As rising commodity prices pressure margins, packaged-goods marketers are vowing to raise prices, cut price promotion and maintain or hike advertising support.
It seems like a tall order amid the lingering effects of recession and oil prices flirting with $100-a-barrel levels not seen since the run up to the 2008 financial collapse. But packaged-goods executives speaking to consumer analysts at the posh Boca Raton Resort and Club this week -- where Rolls Royce sightings were remarkably common -- were defiantly optimistic about prospects for raising prices and, as a result, maintaining or growing marketing support.
Food companies, hit by the first wave of agricultural commodity cost increases, are already taking price increases, while household and personal-care players, more affected by oil prices, are preparing to do so soon. The U.S. Department of Agriculture last week projected food prices will rise 3.5% in the U.S. this year and possibly as much as 5%, as retailers appear to be open to passing along price hikes.
Procter & Gamble Co. Chief Marketing Officer Jon Moeller told the Consumer Analysts Group of New York that the company will begin announcing price increases within a month to make up an estimated $1.5 billion in increased commodity costs this year. He pulled down guidance for operating margin to reflect rising costs and said the world's biggest advertiser won't "back off on investments," including marketing, simply to hit the top range of earnings estimates.
Fueling confidence that price hikes will succeed are strong results for premium-priced products and diminished threats from private label. Indeed, Estee Lauder may raise prices even though it doesn't need to, with its bottom line relatively unaffected by commodity costs. "We have not exploited all the pricing power of the company across the portfolio brands," the company's CEO, Fabrizio Freda, said Feb. 24. "But it has to be done strategically."
Of course, he works in prestige and luxury markets that beat sales of mass beauty products last year as upscale consumers experienced a recovery that eluded others.
Even on the mass side, premium-priced products such as Gillette Fusion ProGlide razors, Crest 3-D White oral care and Old Spice body wash have been in such demand that P&G hasn't been able to fully meet the supply, Mr. Moeller said. He also said private-label market shares in the U.S. across all P&G's categories have declined for four consecutive quarters. Energizer CEO Ward Klein noted that private-label shares even in the economically sensitive battery category are lower now than in mid 2008.
Colgate-Palmolive Co. Chairman-CEO Ian Cook said Feb. 25 that the company is banking on inflation in short- and long-term planning as it hasn't in more than a decade, and believes price hikes "will not be a barrier to consumers staying with our brands and categories." As a result, Colgate plans continued increases in marketing support.
The confidence about price increases and marketing spending sounds like what marketers said amid another cost squeeze in 2008. Yet price hikes didn't come fast enough to prevent margin squeezes that led marketers, including P&G, to cut ad spending even before the financial crisis.
This time around, Clorox Co. Chairman-CEO Don Knauss said the company plans to take quicker, smaller price hikes than in 2008. And marketers throughout the industry already have signaled willingness to sacrifice margins when necessary to maintain marketing support in the past year, said Sanford C. Bernstein analyst Ali Dibadj.
"I don't think they have a choice" about marketing spending, he said. "Anyone who cuts media spend is going to be disproportionately punished."
But questions remain about how consumers will respond to simultaneous price hikes on food, household and beauty products and gas.
Church & Dwight Co. Chairman-CEO James Craigie was less confident about consumers than most of his colleagues based on unrest in the Middle East and soaring gas prices.
"Ten days has been a big change" he said, regarding his outlook, with prospects for $4 or $5 gas tempering his outlook for consumer spending. Then again, Church & Dwight, with 40% of its revenue from value brands, fares better than competitors in a recession. But he noted that even last year nine of Church & Dwight's 13 categories had declining dollar sales, with trends worsening over the year. "I would just say stay tuned," he said.
In food, consumers don't have much choice but to pay higher prices. "Let's face it, people have to eat," said H.J. Heinz CEO Bill Johnson.
But volumes for household and personal-care players have been weak even amid stable or falling prices in the past year, Mr. Dibadj said, as consumers proved soap, shampoo and household cleaners aren't quite as indispensable as food. So higher prices could further dampen volume as the question becomes less about the shift to private label and more about whether they'll buy at all.
Ultimately, the answer may come down to innovation and how well ads work, because volume lifts from coupons and temporary price reductions haven't been working as marketers had come to expect.
"We did not get the expected volume lifts from our promotions, and the strategy proved to be very costly," said Campbell Soup Co. Chief Operating Office Denise Morrison, who will soon take over as CEO. The company is now "shifting away spending from dependence on price promotions and toward increased brand building," she said, adding that "effective advertising is the best way to move soup out of the pantries and on to the table."
The company, which had focused on renovating its lineup to lower sodium, is now looking to introduce new products, such as a premium "slow kettle soup," which will be launched this summer. Aimed at young consumers, the soups will be put in clear packaging to resemble the front-of-store fresh brands that have proven popular, Ms. Morrison said in an interview.
Clorox is counting on stepped-up new product activity, including four new scents of its flagship bleach, four new flavors of Hidden Valley ranch dressing and improved Fresh Step cat litter. Mr. Knauss said last year's launch of Glad trash bags with Febreze Odor Shield technology from joint-venture partner P&G restored dollar growth to a trash-bag category that was in decline and bested by private-label share gains.
General Mills already has made mid-single-digit price increases on about half of its U.S. brands, the company said. And "as we do that, we're very aware that the consumer has choices here," said CEO Ken Powell. But so far the company has held onto its profit margins, he said, allowing it to invest in new products such as Chocolate Cheerios, which was launched last year and is the "most successful new item in the category over the last five years," Mr. Powell said. Across the globe, General Mills plans to launch 300 new products this year, which will be supported with "strong levels of advertising and other consumer-directed marketing," he said.
Hershey Co. is planning to again increase its ad spending, which has jumped from $128 million in 2007 to $391 million in 2010, although this year's increase will grow by only mid-single digits, "more in line with our sales increase," said CEO David West. Much of the ad spending has been poured into its flagship Reese's brand, which executives said appeals to consumers who are not price sensitive.
Though Kraft Foods estimated that North American commodity costs would jump $700 million to $800 million this year, Tony Vernon, Kraft's president for North America, predicted that top-line growth of "more than 3% is quite achievable this year in North America," up from 1.1% in 2010. Kraft executives said they would hike marketing spending by 10%, pouring money into their 20 power brands, which include Planters, Oreo, Trident, Ritz and Oscar Mayer.