Another round of price increases on household products like Gillette razors, Dawn dish soap and Swiffer dusters bolstered Procter & Gamble’s bottom line last quarter, the company said on Friday, a sign that stubborn inflation may linger as companies defend their profit margins.
Procter & Gamble, a consumer goods bellwether, said its profit grew in the first three months of the year after it raised prices 10 percent across its brands. That rise was the company’s second consecutive quarter of double-digit increases. Its profit margin expanded in the quarter, with price increases more than offsetting the rise in what it paid for raw materials.
Revenue rose 4 percent last quarter from a year earlier, even as sales volumes — the number of rolls of Charmin toilet paper and boxes of Tide detergent — fell 3 percent as consumers traded down to less expensive alternatives or bought less. In other words, Procter & Gamble made more money even though it sold fewer products. Sales volumes at the company have declined in the past four quarters.
“Consumer package goods companies are a relatively small part of what contributes to the overall level of inflation,” said Sucharita Kodali, a retail trends analyst at Forrester, a research and advisory company. But, she added, they “contribute very much to the perception of inflation.” Customers do not buy cars or houses every day, but many do notice price increases on frequent trips to the grocery store.
Jon Moeller, Procter & Gamble’s chief executive, said in a statement that the company had delivered strong results “in what continues to be a very difficult cost and operating environment.”
The company also raised its revenue forecast for this fiscal year to a 1 percent rise over the prior year; its previous forecast was a range of flat to a 1 percent drop. And it said it planned to buy back up to $8 billion of its own stock in its current fiscal year, which ends in June.
Procter & Gamble shares closed more than 3 percent higher on Friday.
Americans continued to spend in recent months even as companies passed along higher prices, but there are signs that consumers are starting to pull back: U.S. retail sales declined 1 percent in March from the previous month.
Inflation overall has moderated, climbing 5 percent over the year through March, down from a peak of near 9 percent in the summer. The deceleration has been prolonged and uneven, partly because companies find they can maintain higher prices, especially by pitching their offerings as premium products.
Procter & Gamble even had its own term for its products’ high value — “irresistible superiority” — which was used several times on a conference call with analysts.
Consumers are getting more careful with spending, Andre Schulten, the company’s chief financial officer, said on the call. “That just means we need to double down on our view of what superiority in some of our lower-value tiers means,” he added. That may include communicating the value and quality of products to consumers.
Other consumer products makers have had similar results after increasing prices. In February, PepsiCo said it would not raise its prices further after multiple rounds of increases helped it achieve better-than-expected results in its fourth quarter. And Unilever said this year that it would continue to raise prices but ease the increases in the second half of the year.
Higher prices can frustrate consumers, said Ms. Kodali, the Forrester analyst. Brand loyalists, or “inelastic customers,” are likely to keep buying products at higher prices, but other customers have already changed their shopping habits — as evidenced by Procter & Gamble’s decrease in sales volume.
A customer turned off by rising prices for Pampers disposable diapers, for example, might start using cloth alternatives instead. That customer will be hard for Procter & Gamble to win back.
Higher prices may be good for corporate profits, but they have complicated the Federal Reserve’s efforts to tame inflation by cooling the economy via a series of interest rate increases that started last year. Late last month, the Fed raised its benchmark rate to a range of 4.75 to 5 percent, up from near zero just over a year ago.
In Europe, policymakers have warned that companies’ lifting prices above what is necessary to absorb higher costs could be fueling inflation. Policymakers have long been concerned with the wage-price spiral, in which higher wages push companies to raise prices to compensate for salary increases.
Now, the so-called profit-price spiral may be a risk, too. An executive board member at the European Central Bank warned last month that half of domestic price pressures in the eurozone in the fourth quarter of last year had come from company profits.
Executives at Procter & Gamble acknowledged on the call with analysts that there were still challenges ahead, like higher operating costs and wage increases.
There are “many headwinds that we’re working against and will continue to work against as we move forward,” Mr. Moeller said.
Source: New York Times
