How General Mills Is Beating Rivals on Commodity Price Hikes

(MoneyWatch)  I eat a heaping bowl of Cheerios just about every morning, so I bring home a box just about every week. Until lately, I've been faced with a problem ?€" the box was so big I couldn't fit it on the shelf of my cabinet.

That has changed recently, and it's not only more convenient for me, it's good for General Mills, which released earnings this week showing that it is dealing with higher commodity prices a lot better than most of its competitors. Companies such as Unilever and Kellogg have had trouble passing higher costs on to consumers. But in the 10K it filed this week, General Mills says sales of its cereals grew by 3.1 percent, "driven mainly by pricing and package size changes on established cereal brands led by Cheerios varieties and the Fiber One brand."

In other words, it started selling less cereal for the same price.

It really is that simple, despite the company's almost laughably labyrinthine spin. Here's what CEO Ken Powell had to say to (a possibly depressed) Terry Bivens of Bear Stearns during a conference call with analysts on Wednesday.

I don't know if you will recall this, Terry, because it was kind of an inside baseball look at right size, right price, but as part of that right size, right price exercise which involved changing the size and shape of all of our cereal boxes, we also were able as part of that exercise to kind of revise, you know, and improve the way the cereal boxes go through the manufacturing line, the way the cases work, the way they fit on pallets and all of this sort of thing. And so you know there's actually going to be a quite significant productivity gain in the cereal business from moving to those revised right size, right price package configurations.

So those sort of productivity opportunities which were inherent in right size, right price coupled with the fact that our unit sales are up quite nicely this year -- and it's really units that we make in our factories -- is we see many opportunities for driving productivity in the cereal business going forward. I would say we've increased, you know, the size of that pot significantly over the last year and a half as we've focused on it. So we're going to see continued productivity growth in that cereal business, part of it because of the more efficient right size, right price box sizes.

"Right size right price" means "smaller size higher price," of course. That's not to say that General Mills, which also makes Progresso soup, Nature Valley snack bars, Pillsbury frozen dough products and Yoplait yogurt, is relying solely on such slight of hand. Sales were up in all its business units. And unlike its competitors, General Mills has managed to keep costs in check ?€" even the costs of its input commodities, such as wheat. It has done this by smart hedging ?€" locking in prices in the commodity markets.

"They are as well hedged as anybody in the food sector," said Edward Jones analyst Matt Arnold.

(Cheerios image courtesy General Mills)