Rising oil prices worry consumer products makers

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Rising oil prices worry consumer products makers

By Deepa Babington

NEW YORK, Aug 17 (Reuters) - Rising oil prices are fueling problems faced by U.S. consumer products makers, several of whom are already reeling from marketing missteps, previous surges in raw material prices and the impact of a strong dollar.

The companies -- many of whom use petroleum-based chemicals to produce a variety of products, such as soap and detergents -- are trying to protect their profit margins through cost-cutting and in some cases, price rises. The alternative would be further profit warnings, after a spate of them earlier this year.

Consumer products behemoth Procter & Gamble Co. , for instance, is increasing prices by 5 to 8 percent at its laundry products division, which includes brands such as Tide detergent and Ivory soaps, effective as early as September. The move is a direct response to high oil prices, said Meg McCann, associate director of investor relations at the company.

About 16 percent of the company's cost of goods can be attributed to petroleum-related expenses, analysts say.

"I would characterize (high oil prices) as another thorn in the side of these companies that is putting pressure on their margins," said Goldman Sachs analyst Amy Low Chasen. "These companies have had several problems including higher raw material costs and an inability to increase prices."

As benchmark crude oil prices hover at their highest in a decade, touching $32.55 a barrel for September delivery in New York on Thursday, consumer products companies are faced with a double pinch -- from higher transportation and raw material costs. Makers of forest products-based consumer products, such as tissue and diapers, have also paid more for pulp.

Analysts say this isn't likely to spell disaster for the sector, but the companies will have to cut costs and improve productivity.

"It's a headwind, but it's not cataclysmic," said Merrill Lynch analyst Heather Murren. "People thought raw material costs would have stabilized by now, and they have -- but they've stabilized at a high level."

FOCUS ON COST-CUTTING MEASURES

Despite Procter & Gamble's decision to raise laundry detergent prices, analysts are skeptical about how much of the oil price increase companies can pass on to the consumer across a wide spectrum of products.

Soap and detergent makers such as Procter & Gamble, Colgate Palmolive Co. and Dial Corp. are locked into a highly competitive battle for market share in many product areas and consumers can easily respond to a price increase by switching to another brand.

"It's something that we have to overcome through other cost reduction measures," said Mike Masseth, spokesman for Kimberly-Clark Corp. , maker of Huggies diapers and Kleenex tissues, in reference to the rise in oil prices. "We're going to do our best to offset inflation...We're not looking for an earnings hit."

The sector could learn from innovative fuel cost-reduction methods established by companies in other sectors, said John Hughes, branded consumer products analyst at Dain Rauscher.

For example, a group of food and paper products makers, including General Mills Inc. and Fort James Corp., now a unit of Georgia-Pacific Corp. , formed an Internet-based alliance in March to allow freight carriers to use the same trucks to carry all the companies' products in an attempt to reduce transport costs.

ROUGH YEAR FOR CONSUMER PRODUCTS MAKERS

Several consumer products companies are already trying to recover from a loss of investor confidence after a rash of earnings shocks. Those include Procter & Gamble and Dial, which have both issued several profit warnings, leading to a slide in their share prices.

Some of the weakness has been the result of failed marketing strategies, such as the time when Procter & Gamble blamed reduced marketing support on some key brands for its lack of growth.

A weak euro has also hurt many U.S. manufacturing companies once European revenues are translated back into dollars.

"It can be another straw on the camel's back," said Hughes, in reference to the higher oil costs. "All those things can put a lot of pressure on a company."

http://newsnet.reuters.com/news/rcom:old_business/nN16631181.html

-- Martin Thompson (mthom1927@aol.com), August 17, 2000


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