Oil prices are slippery slope for consumer goods market
The surge in oil prices is the latest blow for businesses that are already being hit by soaring costs as consumer spending remains weak.
Fri, Feb 25, 2011 at 03:58 PM
COSTS: Higher gas prices often make people do more shopping at stores that are closer to home, a shift that stands to hurt big-box retailers like Wal-Mart and Target and help smaller discount stores. (Photo: Paul Sakuma/AP)
BOCA RATON, Fla. - The uphill climb for consumer goods makers to improve sales and profits is getting more slippery, as higher oil prices add to costs and also cut into budgets people have for shopping.
The surge in oil prices is the latest blow for businesses that are already being hit by soaring ingredient costs, as consumer spending on everyday items remains weak, executives said.
"We've had, even since our earnings release, a pretty significant run-up in commodities, some of which have an immediate impact on the bottom line, things like diesel," said P&G Chief Financial Officer Jon Moeller, at the Consumer Analyst Group of New York Conference here.
He said on Thursday that the maker of Tide detergent and Pampers diapers would therefore see its margins increase by less than forecast over the next few months.
Through Thursday, the price of oil traded on the NYMEX was up about 11 percent from January 27, the day Procter & Gamble Co. posted quarterly earnings. The price eased a bit on Friday as Saudi Arabia was reported to have increased output.
The cost of higher oil can show up in any number of places for companies that make cereal, soda and soap, from the materials used in a bottle to the formula for a lipstick to the fuel for a truck that carts both to a store.
Plastic bottles made partially from petroleum account for about 40 percent of the drinks sold by Coca-Cola Enterprises Inc., although PET resin is still less than 5 percent of the Coca-Cola Co. bottler's total cost of goods.
Chief Financial Officer Bill Douglas said the price of resin was being driven up more by the fact that more petrochemicals were being used to make polyester after a weak cotton crop.
"The oil price is not helping, but it's not the primary factor," Douglas said.
Church & Dwight Co Inc. CEO Jim Craigie also said that slides he assembled 10 days ago of the company's prospective 2011 business environment were more optimistic than he feels now, given the rising oil price and unrest in the Middle East.
Risk to consumer spending
Diageo's chief executive, Paul Walsh, said the world's largest spirits company was more concerned about whether a spike in oil would slow consumer spending, which could then frustrate job creation and cause a further economic slowdown.
"I would hope that the spike in the oil price is temporary, and if it is temporary, I don't think we've got anything to worry about," he told Reuters, noting that oil prices were still much lower than the highs reached a few years ago. "If it is sustained, and continues to march toward $140, then I think there are natural concerns that should be had."
Brent crude closed at $111.36 on Thursday, after rising to a 2-1/2 year high of $119.79 on the revolt in Libya causing large disruptions in the OPEC nation's oil supplies. U.S. crude futures, which are more insulated from international geopolitical risk due to a domestic stockpile, closed at $97.44.
PepsiCo Inc., maker of Frito-Lay snacks and Tropicana orange juice, has said it expected $1.4 billion to $1.6 billion in additional costs this year, an increase of 8 percent to 9.5 percent, due to higher costs for commodities.
Pepsi CFO Hugh Johnston said he did not expect to have to alter that forecast.
"We feel like we've got our arms reasonably well-wrapped around, short of some major event where perhaps in the fourth quarter if we're not covered, there might be a significant change in cost," Johnston said.
"In terms of the consumer, it's a much trickier equation," he said, noting that higher gasoline prices often lead to less spending at gas stations on drinks and snacks.
So far, gas station and convenience store business is "still pretty good," he said. "If gasoline prices hold, I don't anticipate any change in trends. But gasoline prices are an open question, they move pretty rapidly."
The average price for a gallon of gasoline in the United States was $3.18 in the latest Lundberg Survey of some 2,500 gas stations nationwide, up 5 cents from two weeks earlier.
Ken Perkins, president of tracking firm Retail Metrics, said higher gas prices often make people do more shopping at stores that are closer to home, a shift that stands to hurt big-box retailers like Wal-Mart Stores Inc. and Target Corp. and help smaller discount stores, which include Family Dollar and Dollar Tree, that are in neighborhoods. He also said that when gas creeps up toward $4 per gallon, it impacts consumers' spending more broadly.
"It is affecting the amount of disposable income, because they are putting more money in their tank as opposed to into retailers' cash registers," Perkins said.
The biggest threat could be to companies whose products are not necessities.
"Our target is a middle income consumer," Kohl's Corp <KSS.N> CEO Kevin Mansell said in an interview. "Higher fuel prices at the pump — that impacts them, that's less money in their pocket for things that are more discretionary, which is pretty much everything we sell."
(Additional reporting by Phil Wahba and Dhanya Skariachan in New York and Jessica Wohl in Boca Raton)
(Reporting by Martinne Geller, editing by Dave Zimmerman and Matthew Lewis)
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