Companies Torn Between Price Hikes and Frugal Consumers
Nestle said its earnings in the third quarter were helped by an ability to raise prices. The company's products include coffee, chocolate bars, and Purina pet products. The prices of many of the agricultural commodities it uses in its goods have risen sharply this year.
McDonald's (MCD) reported earnings recently as well, and announced it will increase the cost to consumers of some of its most popular products.
Many companies are now faced with the need to increase prices, while their frugal consumers remain cautious about spending due to the fallout of the recession.
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Firms that rely on agricultural commodities have especially difficult margin issues. The price of corn is up 70% since June, in large part because of a smaller-than-expected U.S. crop and a fall-off in Russian crop yield. And, the price of corn, a key feed ingredient for cattle, has begun to increase the price of meat. Soy bean and wheat prices have also moved sharply higher.
Firms from McDonald's to General Mills (GIS) are up against the same problem. They want to pass the cost increases they are experiencing onto consumers. This may not work in many markets where consumer demand remains weak. Emerging markets that have experienced economic rebounds may be better able to handle price increases. But companies that sell their commodity-based products largely in the U.S. face particular problems.
The problem is not confined to companies that use agricultural products. Metal costs, including gold and silver, have soared. The price of "rare earth" metals have increased sharply on news that China, which produces over 90% of these metals, may cut supplies to the West.
Some of this price margin pressure will show up in third-quarter earnings. Fourth-quarter numbers could be profoundly affected as the results of months of commodity price rises hit the ability of companies to maintain P&L margins. The reluctant consumer may be as critical to the earnings of companies like McDonald's as anything else.
