Commodity Price Shock Impacting Retail Margins

Large retail manufacturers like Newell Rubbermaid, Inc. – maker of storage containers, Sharpie pens, cookware and other items – are struggling with increased costs for raw materials, and some decided to pass those cost onto consumers. Now, as second-quarter profit margins are not being met, directors are wondering whether that was the best way to make up the difference caused by increased commodity costs. The pain is reflected in many retail stores, including even in the discount market, that are seeing sales drop as consumers choose to forgo purchasing typically economically-priced items rather than absorb the higher costs. For more on this continue reading the following article from The Economist's View.

One more from Tim Duy:

Consumer Update, by Tim Duy: I noticed this in the Wall Street Journal:

Newell Rubbermaid Inc.'s second-quarter earnings rose 13%, helped by fewer restructuring charges, but margins fell as the household-products company's price increases couldn't fully offset rising commodity costs.

It reminded me of this from the Beige Book:

For the most part, firms' ability to pass on price increases remained mixed.

And those attempts to push through price increases where when the economy was "good." Imagine now. Those worried about runaway inflation vastly underestimate consumer's ability to absorb higher prices. Back to the Wall Street Journal:

Newell—whose lineup includes storage products, Sharpie pens and Calphalon cookware—warned last month that several of its large retail customers in the U.S. were beginning to reduce orders, pointing to weak consumer confidence. The Atlanta-based company's earnings have improved in recent quarters, though revenue fell in the first quarter, primarily because of fewer promotions and consumer purchases of less expensive products. Newell, like other consumer-product manufacturers, is also raising prices and trying to reduce spending in an effort to mitigate rising raw-materials costs.

Not surprising - spend less money on marketing while raising prices in a weak environment and sales growth struggles. Consumers can't absorb it as they can in a real wage-price spiral; instead they just downgrade or go without. Also note the role consumer confidence number are playing. Perhaps just a self- inflicted wound that will pass with the new debt deal?

Regarding the consumer, I don't know how many people caught this two weeks ago, also from the Wall Street Journal:

Sales and profit growth have started to slump at the deep-discount retailers called dollar stores, after a robust performance during the recession, a sign that even fairly cheap toys and other small indulgences now are a stretch for some consumers.

In the past several weeks, Dollar General Corp. and Family Dollar Stores Inc., the country's largest chains that sell sharply discounted food, household staples and other items in modest-size stores, missed their quarterly earnings targets. The two chains, as well as Dollar Tree Inc., also reported gross profit-margin declines.

Note the title of this story - "splurges" at dollar store's are drying up! At the dollar store! And note the price sensitivity:

"We have 228 items that are priced at $1 that we think are incredibly important to our customers that we elected not to take price increases on," Dollar General Chief Executive Rick Dreiling told analysts during a June 1 earnings conference call. "This sounds almost silly, but a $1 item going to $1.15 in our channel is a major change for our customer."

Fifteen cents or fifteen percent? It all depends on your perspective. But I think the bottom line is that the commodity price shock severely impacted consumers. Some corporate leaders thought they saw an opportunity to raise prices, and are now paying the price. And one wonders how many were driven to raise prices by the recent six month surge of warnings that runaway inflation is close at hand?

This blog post was republished with permission from The Economist's View.