General Mills the mega manufacturer responsible for your morning bowl of Cheerios, reported a drop in earnings that might make them question if continuing to raise prices is worth it.
CEO of General Mills
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Jeff Harmening acknowledged during the Q4 earnings call earlier this week that consumers responded to higher prices buy making fewer purchases. “As you look at the last 12 weeks, it’s pretty clear that elasticity — volume elasticities have increased,” which may suggest consumer demand is more sensitive to price increases now.
In business and economics, price elasticity refers to the degree to which individuals, consumers, or producers change their demand or the amount supplied in response to price or income changes.
The Cheerios and Betty Crocker giant General Mills felt the impact of this when they reported a decline in profits and volume of sales in the fiscal fourth quarter.
Read: General Mills’ stock slides 5% as sales fall short. North American retailers are reducing inventory.
Richard Moody, chief economist at Regions Financial Corporation, said higher prices are posing an issue for companies, and not just General Mills. “Companies have been raising prices pretty aggressively. We’re seeing that trend definitely subside. Sellers of goods just don’t have as much pricing power as they had for most of last year and the prior year,” he said, in an interview with MarketWatch.
This would be music in the ears of Federal Reserve officials, who are trying to get inflation back down to their 2% target.
St. Louis Fed President James Bullard, during the early days of the fight against inflation in 2022, said inflation would return to the Fed’s target once companies find out that raising prices would be harmful to their bottom lines.
In an interview on Fox Business Network he said, “a lot of CEOs have come on TV and said ‘oh I have lots of pricing power and I can do whatever I want and make a lot of money…but I think some of them are going to get punched in the face here with the fact that consumers have to react” to higher inflation.
Though General Mills’ drop in earnings might not be the punch in the face Bullard warned about last month, their recent report could be a sign that continuing to raise prices could harm businesses going forward.
A statement from the company attributed the drop in earnings to their retail customers reducing inventory. During the pandemic, grocery stores stocked up on Nature Valley Bars and CoCo Puffs due to fears of supply chain complications. General Mills claims retailers are holding less inventory now, so there is less volume for consumers to purchase.
CEO Harmening said the majority of General Mills’ price increases are in the marketplace already. Though conditions can change, “we feel good about what we see right now with our pricing and the inflationary environment that we see,” he said, a possible indication the company might end their price hiking strategy.
Other economists were uncertain about reading too much into lower earnings for companies like General Mills.
Will Compernolle, macro strategist at FHN Financial, said he detected a bit of a culture change due to high grocery inflation over the past two years.
“People are buying less stuff to eat at home. And that is, you know, a kind of mysterious trend in the sense that this is always considered a necessity,” Compernolle said.
In the aftermath of the pandemic, there’s been “a temporary surge in food services spending” as people have chosen to go out to restaurants rather than cook at home, he said.
He said it is unclear how companies like General Mills will respond to consumer spending data. In order to determine demand, they will have to see what “the new normal looks like when the dust settles” and ask the question “are people going to go back to their old composition of food at home versus food away?”
Read: Shopping at Kroger can be up to four times cheaper than eating out, CEO says
Robert Frick, corporate economist with Navy Federal Credit Union, said he thought “consumers are saving more and spending less, perhaps out of caution as most believe a recession is either here or imminent.”
Lower income Americans have become particularly sensitive to price increases, Frick said. He shared his “hunch” is that there is “kind of a drag on spending because lower income Americans are being hurt so badly.”
“It seems likely most of the effects of spending plateauing overall, has to do with that lower third of Americans have have really started to you know, pinch their pennies and run up their debt and they don’t want to run it up any more,” Frick said.
Income and spending data from the government Friday show people have more money to spend, but they are not spending quite as much of it.
U.S. consumer spending slowed in May, rising just 0.1% last month, down from 0.6% growth in consumer spending in the prior month. Instead, consumers saved 4.3% of their disposable income, an increase from April’s 3.4% savings rate.
This post was originally published on Market Watch
