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Commodity costs squeeze consumer goods makers


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Essential IR Insights Newsletter - February 2023

Commodity costs squeeze consumer goods makers

As if slowing sales were not enough, makers of fast-moving consumer goods are facing a new problem: rising raw material prices.

A new analysis by S&P Global Market Intelligence showed that prices for a variety of commodities, ranging from plastic resin to wood pulp, have ticked upward so far this year, increasing the cost of producing many basic consumer goods, such as facial tissues and soap.

While commodity price increases are nothing new to industry giants such as Nestlé SA and Kimberly-Clark Corp., they come at a time when sales at the companies are sagging, especially in the U.S. and Europe. That leaves the firms in a difficult position, analysts said, since they cannot afford to pass the cost on to consumers by increasing prices — a common practice in the consumer goods industry.

The result, especially in the most recent round of results from consumer goods companies, has been narrowing profit margins. During the first half of Nestlé's fiscal year 2017, for instance, the company said rising commodity costs canceled out 100 basis points worth of cost savings from pricing changes and more efficient operations.

"This is the first such commodity basket price increase in several years," Nestlé CEO Ulf Mark Schneider told analysts during a July 27 presentation. The company declined to provide details on the specific commodities Schneider was referencing.

The exact commodities putting pressure on profits vary by company. Margins for Kimberly-Clark's Kleenex brand of facial tissues took a hit during the second quarter of the company's fisal 2017 as prices for virgin eucalyptus pulp, a key component of Kleenex tissues, rose to between $950 and $975 per ton from roughly $850 per ton in previous year, according to a presentation company executives made to analysts July 25.

As a result, the company now expects commodity inflation of between $200 million and $300 million for its entire fiscal year, $50 million higher than it had previously projected.

"For a company that is having challenges growing sales, a little bit of input inflation is coming at the wrong time for them," Jack Russo, an analyst at Edward Jones, said in an email to S&P Global.

In response to higher input prices, Kimberly-Clark is "more tightly managing discretionary and overhead spending," the company said in a statement emailed to S&P Global.

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At Procter & Gamble Co., the largest consumer goods maker by market capitalization, executives told analysts during a July 27 presentation that commodity costs during P&G's fiscal fourth quarter offset savings from changes to business operations. CFO Jon Moeller said during the presentation that P&G expects that raw material prices will "continue to be volatile" as the company begins its 2018 fiscal year. Other commodities have weighed on financial results at major consumer products firms.

During the company's fiscal second-quarter earnings call July 21, executives at Colgate-Palmolive Co. said the price of fats and oils the company uses in personal care products, such as bar soap, held gross profit back 180 basis points, more than eating up 170 basis points of savings for the quarter.

Colgate-Palmolive did not respond to a request for comment, and a spokeswoman for P&G declined to provide details about which commodities held its profit back.

The cost of thermoplastic resins, which consumer goods makers use to manufacture bottles and other packaging for their products, has also risen in 2017 as the cost of fossil fuels used to make them has increased, Bureau of Labor Statistics analyst Bryan Egan said in an interview with S&P Global.

Broadly, consumer goods makers will have to control other costs to offset such commodity rallies, Russo said, noting that "given the weaker sales climate, it is really tough to raise prices at the moment."