General Mills, Conagra, McCormick and many other CPG companies all reported strong organic net sales gains during their most recently reported quarterly earnings earlier this summer, but almost all this was driven by multiple rounds price increases over the past year that masked unusual declines in volume during the same period.
Data from market research firm Circana shows the trend is not isolated to CPGs. In the 52 weeks ending May 21, compared to the same the previous year, sales by volume of eggs fell 4.7%, milk fell 3.9%, packaged bread was down 3.8% and fresh root vegetables dropped 3.5%. However, dollar sales for each increased alongside prices. For example, dollar sales for eggs rose 41.2% as prices increased 48.2%. And dollar sales for bread increased 8.5% along with a price hike of 12.7%.
However, as price growth begins to slow and lap previous increases in the coming quarters, industry stakeholders – including investment analysts – worry that top line numbers will take a hit, unless companies can sufficiently boost volume.
“We’re all sort of waiting with bated breath for things to start moving in the right direction on the volume side of the equation,” Barclays analyst Andrew Lazar said this week at the bank’s annual Consumer Staples Conference in Boston.
Adding that the declines seem “like a bit of puzzle,” he asked General Mills executives what was behind the volume drop-off and sluggish recovery and what needs to happen to drive volumes up.
General Mills President of North American Jon Nudi attributed the declines in General Mills’ volume to several macro factors: increased consumer mobility, channel shifting, retailer destocking and increased competition on shelf.
What is behind the volume declines?
He explained that while many consumers continue to eat at home more than they did pre-pandemic, they also are on-the-go more now than in recent years, which is cutting into volumes.
“This was the first summer that consumers are back to full mobility since the beginning of the pandemic. I read that 110 million Americans travelled last week, and that one-third of the country. So, obviously, if you’re traveling, you are not eating at home and, obviously, that impacts our business,” he said.
In addition, “we have seen non-commercial foodservice channels grow. So things like hospitality, sporting venues, things like that. So that is part of it,” too, he said.
At the same time, he said, consumers are stretching their grocery budgets by shopping more in value channels, some of which are fast-growing and are not tracked.
“In untracked channels, we’re seeing quite a bit of growth right now. So, as you read our volumes, again, it’s probably not fully recapturing all of our sales,” he said.
Consumers are also saving by destocking their pantries, a practice that many retailers are also mirroring as supply chains become more stable.
“Over the last couple of years, the trend has been for retailers to pull volume down as the focus on working capital and getting their inventories in line. And as supply disruptions have normalized, they don’t need to carry as much inventory,” Nudi said.
He explained while this has impacted General Mills volumes in recent quarters, he believes it will not be material over the course of the year.
“There might be a quarter where we see a little bit more versus a little bit less. But overall, again, we don’t expect inventory to be a story for us as we move forward,” he added.
However, he acknowledged, increased competition on shelf could be a long-term factor to watch.
“On-shelf availability was good last year [for General Mills]. It continues to improve. What is different is that our competitors seek an even bigger improvement, particularly private label. A year ago, some of our private label competitors were 10 points south of where they are today from an on-shelf growth standpoint. So, as they get back healthier and on the shelf, that had an impact on our Q1” volume, he said.
Promotions tick up slightly, but competitors, retailers hold off for the most part
General Mills always anticipated that the first quarter would be most challenging for volumes from a comp and share standpoint as it lapped strong growth in the first quarter of last year.
However, Nudi said, the company expects to see volume accelerate through the back half of the year, especially as consumers return to their routines and head back to school.
With this in mind, he advocated for patience on volume recovery, while CFO Kofi Bruce warned against leaning on promotions to drive up volume.
“Certainly you can drop price and move a little bit of volume, but it doesn’t necessarily mean it grows the category or grows our profit or the retailer,” he said, adding that most stakeholders know this and are looking to avoid a race to the bottom with promotions.
He explained that while promotions are up in frequency in the single digits from a year ago, they are still down 10% from pre-pandemic levels. And he doesn’t see a dramatic shift in the near future.
“We’re in a rational period now,” he said. “It’s going to get more competitive for sure as retailers get back to historic levels of frequency, but I don’t see a race to the bottom. And again, I don’t see competitors doing that and I don’t see retailers pushing us to do that either.”