
"The consumer is a little bit more stressed," Powell said. "But there's no question that our products continue to be a great value."
That consumer attitude may already be reflected in the results. While sales in Europe and Asia rose nearly 10 percent, U.S. sales, which are almost 70 percent of revenue, fell 1 percent.
The snack business—which includes Nature Valley and Fiber One bars—increased sales by 14 percent. But its cereal and meals divisions posted weak results.
Then, there's the Yoplait acquisition. General Mills has had a long partnership with the yogurt brand, and is poised to take a majority stake in it over the summer.
Several analysts asked whether General Mills was forced to make the move, considering the licensing partnership, which began in 1977, wasn't due to expire until 2012. But the only color the executives provided was that the brand would deliver value to shareholders and that the deal should close sometime around June.
Last quarter, Yoplait sales grew 1 percent.
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