Colgate "Unafraid" To Hike Prices To Offset Rising Costs
This article was originally published in The Tan Sheet
Executive Summary
Colgate-Palmolive plans to raise prices on products across its portfolio and in all its regions to offset rising commodity costs.
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Colgate-Palmolive plans to raise prices on products across its portfolio and in all its regions to offset rising commodity costs. Costs of raw and packaging materials are expected to grow 11% to 13% during the year, said President and CEO Ian Cook. The firm will continue a cost-savings program to help offset those expenses, but sees the price hikes as a necessary step to mitigate their impact, Cook suggested April 28 during the firm's fiscal 2011 first-quarter earnings call. "We are unafraid, after taking the right analysis, to take pricing on the right businesses at the right time," he said, noting the firm began hiking prices during the first quarter. "We will continue to do that as the year unfolds … balancing always the competitive environment, the innovation stream we have to support the pricing [and] the consumers' ability to absorb the pricing," he said. Cook noted the firm will not act abruptly or all at once as it did in 2008 and 2009, when "we took pricing at levels we had not seen in the prior 10 years, for both those years." Instead, "we're talking about perhaps a greater frequency" of small price increases, he said. Cost Savings Not Enough The move is necessary since the company can no longer offset the costs of commodities with its Funding-the-Growth cost savings initiative alone. The initiative, focused on increased efficiency in the business, has delivered around $400 million in cost savings annually for the past five years. The price increases will benefit the business mostly in the second half of the year. Commodity costs have affected the business broadly, right down to bar soaps. For example, Cook said the Irish Spring personal care product line is a "very strong and buoyant business," but has experienced a "modest slowdown" in part related to a sharp rise in the cost of fats and oils. Looking at the remainder of the year, Colgate expects the cost of a barrel of oil to reach $100. But Colgate has factored a cost of $110 a barrel into its model "and we would feel comfortable if that's where the year ends up," the chief executive said.
With strategic pricing adjustments, the firm believes it can achieve its profit target of mid-single-digit earnings-per-share growth for the year, excluding the 2010 Venezuela hyper-inflationary charge. Procter & Gamble, which released its latest quarterly results April 28, also will raise prices on its products due to high commodity costs (see (Also see "P&G Growth Dragged By Volatile World Events, Commodity Costs" - Pink Sheet, 2 May, 2011.) p. 13). Bulk Of U.S. Launches Slated For Q3 North American sales in the quarter, excluding pet nutrition, declined 4.5% to $718 million due largely to unfavorable comparisons with the year-ago quarter, which new products positively impacted. This year, the bulk of new products in North America, which represents 18% of the firm's business, are expected to launch in the third quarter, July-September. Items hitting store shelves now include Colgate Total Gum Defense toothpaste, Softsoap Body Butter Strawberry Smoother body wash, Softsoap Pampered Hands foaming liquid hand soap and a new line of Irish Spring deodorants and antiperspirants. Recent launches already adding to the top line include Colgate Sensitive Multi-Protection and Colgate Max Clean SmartFoam. The higher costs of raw and packaging materials dragged down operating profit in North America 12% during the quarter to $192 million. Increased promotional investments also cut into profit, Colgate said. Sales in Latin America, which represents 28% of the firm's business, rose 9% during the quarter to $1.1 billion. In Europe/South Pacific – 21% of Colgate's business – sales increased 1% to $832 million. "Colgate's global market shares in toothpaste and manual toothbrushes are both at record highs year-to-date," Cook said. The firm's global share of the toothpaste market grew to 44.7% year-to-date, representing 0.6 share points versus a year ago. Colgate's net sales – excluding acquisitions and divestments – rose 4.5% to $3.99 billion, representing organic growth of 1.5%. Income soared 61% to $576 million, due to a favorable comparison related to a charge the company took last year when its Venezuelan operations were devalued due to hyperinflation. "We are pleased to have met earnings expectations this quarter despite very sharp increases in material costs and an intense competitive environment globally," Cook said in the release. |