Procter & Gamble and Colgate-Palmolive are among a number of major consumer products companies initiating price increases in order to offset rising commodity costs.

In quarterly earnings presentations April 30, the companies acknowledged that the costs - stemming primarily from the price of oil and raw materials - have exceeded prior expectations, and price increases are critical to mitigating the impact.

P&G CFO Clayton Daley said the firm is raising prices on products across its portfolio. In the U.S., the price of Crest Pro-Health rinse will increase 7 percent and Oral-B power brushes 11 percent.

"These price increases will become effective between May and August, and we have announced additional pricing in many other countries around the world," Daley noted during P&G's third-quarter earnings call.

The pricing impact will be felt most strongly in regions dominated by U.S. dollar trends, he added.

"In markets that are either Euro-based or tend to move with the Euro, or markets where currencies have not weakened as much, we'll price accordingly in the local market," he said.

Analysts expressed concern over consumer response to pricing, considering they are already pressed with high gas prices and rising food costs, but P&G CEO A.G. Lafley said "it all depends on the consumer value equation, and we watch that like a hawk."

"Virtually everything we sell is not discretionary - it's a staple. You have to go to the bathroom, you have to get up in the morning and brush your teeth. ... You've got to shave," he said.

Further, P&G believes it can initiate price increases without impacting its market share position because private label manufacturers and retailers have "generally been increasing prices as well."

In order to maintain consumer value of its brands in the difficult environment, P&G will continue focusing on product innovation, according to Daley.

"Better products are even more important during challenging times, when consumers are even more focused on value," he said.

Commodity, Energy Costs Escalate In 2008

Daley discussed how commodity and energy costs have impacted P&G's business in the most recent quarter. He noted that "almost all of our key material inputs are up double-digits, and energy costs have increased even more dramatically, with oil approaching $120 a barrel and natural gas in excess of $10 per million BTUs."

"As a result, we expect to incur approximately $1.4 billion in higher material and energy costs this year." Regarding next year, "we are in the midst of our fiscal 2009 planning process and we are building our plans on the assumption that material and energy costs will increase by over $2 billion versus the current year," Daley said.

Despite the cost challenges, P&G's net sales in the third quarter increased 9 percent to $20.5 billion, while net income rose 8 percent to $2.71 billion (¹ Also see "P&G Beauty Business Is Hanging In, Pantene Is Not A Wounded Duck – Lafley" - HBW Insight, 5 May, 2008., p. 9). The firm reached financial targets through cost-saving efforts, including product reformulation.

"We will accelerate our productivity efforts by reducing organizational redundancy, streamlining decision making, and institutionalizing overhead cost control," Daley said.

Additionally, "we will drive favorable mix by trading consumers up to value-added products, and we will continue to take broad pricing actions as necessary," he added.

In a May 1 analyst report on P&G's third quarter, Sanford Bernstein analyst Ali Dibadj said commodity cost inflation and the firm's ability to offset it by cost savings will "remain central to the company's storyline."

He estimates that the projected $2 billion in input cost inflation can be offset through a combination of pricing (roughly $540 million benefit), favorable mix/trade-up (roughly $460 million benefit), and various cost savings projects (more than $1.1 billion).

Colgate Responds To "Unprecedented" Costs

Colgate similarly addressed the issue of rising commodity costs during its April 30 first-quarter call, referring to the trend as "unprecedented" but claiming it has been able to soften the impact in the most recent quarter.

"Pleasingly, despite this unprecedented jump, the company's aggressive savings programs, higher pricing and shift toward higher-margin oral-care products virtually offset the impact," the firm said.

Colgate explained that it has established a "very disciplined process" for setting prices worldwide, with an executive for each product category developing a plan for each country.

During the first quarter, Colgate increased product prices by 3 percent - "the highest in a long time." In the U.S., prices for toothpastes will increase by 9 percent, effective at the start of the third quarter.

"Some of our price increases have only been recently announced and will not take effect in the market for several months," the firm noted.

Despite the price increases, Colgate is not seeing a drop-off in sales, according to President & CEO Ian Cook. "We think we have responded appropriately to unprecedented cost movements in the marketplace and have pricing in place now going forward that reflects that, accounts for that, and has not been tempered by any concern relative to the consumer."

Cook noted that private-label brands have raised their prices accordingly, and such brands have not been gaining market share in the categories in which Colgate competes.

In the first quarter, Colgate's net sales grew 15.5 percent to $3.71 billion. Net income fell 4.1 percent to $466.5 million, negatively impacted by restructuring charges. However, income was slightly higher than anticipated due to product price increases, which offset commodity costs (² Also see "Colgate Oral Care, Soap Strengthen North American First-Quarter Sales" - Pink Sheet, 5 May, 2008., p. 18).

Commenting on Colgate's quarterly performance, Dibadj said "results dampened the company's reputation of being immune to commodity cost inflation," as the company was compelled to down-adjust its gross margin guidance.

"Over the next several quarters, the focus on the stock will be on Colgate's ability to offset commodity cost inflation with pricing increases, while keeping operating margins relatively steady and continuing to invest in advertising spend," Dibadj said.

- Eileen Francis (e.francis@elsevier.com)

P&G, Colgate Hike Prices To Offset Rising Commodity Costs

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