General Mills' inability to cut prices eats into sales

(Reuters) - General Mills Inc GIS.N reported its seventh straight decline in quarterly sales on Tuesday as the maker of Cheerios breakfast cereal limited discounting in a bid to boost margins, amid stiff pricing competition.

A box of Cheerios breakfast cereal made by General Mills is shown in this illustration photograph taken in Encinitas, California, U.S. June 27, 2016. REUTERS/Mike Blake/File Photo

The company has been offering fewer discounts on products such as Progresso soups and Pillsbury dough to cut costs, while rivals have been slashing prices to compete for retailers’ shelves.

The price gap with its competitors was one of General Mills’ “biggest challenges” so far this year, Chief Operating Officer Jeff Harmening told analysts on a post-earnings call.

“We haven’t had the promotion mix right and we haven’t been as competitive in pricing as we could have been,” Harmening said.

General Mills said it was still cutting back on discounting in the current quarter, but at a slower rate than it has so far done.

Retailers including Wal-Mart Stores Inc WMT.N, Target Corp TGT.N and Inc AMZN.O are currently embroiled in a price war that has made it crucial for them to stock cheaper products.

“2017 does seem to be developing into a ‘tug-of-war’ between the retailers and food manufacturers, where pressure is mounting on retailers to become sharper on price points,” Bernstein analyst Alexia Howard said on Monday.

The company’s net sales fell 5.2 percent to $3.79 billion in the third quarter ended Feb. 26, hurt by weak demand for its yogurt and baking products. Sales fell short of analysts’ average estimate of $3.82 billion, according to Thomson Reuters I/B/E/S.

General Mills, like its competitors ConAgra Brands Inc CAG.N and Campbell Soup Co CPB.N, has also faced lackluster demand for processed foods as consumer tastes shift toward fresh foods and items seen as healthier.

The company stood by its forecast for organic sales to fall about 4 percent in the year ending May.

Gross margin increased 60 basis points to 34.5 percent of net sales in the quarter.

Net income attributable to General Mills fell to $357.8 million or 61 cents per share, from $361.7 million or 59 cents per share, a year earlier.

Excluding one-time items, the company earned 72 cents per share, beating the average analyst expectation by a cent.

Minneapolis-based General Mills’ shares were down 1 percent at $59.99 in morning trading. They had fallen about 2 percent this year.

Reporting by Richa Naidu and Sruthi Ramakrishnan in Bengaluru; Editing by Sai Sachin Ravikumar