General Mills Inc. is raising prices further in coming months as it grapples with what it says is an unprecedented combination of cost inflation and supply-chain disruptions.
The maker of Cheerios and Betty Crocker cake mix said it is facing escalating costs across its business, from raw materials such as meat and grains to transportation and labor. Executives said the company is experiencing record levels of disruption in its supply chain, from ingredient suppliers to its own manufacturing plants and customers' warehouses.
In response to higher costs and supply-chain challenges, U.S. food companies such as General Mills, Campbell Soup Co. and Conagra Brands Inc. have opted to raise prices throughout the year. That has contributed to higher grocery bills for consumers, with the U.S. Bureau of Labor Statistics reporting in December that prices for all food consumed at home rose 6.4% over the past 12 months, the biggest 12-month increase registered since December 2008.
General Mills has been raising prices for its products through a variety of measures, including list price increases and changing packaging and sizes to charge more per ounce. On Tuesday, the company said further increases will take effect in January, with average unit prices rising steadily over the course of the year.
"The current operating environment is as dynamic and challenging as I've seen in my 27-plus years in the industry," said General Mills Chief Executive Jeff Harmening.
General Mills said elevated costs in the latest period outpaced its efforts to raise prices and boost productivity, resulting in a 6% decline in adjusted operating profit. The company's shares fell 4% to $65.10 as earnings for its fiscal second quarter missed analysts' expectations.
Widespread disruptions at a time when consumer demand is still elevated compared with pre-pandemic levels are hurting General Mills' ability to fully deliver on customer orders. The company said its service levels are in the mid-80% range versus its usual high 90% range, though it said its customers report its performance during the pandemic has been at the top among food makers.
Labor shortages among suppliers have thwarted delivery of key ingredients to General Mills factories, the company said, forcing it to shut down production lines, or procure ingredients from another plant. At other times, ingredients are delivered and products made, but driver shortages mean missing customers' delivery windows, leading to fines and fees.
Jon Nudi, head of General Mills' North America retail business, said: "It's really the short-term supply-chain costs that we're seeing pull in that are really the bogey for us."
In response, executives said they have worked to secure alternative supply sources and boosted the company's inventory levels for certain raw materials.
General Mills said it now expects cost inflation between 8% and 9% in its current fiscal year, up from its previous estimate of between 7% and 8%.
Mr. Nudi said conversations with retailers over price increases aren't any easier than in years prior, and that he expects resistance among consumers to higher prices to tick higher in coming months.
"We spend a lot of time building the case," Mr. Nudi said. "We want to make sure that we price in a way that is right for our consumers as well, so we're balanced on how much pricing we can take, how much is warranted."
General Mills said it expects elevated demand for groceries to continue as consumers continue to spend more time working at home, as well as cooking and baking. Net sales for the quarter ended Nov. 28 rose 6% and the company raised its full-year sales outlook. It now expects organic net sales to rise 4% to 5%, up from previous guidance for a decline of 1% to 3%.
General Mills posted net income for the quarter of $597.2 million, or 97 cents a share, down from $688.4 million, or $1.11 a share, a year earlier. Adjusted earnings of 99 cents a share missed analysts' estimates of $1.05. Sales of $5.02 billion were up from $4.72 billion and ahead of analysts' predictions.