September 5, 2008 in City

Energy prices forcing change

Companies cut costs, boost efficiency
By Ellen Simon Associated Press
 
Associated Press photo

Tina Hamler, left, and Griselle Garcia work on the Sharpie marker packaging line as they place colored Sharpie Retractable fine tip markers into plastic packaging at the Newell Rubbermaid Sharpie Manufacturing Plant in Shelbyville, Tenn. The company retooled ingredients for their plastic products, like Sharpies, because of high fossil fuels costs.
(Full-size photo)

Fast fact

Consumer inflation is the highest in 17 years, up 5.6 percent this year, and unemployment is at a four-year high.

NEW YORK – Conventional wisdom had long held that some industries would collapse if oil topped $100 a barrel. As oil neared $150, sending costs higher for everything from jet fuel to plastic jars, the question was how many companies would succumb.

The surprising answer: Not many. Some have even thrived.

Companies have culled unprofitable products, cut production costs and passed along price increases. With oil prices roughly twice what they were in January 2007, many companies have simply adjusted. Now that oil’s daily price swings are moving down as well as up, that preparation has put them in a strong position – leaner than they’ve been in years, with customers paying higher prices.

Of course, the adjustment hasn’t been smooth.

Consumer inflation is the highest in 17 years, up 5.6 percent this year, and unemployment is at a four-year high. Workers are doing more, without earning more: Productivity, the output for every hour of work, jumped 4.3 percent at an annual rate in the April-June quarter, while labor costs fell.

The auto industry has been hammered as gasoline prices climbed roughly $1.30 a gallon since the beginning of 2007. Higher prices for gas and food crimped consumer spending and slammed department stores and restaurants. Every penny increase for a gallon of gas equals more than $1 billion in consumer spending over a year, according to Citigroup Inc. Business bankruptcies are higher than they were a year ago, soaring in industries like trucking, which have excess capacity and are unable to pass on higher costs.

But many businesses have proved resilient. A surge in exports thanks to the weak dollar helped, but so have price increases and cost-cutting.

Underwear company Maidenform Brands Inc. said on its second-quarter earnings call in August that it had been able to offset all the fuel surcharges it received in 2008.

“In 2009, we’re going to have to work harder,” said Chris Vieth, the company’s chief operating officer and chief financial officer.

To that end, Vieth said the company had a team looking for new factories to work with in Vietnam and Thailand. It’s also finding lower cost materials.

Church & Dwight Co., which makes detergent, toothpaste and Arm & Hammer baking soda, has raised prices on 30 percent of its products. At the same time, it kept a lid on costs. Condensing laundry detergent and shipping it in smaller packages saved so much money, the change more than offset rising commodity costs.

As a result, Church & Dwight added 1.1 percent to its second-quarter gross margin, while net income increased 13 percent, from $40.5 million for the year ago quarter to $45.8 million.

At Newell Rubbermaid Inc., where resin prices are one-tenth the cost of goods, oil’s run-up could have been disastrous.

“When I found myself looking at the price of oil several times a day, it was too much,” CEO Mark Ketchum said. “That’s not the way a CEO or any member of management is going to build shareholder value.”

Rubbermaid had already restructured, winnowing 40 percent of its product line in 2003 and 2004. As oil rose, management scrutinized the 12 percent of “commodity-like” products it had kept.

The products, including plastic shelving and its cheapest storage containers, had one thing in common: Resin was somewhere between one-third to one-half the cost of sales.

“We couldn’t sell it for what it cost to make it,” said spokesman David Doolittle.

Its cheapest clear plastic storage bins, which hold Christmas tree ornaments or sweaters and are pulled out of a closet twice a year, no longer made economic sense, Ketchum said.

“Resin is never going to be a cheap alternative; those may go back to cardboard boxes,” he said.

In contrast, the company kept its Roughneck containers, meant for hard use, like recycling bins.

“The consumer is willing to pay a price because they know they’re going to beat the heck out of them,” he said.

Rubbermaid hasn’t released a list of products it will drop, but it has said it will keep making Sharpie pens, Rubbermaid food storage products and Graco car seats, where resin is only 2 to 15 percent of total costs. Once Rubbermaid has whittled its product line, $500 million of the company’s $6.5 billion sales will be gone, but Ketchum expects margins to rise.

In the process, the company will trim the 700 million pounds of resin it buys each year by 280 million pounds. It will also change how its CEO spends his days.

On Rubbermaid’s earnings call, Ketchum said, “I expect to spend one-tenth as much time talking about resin next year, even if it continues to rise.”

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