General Mills Q2 2023 Earnings Call Transcript

Participants

Corporate Executives

• Jeff Siemon, Vice President, Investor Relations
• Jeffrey Harmening, Chairman & Chief Executive Officer
• Kofi Bruce, Chief Financial Officer
• Jonathon Nudi, Group President, North America Retail

Analysts

• Andrew Lazar, Barclays PLC
• Ken Goldman, JPMorgan Chase & Co.
• Max Gumport, BNP Paribas
• Robert Moskow, Credit Suisse Group AG
• Michael Lavery, Piper Sandler Companies
• Pamela Kaufman, Morgan Stanley
• Chris Growe, Stifel Nicolaus
• David Palmer, Evercore ISI
• Cody Ross, UBS Group AG

Presentation

[Operator]

Greetings, and welcome to the General Mills' second quarter fiscal 2023 earnings Q&A webcast. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, December 20, 2022.

I would now like to turn the conference over to Jeff Siemon, Vice President of Investor Relations. Please go ahead.

[Jeff Siemon, Vice President, Investor Relations at General Mills]

Thank you, Kelly, and good morning, everyone. Thanks for joining us today for the Q&A session on our Q2 fiscal '23 results.

I hope you all had the time to review the press release, listen to our prepared remarks and view the presentation materials, which are made available this morning on our IR website.

Please do note that in our Q&A session, we may make forward-looking statements that are based on our current views and assumptions. Please refer to this morning's press release for factors that could impact forward-looking statements and for reconciliations of non-GAAP information, which will be discussed on today's call.

I'm here with Jeff Harmening, our Chairman and CEO; Kofi Bruce, our CFO; and Jon Nudi, Group President of our North America Retail segment.

Let's get to the first question, Kelly. So please get us started. Thanks.

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from Andrew Lazar with Barclays. You may proceed with your question.

[Andrew Lazar, Analyst at Barclays]

I think just to kick it off, I guess, I appreciate that capacity constraints can often lead to a gap between shipments and retail takeaway, but obviously, the differential in Pet was far greater than anticipated. So I'm trying to get a sense of why would retailers pull back on orders when capacity is constrained and demand remains so strong and does this pose any risk ultimately to the demand side of the equation? And then I've just got a quick follow-up.

[Jeffrey Harmening, Chairman & Chief Executive Officer at General Mills]

Yes. Sure, Andrew. Thanks for the question. I would say, ironically, in the second quarter, a lot of what occurred in we anticipated, including retail sales and the fact that we were capacity constrained. And as we look ahead, we guided to double-digit growth for the second half of the year, by which I mean starting in Q3, given the strong level of innovation we have and the fact capacity is online, and we've got really good advertising and marketing support.

The one thing that was different than we expected was a drawdown in retail inventory you pointed out to. But we don't -- first of all, most importantly, we don't think that this is a long-term trend. We think it is something to happen this quarter. In terms of the rationale why, I would say, in general, the retailers have carried a little bit less inventory across the board during this time only because with inflation, what you don't want to do is carry a lot of working capital. And so -- but certainly not eight points worth of differential.

The other reason I would say is that because we lack capacity, there are a lot of categories like treats, for example, where normally we would merchandise a lot during this time of year, but we couldn't do that. And so not only do we not -- were we not able to service demand, but we had to pull back on merchandising. And a lot of times, retailers carry more inventory when they're going to merchandise. And so you really see that in our treats business.

And then the third reason is we had a couple of big retail customers and we have a more mass merch orientation that didn't take inventory coming into the season because that warehouses full of other things. It's a little bit different customer set than our North America Retail business, for example. And so that's why we don't see it on the North America retail side. So, those are really the laundry list, if you will, of reasons why inventory was less. But as you can imagine, we've done a very deep dive on inventory levels by customers. And I can tell you, we don't think there's going to be a repeat performance of that nature in the third quarter. In fact, that's why we're comfortable guiding up double-digit sales growth again.

[Andrew Lazar, Analyst at Barclays]

And then, I think you were looking for flattish gross margins or so for the full year, if we were thinking about last quarter's conference call, obviously, with the upside to gross margins in this quarter despite the pet constraints on profitability. Could we see gross margins likely up year-over-year for the full year at this stage?

[Kofi Bruce, Chief Financial Officer at General Mills]

Sure. Andrew, it is Kofi. Thanks for the question. Certainly, as we look at our revised guidance, that's within the range of possibilities. And while we're not giving specific guidance on gross margin, we're very comfortable we're making good progress against our long-term goal of getting our margin back to pre-pandemic levels. We're still about 150 basis points back of there. So, we're going to continue to drive at the things that will help us improve the margin profile as we go forward.

[Operator]

Our next question comes from Ken Goldman with JPMorgan. You may proceed.

[Ken Goldman, Analyst at JPMorgan Chase & Co.]

I wanted to just ask, you seem confident understandably why, why the de-load won't happen again, and thank you for the clear explanation, Jeff, on what the drivers were. I'm just curious, as you progress into your third quarter, it might be a little early to ask because we're still not at Christmas. But are you seeing any refilling of inventory levels by retailers, if you addressed this already, forgive me, but just trying to get a sense of sort of more real-time data as to what's going on?

[Jeffrey Harmening, Chairman & Chief Executive Officer at General Mills]

Yes. I think a couple of points, Ken. Yes, we are early in the quarter. Having said that, there are a couple of things that give us confidence in our forecast for the third quarter, the first I would start with Life Protection Formula, which is our biggest dry business. And we've seen over the last six weeks, we've seen demand really rebound quickly. And that's important because that's the first business that we could bring back up to appropriate service levels. And so that gives us confidence.

In addition to that, we -- I did tell you we were going to grow double digits in the third quarter. And I can report that we're only about three weeks into December. So it's -- but three weeks is not nothing, and I can tell you, we're on track to deliver what we said we're going to do in the third quarter, which again gives us more confidence that we're going to be able to do what we say we're going to do and that we've seen the pipeline of inventory start to refill itself because we're able to service the business better, and it's especially true on treats.

[Jeff Siemon, Vice President, Investor Relations at General Mills]

And Ken, I'd add just to put some numbers on it, this is Jeff Siemon. For Life Protection Formula, the movement in Nielsen measured channels in the last month is up almost 20% and volume has been positive and accelerating recently now that we've gotten service back in the 90s. So just to put some dimensions on it, it's been encouraging to see that business grow basically in line with or even ahead of where the category is growing overall.

[Ken Goldman, Analyst at JPMorgan Chase & Co.]

And then a quick follow-up. Just how do we think about the impact of adding more production from co-manufacturers and maybe re-stepping on the marketing pedal, for your pet food business in the third and fourth quarters, obviously, hopefully, there will be a better volume turnaround, and that will help as well. I'm just trying to get a general sense of, I guess, how to model those margins given all the puts and takes.

[Jeffrey Harmening, Chairman & Chief Executive Officer at General Mills]

So let me start and then Kofi can give you some more thoughts on the margin. I would say how to think about the whole basket. I would say, clearly, we anticipate our reported net sales to improve to double digits in the second half of the year behind all of the activity we talked about. Given that we went -- we've gone externally both in treats and more importantly, in dry dog food for -- to get capacity sooner, that obviously helps our service levels, external capacity doesn't tend to be as profitable. So I wouldn't anticipate our gross margins to rise as proportionately as our sales would rise. But the benefit is that we're getting back, and we're satisfying pet parents sooner.

The other thing I would say is that to the extent that we increase advertising in the third quarter, and I think we have some really nice advertising. We're going to increase that double digits in the third quarter. I wouldn't expect our operating profit margin to rise as fast it should get better, a lot better, but it probably won't rise as fast as the sales growth in the near term, but that's a choice that we're making. And our choice is to get back to growth first and making sure we can get that flywheel going again.

So Kofi, you want to add any color to that?

[Kofi Bruce, Chief Financial Officer at General Mills]

Yes. And that said, we do expect profit growth on our pet business in the back half of fiscal '23. Some of the key things you'll see is we'll expect price/mix to catch up with inflation. We've got another effectively round of pricing coming through at the beginning of calendar year '23. We don't expect the pressure on supply chain to be as acute. So we won't see as much sort of drag from other cost of goods sold. And of course, we're not expecting the inventory depletion and the pressure that and deleverage that comes with that headwind. So as a result, we would expect our second half top line growth should give us still a solid profit growth even if it's slightly behind the top line growth.

[Operator]

Our next question comes from Max Gumport with BNP Paribas. You may proceed.

[Kofi Bruce, Chief Financial Officer at General Mills]

Thanks for the question, and happy holidays. And going -- sticking with pet, you just mentioned another round of pricing you expect to come online in CY '23, I believe, and there's a narrative that the pet food industry in the US could be on the horizon of getting more competitive due to potential supply/demand imbalances. I'm wondering, if you can provide any color on what you're seeing on that front?

[Jeffrey Harmening, Chairman & Chief Executive Officer at General Mills]

Yes, Max, thanks for the question. As we -- when you say more competitive, first of all, I would say that category is always competitive. There are a lot of great competitors in the category. Having said that, I suppose the question comes down to, you're talking about price competitive or something like that. What I would say is that we continue to see the premium end of the category growth. And we see Blue Buffalo is present life protection formula, again, continue to accelerate once we get supply back online. And in general, we see the premium part of the category doing quite well. And it's a category that really lends itself is a fairly inelastic category. And that's because pet parents really, really care about what they feed their pets.

And so I don't anticipate between the nature of the category and the fact that we're still seeing inflation. Our inflation for the company in the back half of the year will be up double digits. And so, it's not as if we're answering into a deflationary environment. We're all still making -- we're all still kind of recovering service levels. So the supply chain, we're not in an overcapacity situation. Supply chains are still have some catching up to do. So because we see inflation, because of the nature of the consumer, because of the nature of the supply chain, even though it's always a competitive category, I wouldn't see it getting more competitive in terms of pricing in the near term only because of all of those factors.

[Max Gumport, Analyst at BNP Paribas]

Great. And one follow-up. So you mentioned that you expect the price elasticities to remain below historical levels during the remainder of FY '23 and also that there particularly benign in North America retail. I'm wondering what you're seeing on this front in your international businesses, particularly European Cereal as we've heard some commentary of a return to normal levels of elasticities in those markets from other industry participants.

[Jeffrey Harmening, Chairman & Chief Executive Officer at General Mills]

Yes. I guess I would say, in general, not commenting on cereal specifically, I guess, but in general in Europe. First of all, we say the economic situation in Europe is more challenging than it is here, particularly driven by energy prices and unemployment, that's a little bit higher than it is in the US. So I would start with that.

The second, I would say, is that elasticities in Europe tend to be a little bit higher than they are in the US normally, and we're seeing that in this environment as well. And that kind of plays itself out across categories. And so, whether it's cereal or bars or ice cream, so we -- so I would say the situation in Europe is a little more challenging than it is here, but it really has to do with a combination of macroeconomic backdrop, combined with elasticities in general, tend to be a little higher. But I would say directionally, we're seeing the same kinds of things there that we see here.

[Operator]

Our next question comes from Robert Moskow with Credit Suisse. You may proceed.

[Robert Moskow, Analyst at Credit Suisse Group]

You mentioned some new pricing actions in pet. Do you expect to take more pricing actions in North America retail as well? The public comments from the grocers sound increasingly concerned about higher pricing and the impact on their consumers. So, I wanted to know if there's any blowback on that. And then also, in the past, there's been unusual de-loading in January by some retailers to protect balance sheets. I think you mentioned it here today. Do you see any risk of that happening as well?

[Jeffrey Harmening, Chairman & Chief Executive Officer at General Mills]

So Rob, I would say as it relates to pricing, I mean, we've announced some pricing on pet. We've announced that to our retail customers already to take effect, I think, February 1. So we've announced that already. In terms of -- but I will also remind you that when we started the year, we said that for most of this fiscal year, we've taken most of the pricing that we need to take in the market already for this fiscal year. So that also remains true. But I will also say in the back half of the year, we're expecting double-digit inflation. So it's not as -- it may decelerate from where it is now, but then decelerating to double digits is not exactly zero.

And even as we look across a longer horizon, I don't want to play Nostradamus with inflation rates. What I will say, though, is even looking out past six months, it's pretty clear to us that we'll still see an inflationary environment. It may or may not be as robust as it is now, but it will still be an inflationary environment, driven quite a bit by wage increases. So it's hard for us to see an environment where we don't see inflation. Even if that inflation -- those inflationary levels may not be exactly what we've experienced over the last six months. And so as we look at our business, we'll continue to look at pricing. But the key is that the pricing has to be justified. And this has always been the case. But it has to be justified based on the cost that we're seeing.

And we find with our retail customers if we can justify the cost that we're seeing and that they know that we're investing in the growth of our categories, which we are through double-digit consumer spending increases, launches like minis and cereal and like the innovation we have in Pillsbury and Blue Buffalo, then the conversations are a lot more productive than otherwise. So that's, I guess, what it was a long-winded answer to a fairly straightforward question on pricing. With regard to retailer inventories, I would say we have seen a little bit less retail inventory because of this inflationary environment. But I would say as we look forward, we've probably seen -- I wouldn't -- I don't think that's a risk to our go forward either on Blue Buffalo or our business in general. So that's kind of some generalities.

Jon Nudi, anything you want to add to that?

[Jonathon Nudi, Group President, North America Retail at General Mills]

No, I think you hit it. I would just say that our SRM capability is something I'd point to is much more sophisticated than it was a few years ago. So as inflation continues to come, we'll leverage the entire toolbox. So it's not just list pricing, it's promotional optimization and mix and pack price architecture. And by leveraging all those tools, we believe that we'll be able to combat inflation as we move forward as well. And in terms of retailers, as Jeff mentioned, I mean, is pricing has never been easy. And even over the last couple of years that we've seen significant inflation. But if we can bring in a strong market basket story, we have had success moving pricing through the market.

[Robert Moskow, Analyst at Credit Suisse Group]

Can I ask a follow-up? In the past, have you been able to go to retailers and show labor inflation internally and use that as a rationale for raising price. It seems like that's something new.

[Jonathon Nudi, Group President, North America Retail at General Mills]

Yes, Rob, I think the scale of the inflation is different today, right? So we're seeing a double-digit inflation. And historically, over the last decade or so, we haven't seen a lot of inflation has been low single digits. So it really hasn't been a conversation because there really hasn't been enough inflation to take significant action. I think with the scale of the inflation we're seeing today and the sophistication, as I mentioned as well, we're able to really break down where we're seeing inflation and some things are starting to moderate. But at the same time, you're seeing things like labor, certainly, sprout remains sticky, and it's in the equation. And we've gotten more sophisticated but our retailers have as well. So again, I think we have really good constructive conversations that are really based on facts at this point.

[Jeff Siemon, Vice President, Investor Relations at General Mills]

Rob, or where we see that impacting us is not so much our own labor, but it's the labor at our suppliers, which translates through their pricing to us. So yes, there's labor inflation in our own facilities, et cetera, but the much bigger aspect of labor is upstream at the supplier base.

[Operator]

Our next question comes from Michael Lavery with Piper Sandler. You may proceed.

[Michael Lavery, Analyst at Piper Sandler Companies]

I just wanted to come back to the elasticities and maybe understand a couple of things better. You say you don't expect to sort of revert to more normal levels over the second half. I guess -- or at least over the year? And is that just because half the year is done? Or what are you seeing something different maybe structurally, what's driving that expectation? And what would you consider a more normal level to be?

[Jeffrey Harmening, Chairman & Chief Executive Officer at General Mills]

I think what drives our assumption, Michael and frankly it's an assumption is that we still see the conditions for inelasticity relative inelasticity, not complete inelasticity, but relative inelasticity in the marketplace. And those conditions are a continuation of inflation. And even if they're not what we experienced in the first half, they're still double digit. The second is supply chain, the supply chain still having supply chain disruptions. Again, our service level is in the high 80s. So that's certainly a lot better than they were a year ago, which were they were in the 70s, but it's certainly not at 98% either. So a continuation of supply chain challenges.

And also, consumers to be under pressure. In fact, it's highly possible consumers will be under more pressure over the next six months. And when that happens, consumers tend to eat at home more rather than eat out more. And so, it's very possible we'll see -- continue to see trading into food eaten at home. So those are the factors that we see and drive our assumptions that there won't be a significant change in elasticities over the next six months. But look, those are the assumptions based on what we see right now.

[Michael Lavery, Analyst at Piper Sandler Companies]

Okay. Great. That's helpful. And I know China is fairly small, but just would love to get an update on maybe what you're seeing there. Obviously, in the second quarter, there were some of the lockdown, I guess, pressure or the -- certainly, food service challenges from those restrictions. As kind of evolving there, any update on the latest of what you're seeing in China and how we should think about that?

[Jeffrey Harmening, Chairman & Chief Executive Officer at General Mills]

Well, there's been a fairly significant policy change by the Chinese government on COVID and zero COVID. And it's going to be a ride, I think, for the next few months because we've had a population that's gone from relatively no COVID to quite a bit of COVID in the marketplace. And so that now people don't lock down as much. But I think when you have as much COVID as they have, we'll see not as many people venturing out, which is very good for our Wanchai Ferry dumpling business, which is half of our business and not as good for our Haagen-Dazs business. And so, I want to think about that business over the next few months, I think it's going to be a wild ride. But I would think that our dumpling business will do quite well. And our Haagen-Dazs business will maybe be a little bit more challenging over the next few months, but they're about equal in size.

[Michael Lavery, Analyst at Piper Sandler Companies]

Since they pivoted on policy, they've conveniently stopped giving information on case counts. But so I guess, yes, it -- is it pretty chaotic there? I mean, I guess we're just in for a few months of some uncertainty, but it sounds like you're positioned while neither stated that pretty well.

[Jeffrey Harmening, Chairman & Chief Executive Officer at General Mills]

I think so. I think in the grand scheme, it won't be material for General Mills, the shift from one to another. It may be a little more material for our Chinese market, but it won't be for the Company in aggregate. In terms of the case counts, I don't know, but they're clearly going up, and they're going up, they're going up rapidly for the moment.

[Operator]

Our next question comes from Pamela Kaufman with Morgan Stanley. You may proceed.

[Pamela Kaufman, Analyst at Morgan Stanley]

I wanted to come back to the Pet segment. And just to revisit what gives you confidence that you can return to double-digit growth in pet in the second half of the year? And can you decompose how you're thinking about the drivers of that growth? I mean, can you grow volumes with the capacity that you've secured? Or do you expect volumes to continue to decline with the growth driven predominantly by the pricing?

[Jeffrey Harmening, Chairman & Chief Executive Officer at General Mills]

So the -- so Pam, what gives me confidence are a combination of factors. And I think the key -- the first key factor is the restoration of our supply chain and of our capacity. And this particularly important in our treats area, and -- but it's also important for dry dog food and cat food as well. But I would start with treats and then go to dry dog and cat food. So the first piece of confidence is that we've -- we have gained enough capacity to actually to be able to grow volumes in the second half of the year on both of those platforms. And so that's the first piece.

The second, though, then it has to be backed up by good marketing. I feel really good about our innovation, really good about what we're doing on the Wilderness brand, I feel good about our change to Tastefuls and cat dry food. I feel very good about our partnerships with our retail customers to get our treats business take started again. We have great products on treats. We've rebranded a lot of what we had bought from Tyson to Blue Buffalo. And so the branding is really good. We've got good programs with our retail customers. So I feel good about our ability to drive our treats business. And then we're going to increase our brand building by double digits. And we've actually already seen a return to volume growth on Life Protection Formula, and we didn't have innovation on that.

We didn't have advertising increases on that. All we had a supply. So I feel like the key is supply and then building on top of that really good innovation, strong in-store execution on treats and good advertising at good levels on top of that, that gives me quite a bit of confidence that we'll be able to turn around the Blue Buffalo business in short order. And as we've seen through this whole time, even though our second quarter was not what we wanted and not what you all expected, the brand remains really good. And we've done a lot of brand -- a lot of brand testing. The brand remains really good. The trends towards humanization are really good. So the tailwinds in the category are still there for us behind a good brand and increased supply and marketing.

[Pamela Kaufman, Analyst at Morgan Stanley]

That's helpful. And you pointed to a lot of innovation that's coming within the Pet segment. Is there anything in particular that prompted your plans to step up innovation or were these initiatives already in the works? And how should we think about the margin impact of the innovation? You mentioned you're adding more meat to Wilderness. How are you planning to offset these costs? And what is the margin profile versus the existing portfolio?

[Jeffrey Harmening, Chairman & Chief Executive Officer at General Mills]

Well, I would say on the innovation front, we've been we've had innovation that we've been willing to put in the marketplace for some time. But obviously, we haven't been able to supply the base business where one or two. So adding innovation on top of that is probably not a good idea. In fact, I think the people listening should take a sign of confidence that we can supply our business better because we're bringing this innovation to the market -- marketplace. And we certainly wouldn't do that if we didn't think we could supply it. That would be my fit point of innovation. So we've had this plan for a while.

When it comes to the product renovations themselves, I mean, Wilderness is a high-priced, high-margin business. And so, to the extent that the pet parents want more meat in the product, which they do, and we're giving that to them, that's to do wonders for our margin profile. In fact, I would tell you the most important thing that we can do to enhance our margins in pet is to grow pounds. And so, to the extent that we have the supply and the news on a high price, high-margin brand, that should be just what the doctor ordered for the margins for the pet business.

[Operator]

Our next question comes from Chris Growe with Stifel. You may proceed.

[Chris Growe, Analyst at Stifel Nicolaus]

Good morning. I want to start first, if I could, with a question on the gross margin, perhaps for Kofi, but just to understand, the sequential change in the gross margin from 1Q. And again, your gross margin was up nicely year-over-year, and that's been quite unique in the industry. I just want to get a sense of any factors that are worth considering that occurred sequentially. And obviously, the one that stands out, I think, would be around Pet. Was that one of the sequential drivers of the softer gross margin absolute performance or any other factors that are worth noting there, if you could, please?

[Kofi Bruce, Chief Financial Officer at General Mills]

Sure, Chris. You have the plot. Certainly, Pet is a contributing factor, but there are also some other structural things around mix of our business as we move from Q1 to Q2. We have a lot more volume from businesses such as soup and baking products, which is, as you know, are heavily merchandised in that seasonal window, so those tend to drive us to a structural step-down in margin as we move from Q1 to Q2. And the other factor, as you rightfully noted, was the acute pressure on Pet margins in this quarter.

[Chris Growe, Analyst at Stifel Nicolaus]

Okay. And I just had one more follow-up on the Pet profit. And you had indicated that the second quarter would be a little softer. You had some costs related to getting third parties and co-manufacturing ready, some inventory and warehousing costs. I guess I just want to get a sense of this second quarter Pet profit performance was unique. You plan on some of that occurring. So are a lot of those costs then sort of embedded in the business? Do you have any ongoing costs related to the co-manufacturing outside just that's a lower margin way to supply your business?

[Kofi Bruce, Chief Financial Officer at General Mills]

Sure. So I would expect some of those costs to be structural for sure as we go forward. We'll have external supply chain costs related to the step-up in volume that we're getting. But not all of those costs will carry forward. Some of these costs were related to disruption and enrollment of additional warehousing capacity in that window. So we would expect in aggregate that the drag from those costs will reduce as we step into Q3 and Q4 for this year, which is part of the reason why we also expect profit growth and profit margin improvement as we step into those quarters.

[Operator]

Our next question comes from David Palmer with Evercore ISI. You may proceed.

[David Palmer, Analyst at Evercore ISI]

Just another angle on that gross margin question. If we look at this quarter, your gross margin is still down maybe 80, 100 basis points from pre-COVID levels, tons of cross currents there, but I'm wondering how you're thinking about that gap and your ability to get back to pre-COVID levels on gross margin? And the things I'm thinking about are you mentioned the supply chain friction costs, but there's going to be maybe be some categories out there where you're going to be pricing to protect profit dollars. And so, there's some math going against you. So I'm wondering if you'll need to see some easing in some key commodities in certain categories. But the other thing I'm also thinking about is you've had some very strong growth in some of your highest margin categories. So I could imagine a scenario that you'd be -- particularly as you're doing as well as you're doing with dough that you could be above past peak as you get past some of these friction costs. So any commentary there would be helpful.

[Kofi Bruce, Chief Financial Officer at General Mills]

Sure, sure. I'll try to do justice to your question. So as you think about the path forward, obviously, you hit on the first thing and sort of one of the precedent conditions will be a return to something that is a much more stable and closer to historical level of supply chain disruptions. We're still probably running about 2x our historic levels well off of the peak of 6x to 7x where we were last year, but still enough to be meaningful and significant. And we would also expect that once we get out of a short supply environment, it will be easier to get at HMM and more fully utilize that lever.

And that we would expect some of the pandemic era costs related to servicing the business in a more stable environment will become easier and lower. So structurally, we view our job to kind of claw back about 150 basis points of margin versus our sort of pre-pandemic level. I think the stable environment from a supply chain standpoint will be one of the first and the most important things. And then second, it will be probably a return to more historic levels of inflation, moderation of inflation, which -- who knows when that's coming. But we're certainly positioning our business to make sure that we're taking the cost out as we as we have the opportunity to do so.

[David Palmer, Analyst at Evercore ISI]

And just a separate follow-up. You talked about investments in your prepared remarks in digital and other capabilities. Could you just give us a sense about what you think the benefits will be from those investments and when and where we'll see that?

[Kofi Bruce, Chief Financial Officer at General Mills]

Sure. So a lot of the focus of our investments in digital and technology to enable our marketing activity and as well our supply chain efficiency. So, we'll see benefits both in gross margins, and we would expect to see that deliver on growth.

And then, I'll ask Jon if he wants to weigh in since we're seeing a lot of investment in our North America retail business.

[Jonathon Nudi, Group President, North America Retail at General Mills]

Yes, absolutely. So as Kofi mentioned, supply chain is a big focus and there's a lot of opportunity for efficiency there. Now on the marketing side is really something we call connected commerce, and it's really the funnel -- the top of the funnel is we generate demand and in a digital world, more and more of our marketing is becoming digital marketing, performance-based marketing. So, we've invested heavily to acquire first-party data and really make sure that we have a strong marketing engagement platform that we can then serve up relevant messaging at scale and really customized for our consumers, we're seeing really incredible returns from that.

Further down the funnel, at the bottom was actually the transaction that we're kind of ambivalent whether it's in-store or online. The margins are the same. We actually over-index from a share standpoint online. But we've developed quite a few digital tools to really understand the digital shelf. We grew up in a world that a bricks-and-mortar world that we understand Nielsen and the drivers of our business, digital is different, right? So we had to develop the dashboards for our team is to really look at the metrics that matter, make sure the digital shelf is correct, make sure that our search metrics where they needed to be. And a lot of that is now digitized. It's on our leaders, computers every day in a dashboard form, and they're making real-time adjustments to the business. So I think you're seeing it actually translate into strong performance in the market today, and will continue to become even more sophisticated as we move forward and continue to invest in this capability.

[Operator]

Our next question comes from Cody Ross with UBS. You may proceed.

[Cody Ross, Analyst at UBS Group]

Can you just clarify or quantify how much the retailer inventory reduction was in Pet this quarter? And then also, I apologize if I missed it, which channels or retailers was the inventory reduction in?

[Jeffrey Harmening, Chairman & Chief Executive Officer at General Mills]

I'll answer the first part of that question for you. The second one, I'll take a polite pass. But the -- on the first part, our retail sales, Cody, were about -- up about 8% during the quarter, and our reported net sales were flat. And so the difference between that 8% points was a reduction in retailer inventory for the variety of reasons that I stated earlier. In terms of which customers and retail, I'm not going to get into a customer-by-customer kind of dissection of that.

[Cody Ross, Analyst at UBS Group]

Understood. Thank you for that. And then you mentioned in your prepared remarks adding capacity in fruit snacks and in pet treats and dog food. Can you just discuss holistically across your business? How much capacity you are adding? And can you walk us through the planning and analysis that is done to determine, which categories that you choose to add more capacity in?

[Jeffrey Harmening, Chairman & Chief Executive Officer at General Mills]

Yes. From a high level, I mean the what I would tell you, the best returns that we can generate as a company are adding capacity on platforms that we already know and that are already growing. And the litmus test for me is that if they're growing before the pandemic and they're growing during the pandemic make the chances they grow after a pandemic are quite a bit higher. And you see that in our Pet food business. You see that in Fruit Snacks. You see that in Totino's, you see that in Old El Paso. And so, we have a variety of businesses. You've seen that in our Cereal business.

And so, we have a variety of businesses that we've seen continued growth, and we've run out of capacity. And frankly, as soon as we've generated capacity, I think Fruit Snacks is a good example. We've added capacity and you will probably need more given the high level of demand. So that's kind of how we look at it. We make sure that all of these growth investments are value enhancing for our shareholders. But to the extent there are growth businesses and they are good margin businesses and all of the above or meet that criteria then we're more than happy to invest in our own internal capacity.

[Jeff Siemon, Vice President, Investor Relations at General Mills]

Okay. I think that's all the time we have for this morning. So Kelly, I think we can go ahead and wrap up. Thanks, everyone, for the time and the good questions, and happy holidays to everyone.

[Operator]

[Operator Closing Remarks]