US food manufacturers have long been grappling with weak product demand, which adversely impacted their margins. Meanwhile, increased promotions to spur demand and brand building investments to support innovation and new product launches remained a drag. Also, inflation in commodity prices, price competition among retailers, and higher freight charges exacerbated by hurricanes pressured margins.
For instance, General Mills (GIS) has reported sluggish margins over the past several quarters. Other major food manufacturers have fared no differently. Notably, Hershey (HSY), Kellogg (K), and J. M. Smucker (SJM) reported a YoY decline in gross margins during the last reported quarter. Meanwhile, Mondelēz’s (MDLZ) gross margin remained flat.
Amid challenges, a focus on cost and productivity savings has helped these companies partially offset the impact of margin headwinds.
What to expect from General Mills
General Mills had stated that it expects margin headwinds to subside in 2H18, which is likely to boost its margin performance. Plus, higher net price realization and benefits from its global sourcing initiative are expected to drive margins. Also, increased cost savings should support Q3 margins.
However, soft sales, the promotional environment, and increased costs stemming from commodities and freight could weigh on its fiscal 3Q18 margins. The company’s management expects its adjusted operating margin to remain below the prior year’s level in fiscal 2018.