Fed Watches to See If Wal-Mart Accepts Higher Priced Huggies
Fed Watches to See If Wal-Mart Accepts Higher Priced Huggies
June 20 (Bloomberg) -- The makers of Huggies diapers want to raise prices; Alan Greenspan will be watching the Wal-Mart checkout counter to see if they succeed.
Kimberly-Clark Corp., along with other consumer-products makers such as Clorox Co. and Procter & Gamble Co., have announced the first widespread price boosts in a decade, in an effort to recoup higher raw-material costs. Discounters such as Wal-Mart Stores Inc. and Target Corp. are pushing back. ``The very last thing they want to do is to increase prices for the consumers,'' says Scott Krugman, spokesman for the National Retail Federation, the industry's Washington trade group.
The conflict highlights an important force in the economy that is helping to keep prices stable: the influence of ``big- box'' retailers such as Bentonville, Arkansas-based Wal-Mart, the world's largest retailer, and Minneapolis-based Target, the No. 2 U.S. discounter. Wal-Mart alone accounts for close to one-third of North American sales for major U.S. household goods companies; the resistance of it and fellow retailers to price increases helps make Federal Reserve Chairman Greenspan and other policy makers more confident that inflation is being contained.
``Over the past few years, the pricing power in the marketplace has shifted away from the manufacturer to the distributor-retailer like Wal-Mart,'' says Barry Bosworth, a senior economist at the Brookings Institution, a research group in Washington. ``These chains are so big, they have the upper hand in setting prices. If products don't sell, they eliminate them from the shelves.''
Pricing Power
Pricing power, the ability of corporations to raise prices easily, is one of the key indicators the Federal Reserve monitors continually in its deliberations over how far to keep raising interest rates, Fed Governor Donald Kohn said June 14.
Greenspan, during congressional testimony June 9, said that ``at the moment, we are finding little evidence of inflationary pressures on the product side.'' While he cited ``some evidence'' that pricing power has been increasing, he said overall inflation remains ``modest.''
That's why the household-goods increases may be closely watched, despite the fact that they affect a small part of the overall economy. On tap for the next two months are announced plans for a 9 percent boost in prices of Clorox liquid bleach; 5 percent increases in diapers from Cincinnati-based P&G's Pampers line and Dallas-based Kimberly-Clark's Huggies; and 6 percent to 7 percent increases in prices of batteries from Boston-based Gillette Co. and St. Louis-based Energizer Holdings Inc.
Raw Materials
Manufacturers say the planned price increases, the first in a decade, are needed to cover the soaring cost of raw materials. ``We have not taken enough pricing to recover margins,'' Gerald Johnston, chief executive of Oakland, California-based Clorox, told investors May 11.
The Reuters/Commodities Research Bureau index of 16 major commodities, from platinum to soybeans, rose 8.5 percent from February through mid-March. It then dropped 6.6 percent through mid-May and rose 5 percent over the past month.
Prices of pulp, used in paper and packaging, surged in 2004 to a four-year high of $590 a metric ton. Raw coffee prices hit a five-year high in March this year. PET resin, used in plastic bottles, rose 22 percent in 2004 and is expected to jump 39 percent this year, according to estimates from Goldman, Sachs & Co.
A Collective Feeling
Bob Goldsborough, an industry analyst at Ariel Capital Management Inc. in Chicago, which owns Clorox shares among the $21 billion in assets that it manages, says that until recently, competition made producers of household products leery about raising prices for fear it would cost them market share. ``There's now, in the case of managements, a collective feeling that they have to take price increases and help make them stick,'' he says.
Retailers, meanwhile, are maintaining a skeptical posture. ``When suppliers bring price increases to us, we don't just accept it,'' says Karen Burk, a Wal-Mart spokeswoman. ``We ask them to show us that raw materials costs have actually gone up and that's the reason for the increase.''
Even then, ``if suppliers' costs are going up it doesn't necessarily mean it'll be reflected in our stores,'' she says. ``If there's any way we can not pass the price increase on, we try not to.''
Richard T. Curtin, director of the University of Michigan's Survey for Consumers, whose monthly report on consumer sentiment is closely watched by financial markets, doubts that most of the price increases planned for household goods will stick.
Hands to the Fire
Companies ``have a slight degree more pricing power than they did'' a year ago, ``but not as much as they think they do,'' Curtin says. ``Consumers have been holding manufacturers' hands to the discount fire, and I don't think they're going to give up.''
Curtin predicts that many consumers will shift ``from the name-brand product to the store-brand'' -- particularly in supermarkets. That's likely to be the strategy of Carla McDonald, a 47-year-old Madison, Wisconsin, mother of two. ``What do they want to do, drive us all to the store brands?'' she says. ``Good luck, Colgate!''
New York-based Colgate-Palmolive Co. plans price increases on its dishwasher detergent. Other price boosts announced since January involve Clorox's Glad trash bags and containers, Irvington, New York-based Prestige Brands Holdings Inc.'s Comet cleanser and P&G's stomach remedy Pepto-Bismol.
One-Time Events
While Amy Chasen, an analyst at Goldman Sachs in New York, sees ``an improving pricing environment,'' Robert Brusca, a former Federal Reserve economist who is now president of Fact & Opinion Economics in New York, says that ``I don't see any evidence'' that pricing power is up sharply. He thinks many of the increases that have stuck are likely to be one-time events that don't indicate a broader trend.
For the companies confronted by pushback from the big retailers and consumers, ``it's the perfect storm,'' says Jason Gere, a New York-based analyst at A.G. Edwards & Sons Inc. who covers household goods companies such as P&G. ``Manufacturers are being hit by higher commodity costs and have to increase prices somehow or their margins will get squeezed. But they can't afford to raise prices too much if they want to remain competitive on the shelf.''
To contact the reporters on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net; Art Pine in Washington at 1971 or apine@Bloomberg.net.
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