James Hamilton posted a quick study of the impact of oil prices on car sales in “Oil prices and the U.S. economy” in EconBrowser. Hamilton demonstrates from recent history that once the economy has made an adjustment to high oil prices, a subsequent price run will not impact the economy until it reaches new highs. In other words, oil prices must force the economy (consumers and businesses) to make new adjustments before a significantly negative impact occurs. Auto sales already greatly favor more fuel efficient vehicles, thus blunting the traditional drag on the auto sector as consumers shun bigger, gas guzzlers.
Oil’s relative share of consumer expenditures is another factor to consider. Amazingly, energy’s overall share of consumption has declined as gas prices have soared in recent months.
For more detail and data see “Oil prices and the U.S. economy“
Whirlpool (WHR) reported fourth quarter and full-year earnings February 1, 2012. The company reported on its struggles with higher material costs, and its successful implementation of price increases to help offset these costs and improve margins:
“…we did have higher material and oil-related cost which came in at approximately $450 million and that significantly impacted our results last year…we still see this year 2012 estimated raw material inflation to be a headwind, and we’re forecasting those increases to be between $300 million and $350 million, but we expect to more than offset these costs with our other normal strong productivity activities.
All previously announced price increases are fully implemented, including the most recent 6% to 7% price increase effective January 1, 2012. As you know, these increases are necessary to mitigate higher material costs. As a result of a cost base price increases, our margins have substantially improved both sequentially and year-over-year. And we are well-positioned to expand margins in 2012…
…We are focused on executing the margin expansion actions already in place. We expect to benefit from: one, our previously announced price increases in every region of the world…
…we’re planning for a flat to a slight improvement in demand. We will have raw material inflation in the range we talked about, but we expect to fully mitigate those increases through our productivity.” (Seeking Alpha transcripts)
These actions both remind us of the real inflationary pressures facing industrial/durable goods companies, AND the pricing power that some of these companies have, particularly in the U.S. Whirlpool’s price increases contributed much more to margins in North America than they did in the rest of the world as the company took a “strong stance” on pricing in North America. Prices were increased in Europe in the third quarter of last year.
Management’s discussion about the difference in price elasticities in the U.S. versus the rest of the world was particularly illuminating. Management claimed that “…the [U.S.] consumer who’s in the market ever 10 years doesn’t really have a preconceived notion about what that value feature content is” whereas in consumers in emerging markets are making first-time purchases with definitive affordability thresholds. Thus, although Whirlpool saw the need to raise prices as much in these markets as in North America, the resulting elasticities prevented them from raising prices as much as in North America.
Whirlpool does not discuss future pricing, but I am expecting more price increases if the economy continues to improve, especially in the U.S.
CNNMoney.com is reporting that Wal-Mart will offer a price guarantee this holiday season. From Nov. 1 through Dec. 25, 2011, Wal-Mart will refund the difference if you find a lower-priced product at a competitor’s store in your local market. This program will help drive down the cost of holiday shopping for consumers and likely erase much of any pricing advantage that Wal-Mart’s competitors manage to find. Interestingly, it could also encourage retailers to push their own prices up, closer to Wal-Mart’s, given the effective lack of price advantage.
Note well that I cannot think of a single retailer who consistently charges lower prices than Wal-Mart on anything. So maybe this whole thing is more a marketing gimmick than anything else?
For more details see “Wal-Mart introduces Christmas price guarantee program.”
DemandTec (DMAN) sells software to help companies optimize the pricing of their products. The company specializes in the retail space.
On a day in which commodity prices and stocks took another plunge, DemandTec released the results of a poll of 16,000 leading retail and consumer products users that asked about pricing expectations:
“Nearly 50 percent of respondents agree that shelf prices will rise moderately as both retailers and manufacturers absorb some margin compression in the coming six months.”
Although it is not 100% clear, the poll seemed to focus on shelf prices of food products. A lot of the margin compression will be coming from commodity prices.
Whirlpool (WHR) reported earnings yesterday and indicated that the company is sticking by its full-year guidance despite increasing cost pressures. WHR has been able to pass some of these costs to its customers through price increases:
“Despite a substantial increase in material and oil-related cost inflation, we are maintaining our full year earnings and cash flow outlook…We have implemented cost-based price increases in many regions around the world, continue to introduce a strong cadence of innovative new products and remain focused on accelerating our cost reduction and productivity improvements to manage higher material cost inflation.”
Disclosure: author owns WHR
In a refrain similar to Kimberly-Clark’s lamentations, Proctor & Gamble (PG) announced an increase in prices in some paper-based products in response to rising pulp, oil, and gasoline costs. In “P&G raising some prices for retailers“:
“P&G said list prices for Pampers are up 7 percent on average, Pampers wipes up 3 percent, and Charmin and Bounty products up 5 percent. P&G said Luvs, its lower-priced diaper brand, remains unchanged.”
Disclosure: author is long PG
A little over a month ago, Kimberly Clark (KMB) announced it was raiding North American nurseries and bathrooms with price increases:
“[The] baby and child care and consumer tissue businesses are notifying customers of plans to raise prices in North America during the second and third quarters of 2011…
…Net selling prices in the U.S. and Canada for Huggies baby wipes and diapers, Pull-Ups training pants and GoodNites youth pants will increase on average between 3 and 7 percent, with implementation timing ranging from June 19, 2011 to August 17, 2011. In addition, net selling prices in the U.S. for Cottonelle and Scott 1000 bathroom tissue will increase approximately 7 percent, effective June 19, 2011. The price changes vary by brand and pack size.”
KMB blamed, you guessed it, the rising costs of commodities and raw materials. In today’s earnings release, KMB increased its inflation expectations:
“Inflation in key cost inputs of $450 to $550 million compared to the previous assumption of $200 to $250 million. This reflects estimated average market pricing for benchmark northern softwood pulp of $1,000 to $1,020 per metric ton and average oil prices of $100 to $105 per barrel for the year. The increased inflation assumption is primarily due to higher costs for virgin pulp, polymer resin and most other oil-based materials. “
From the earnings conference call (following quotes from Seeking Alpha transcripts):
“Clearly, the environment is much more challenging since we talked to you last at the beginning of this year. Market pulp costs did not fall in the first quarter like we and most others had assumed. Instead, costs rose in March, and over the next few months, are likely to hit or potentially even exceed the peak levels that occurred last summer.
In addition, as we all know, oil prices have risen rapidly to over $100 a barrel, this is well above what we planned for and it’s caused prices for many of our oil-based cost inputs to increase considerably. For example, polymer costs are up about 20% both year-over-year and sequentially from the fourth quarter of 2010. Similarly, superabsorbent costs are up 15%, and costs for both of these key materials are expected to increase further in the near term.”
During the earnings conference call, KMB made it clear that they are taking a multi-faceted approach to addressing their inflation problem:
“We’re responding to the significant pickup in cost inflation in three primary ways: First, we’re raising selling prices across a number of our businesses; second, we’re accelerating or implementing additional FORCE cost savings programs; and third, we’re focused on managing our overhead spending aggressively.”
In addition to March’s announced price hikes, KMB will be taking pricing actions worldwide:
“We’re also in the process of raising prices in many areas of K-C International, particularly in Latin America.
And our B2B businesses are also taking pricing action, including a North American K-C Professional price increase that we announced last week. So as a result, we now anticipate that price and mix improvements will deliver 1 to 2 points of revenue growth in 2011. That’s up from our original assumption of about 1%.”
It seems there more and more upward pricing pressures are surfacing for the Federal Reserve to dismiss. Investors did not dismiss the bad news, sending KMB down 2.7% on the day.
When the nation’s low-cost leader in retail warns about rising prices, people listen. Late last night, USA Today interviewed Wal-Mart (WMT) CEO Bill Simon in an article titled “Wal-Mart CEO Bill Simon expects inflation.” Nothing in the article comes as a surprise to those of us paying attention to inflation but having Simon issue this warning gives a lot more credence to the assessment that inflation, and inflation expectations, are slowly but surely coming unhinged.
The article includes a video in which Simon notes that inflation is “starting to creep into the business.” He started seeing inflation pressures late last year in items like dairy and is now seeing it in transportation-related goods like paper. (I assume he meant goods that carry heavy transportation costs). The article also features some cautionary commentary from a retail analyst.
Key quote from Simon in the article:
“…Inflation is ‘going to be serious…We’re seeing cost increases starting to come through at a pretty rapid rate.'”
NPR blog is hosting an informal poll on inflation expectations here: “Wal-Mart CEO Sees Inflation Ahead; Do You?”
The NY Times printed a mostly anecdotal article about companies hiding price increases in smaller packages in “Food Inflation Kept Hidden in Smaller Bags” (reprinted by CNBC). The article chronicles one shopper’s slow awakening to the shrinking packages all around her as she tries to stretch the family budget to keep the same food on the table. Examples of shrinking products include a can of Chicken of the Sea albacore tuna, Doritos, Tostitos, Fritos, “fresh stack” packages of Nabisco Premium saltines and Honey Maid graham crackers, Procter & Gamble “Future Friendly” products, and the unwrapped Reese’s Minis.
We have printed similar stories of companies using shrunken packages as a method for passing on stealth price increases (see category “Disguised Inflation“):
- November 28, 2009: “Food packages are shrinking, but prices remain the same“
- January 25, 2010: “Stealth inflation“
- November 11, 2010: “Inflation hidden in higher unit costs“
In “Philips Warns On TV Business As Price Pressures Remain“, the Wall Street Journal reports that Philips (PHG) observed a 15% decline in television prices form the fourth quarter of last year to the first quarter of this year. PHG is under pressure to turn a profit in televisions as the company has lost money in this division for several years.
The troubles at PHG confirm the poor performance retailers like Best Buy (BBY) saw in televisions. From BBY’s last earnings report (March 24, 2011):
“The Domestic segment experienced a low double-digit decline in entertainment hardware and software, as well as TVs, as current consumer demand in new television technologies had not yet emerged as a significant revenue driver…”
Reuters reports that Proctor & Gamble Company (PG) and Unliever (UL) are hiking the price of soap and detergent in China by 15% (see here). This action has apparently attracted the attention of government authorities who have promised to “investigate.”
The Institute for Fiscal Studies (IFS) released a study on March 21 noting that the recession and recovery period in the United Kingdom from 2008-2011 marked “…the first time that incomes have fallen over a three-year period since the three years from 1990 to 1993, and the biggest three year drop in real living standards since 1980-83.” Real household incomes fell a total of 1.6% over this time whereas in “normal” periods the typical UK household experiences an average income gain of 1.6% per year.
Inflation racing ahead of wage gains was cited as one of the most important factor contributing to this historic decline. Lower interest rates for savings had a large impact on the standard of living for retirees.
Deflation on earning power and inflation in the cost of household purchases has placed a double squeeze on UK residents. In this context it is interesting to note Bank of England governor Mervyn King lamentations during last month’s conference call to defended monetary policy in the latest Inflation Report. King partially defended the on-going accomodative monetary policy in the face of inflation stubbornly above the inflation target of 2%. King asserted that the recession was going to reduce the standard of living either through deflation of wages (impact from the economy) or the increased prices of purchased goods (impact from monetary policy). In his view, this adjustment appears inevitable. However, this recent study by the IFS seems to suggest that in trying to choose the “least bad” option, the UK may end up stuck swallowing both bad options.
Inflation may be scheduling an autumn arrival in the U.S. The New York Times reports in “Companies Raise Prices as Commodity Costs Jump” that businesses across the economy are chomping at the bit to raise prices soon:
“A package of Oscar Mayer cold cuts. A pair of Nine West boots. A Whirlpool washing machine.
By the fall, people will most likely be paying more for each of them, as rising prices hit most consumer goods, say retailers, food companies and manufacturers of consumer products…
…Many big companies, including Kraft, Polo Ralph Lauren and Hanes, say they cannot hold off any longer and must raise prices to protect some profits.”
While such talk has come later in the economic cycle than we expected, its arrival should be taken seriously. The NYT article quotes analysts who take the other side of the story, for example claiming that consumers will not pay the higher prices. However, with corporate profits at historic levels despite extremely high unemployment, we should not underestimate the inflationary pressures that could stick once companies feel compelled to finally pass on their higher costs to consumers.
It is almost commonplace now for companies to address inflationary issues in their earnings reports. With its products made of steel, Whirlpool (WHR) is certainly no exception.
In its earnings report this morning, Whirlpool had the following to say about its outlook for inflation, and its impact on the company:
“In 2011, we expect to expand our operating margins despite significant global inflation and generate good levels of free cash flow and further strengthen our financial position…
…Raw material inflation is driving costs higher and we expect to mitigate these costs with improvements in cost productivity, innovation and recently announced price increases.”
Expect to pay more for that kitchen upgrade in the near future…
(Author owns WHR)
On Thursday, CNBC aired a segment on restaurant stocks, discussing the prospects for profits given rising food costs.
The December statistics from the Labor Department demonstrate the growing pressures on costs for eating establishments. The December PPI was up 1.1%. Food prices were up 0.8% primarily due to a 22.8% price hike in fresh and dry vegetables and an increase of 15.4% in the price of fresh fruits and melons.
Nation’s Restaurant News conducted a survey of restaurant operators that found that food prices will be a big issue in 2011:
- 60% expect to raise menu prices in 2011
- 5% expect to cut prices in 2011
- 39% say higher commodity costs would pose biggest challenge
The guests on the CNBC segment were a bit split on their assessments of the restaurant industry’s prospects for 2011.
Dan Popowics, Fifth Third Asset Management
- Operators will be reluctant to raise prices will look to rent or labor and hedging
- Menu prices are a last resort
Peter Sorrentino, Huntington Asset Advisors
- If operators don’t get squeezed then consumers will get squeezed
- There is not much additional room to maneuver
- Cost-cutting story is not going to work
Either way, the increasing “agflation” around the world looks ready to pinch U.S. consumers, businesses, and/or investors.
Bloomberg reports that Wal-Mart “…raised prices on hundreds of toys this month..” While these price hikes come on the heels of numerous discounts, it is still a curious development given Target and Toy R Us have been taking share from Wal-Mart in the competitive market for toys.
We will be watching whether these price hikes can be sustained through the remainder of the holiday season.
Netflix (NFLX) is increasing the price it charges for its 1-DVD and 2-DVDs out at a time plans by $1. Its 3 DVDs-plan will increase by $3 to $19.99.
In this short post, Fortune provides a detailed diagram showing how companies have held product prices steady but have shrunk toilet paper rolls to cover the higher costs of pulp and shipping. In other words, the per unit cost (square inch of toilet paper) has increased, but this increase is not reflected in the final price, but in the lower amount of product provided at that price. This is a common tactic to disguise the inflated price of a good to maintain the appearance of price competitiveness. Just one more way in which an apparently benign pricing environment is actually sitting on top of roiling pricing pressures.
In “Business Earnings Climb Despite Rising Costs“, the WSJ reports that companies reporting third quarter results are starting to sing a common refrain: material costs are rising fast and threaten to pressure profits. Soon, these pressures could translate into inflation at the consumer level…just as the Federal Reserve is rolling out a second phase of quantitative easing to fight the exact opposite force of deflation.
The article cites inflationary (or stagflationary) examples from paper and packaging makers, apparel manufacturers, tire companies, and office supply distributors.
Avery Dennison Corporation is experiencing particularly acute problems with higher material costs:
“Label maker Avery Dennison Corp. is battling higher raw material costs with price hikes, but is still losing ground. CFO Mitchell Butier said while the company keeps adding more price increases to fight rising raw materials, it continues ‘to be behind that curve.’ The company announced a ‘mid to high single-digit’ price increase in North America, Chief Executive Dean Scarborough said. ‘Pretty substantial…but we need it. Our margins are really taking a hit,’ he added.”
In “Unable to Stretch Further, Apparel Makers Raise Prices“, the WSJ notes that surging prices for cotton will force apparel companies to hike clothes prices next year even if consumer demand remains sluggish:
“Hanesbrands Inc, Jones Group Inc. and VF Corp. said they will raise prices for clothing set to hit stores early next year by as much as 10%. When cotton prices began their climb a year ago, retailers and manufacturers were unclear how much—if any—of the cost would be passed along to consumers. But with benchmark cotton now up about 80% since the beginning of the year, apparel companies say they no longer have a choice.”
…and polyester will not provide any pricing relief:
“Companies can’t blend their way out of the problem. Polyester prices are also rising, climbing between 20% and 25% this year driven by oil prices and higher demand from manufacturers switching away from cotton.”