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.