Consumer Goods Giants Forced To Act As Commodity Costs Rise
09 Februar 2011 - 5:57PM
Dow Jones News
Major consumer goods companies are being forced to reassess
their business models in the face of soaring commodity costs as
they attempt to minimize damage to profit margins and scale back
losses.
Whether through raising prices, cutting costs, adjusting product
size or altering ingredient mix, companies such as Unilever PLC
(ULVR.LN), Reckitt Benckiser (RB.LN) and Kraft Foods Inc. (KFT) are
all having to take action as rising input costs show no sign of
abating.
As escalating costs have hit all categories of commodities, no
single company is better placed than another, so their differing
strategies will be under close scrutiny.
"It is similar across the board. Looking at coffee, cocoa, the
oil price--everything has gone up significantly and most are back
at 2008 levels. On commodity prices, they all tend to drag on each
other," Espirito Santo Investment Bank analyst Martin Dolan said
Wednesday.
Dolan said that lack of clarity on strategic hedging makes it
hard to clarify the differing potential impact on individual
companies and their ability to respond to market fluctuations.
"What we don't have a handle on is whether anyone is hedged better
than anyone else. Probably, they are covered in margin terms for
the first half, but after it is difficult to assess," he said.
Unilever PLC (ULVR.LN), the Anglo-Dutch maker of Ben &
Jerry's ice cream, and Reckitt Benckiser (RB.LN), producer of Lysol
disinfectants, are taking on inflationary headwinds by innovating
and streamlining packaging, ramping up savings plans by paring
logistical and purchasing costs, and selectively increasing prices
across favorite food, personal care and household product
brands.
Unilever said last week that it has no plans to reduce the size
of its products, following reports that U.S. rival Kraft Foods Inc.
(KFT) has chosen to combat rising ingredient costs by cutting the
size of its Cadbury Dairy Milk chocolate bar rather than raising
prices.
Unilever predicted a 400 basis point hit to full-year margin due
to escalating commodity costs while U.S. rival Procter & Gamble
(PG) said earlier this month its commodities bill will total $1
billion for the year to the end of June, more than double
expectations.
Analysts warned that Unilever should be mindful of worsening
conditions to come. "With Unilever struggling for margin in the
face of what we think are only the foothills of input cost
inflation, we expect even bigger challenges when it faces the peaks
to come," said Martin Deboo of Investec Securities.
Reckitt Benckiser's more limited exposure to costs related to
food products does not mean it has an easier ride as "its costs
(are linked to) the oil price and oil price derivatives," said
Espirito Santo's Dolan.
Earlier Wednesday, Reckitt Benckiser, the Slough, U.K.-based
maker of Lysol disinfectants, Clearasil spot cream and Finish
dishwasher powder, as well as French's Yellow Mustard, said its
gross margins fell 80 basis points in the fourth quarter on higher
promotional spend and as cost inflation took effect.
"(Costs) are a concern and a challenge for all companies in the
industry. We have key raw materials that are going up. (Costs) will
not be eliminated, but we have programs to neutralize the impact,"
Chief Executive Bart Becht said. These include paring logistics,
sourcing and purchasing costs.
At 1543 GMT, Unilever was flat at 1826 pence, while Reckitt
Beckiser, which underwhelmed investors with its fourth-quarter
results, was down 172 pence, or 5%, at 3273 pence, the biggest
faller on the FTSE 100.
By Simon Zekaria, Dow Jones Newswires; +44 207 842-9410;
simon.zekaria@dowjones.com
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