advertisement

Inflation pushes retailers to increase prices

Sunday, July 27, 2008 | 7:04 p.m. CDT

NEW YORK — Coming to a store near you: Even higher prices.
Most inflation this year has come from food and fuel, as retailers resisted passing along to strapped consumers the higher prices manufacturers charged them, but coming increases from companies such as Johnson & Johnson and Hasbro may leave them with no choice.
“While these increases have not for the most part been passed on at the retail level, it is inevitable that they will be at some point,” said Dean Baker, co-director of the Center for Economic and Policy Research. “Car dealers and other retailers cannot continue to absorb rising costs at the wholesale level and not pass some of these increases on to consumers.”
Sherwin Williams Co. on July 17 announced its third price increase in eight months. The company has been having “difficult discussions” with retailers, Chris Connor, chairman and CEO, said on its quarterly conference call.
The price increases are “well supported with facts in terms of why the company needs them,” he said. “Our customers, to the best of their ability, are passing them on.”
Hasbro said the retailers it sells to didn’t like price increases the company announced Monday “but they recognize that their own private-label costs are going up and they’ve accepted it.”
The increases leave retailers in a bind: They can keep prices steady and cut profit margins or raise prices and risk losing sales.
Wal-Mart Stores has been in the lead of aggressively keeping prices down, pressuring its competitors to do the same.
“We have seen inflation and we have passed some of that through,” said John Simley, a Wal-Mart spokesman. “We have, wherever possible, worked with our suppliers to reduce the inflationary impact as much as possible.”
Costco Wholesale Corp. said Wednesday its fourth-quarter earnings would be “well-below” Wall Street estimates of $1 a share as it delays price increases. Stock in rival BJ’s Wholesale Club fell more than 10 percent as investors feared the competitor would have to match Costco’s prices.
Some economists say that once Americans spend their $106.7 billion in tax rebate checks, consumer spending may shrivel, sparking a round of price cuts to entice shoppers. Others think price increases may be postponed, but they’re on their way.
Much of this depends on how much money consumers have after buying gas and groceries — and what kind of mood they’re in once they’ve filled their tanks. On Friday, The Reuters/University of Michigan index of consumer sentiment for July came in at 61.2, beating expectations and slightly better than the 28-year low of 56.4 hit in June. Still, the confidence index was at 90.4 a year ago.
Even Costco said it won’t swallow price increases from suppliers on key items, but would postpone passing them along to consumers, if only for a few weeks, because it wants to be the last retailer to raise prices.
The company raised its prices for rotisserie chicken from $4.99 to $5.49 about three months ago. Last week, the prices rose to $5.99.
“I think the consumer is just starting to see, not only with us, rising commodity costs and rising general merchandise costs in a much bigger way than they’ve seen other than with gasoline itself,” said Richard Galanti, Costco’s chief financial officer, during a conference call Wednesday.
Inflation hit 5 percent for the year in June, the highest it’s been since 1991, but the price increases hitting manufacturers have been far worse.
Prices manufacturers paid for crude materials rose 70 percent for the three months ended in June, but companies weren’t able to pass all those increases along. Prices for the intermediate goods made from those materials rose much less, about 27 percent. The prices for finished products made from those goods rose 14 percent, according to the Bureau of Labor Statistics Producer Price Index.
Kimberly-Clark Corp., which makes Kleenex, Huggies diapers and Viva paper towels, said Thursday that energy and commodity cost increases this year would total as much as $900 million, double its prediction at the beginning of the year.
Saying the company might raise prices for the second time this year, Chief Executive Thomas Falk added, “The reality is that the rapid run-up in commodity costs has outpaced our ability to offset inflation in the near-term with price increases and other actions.”
The increases keep coming.
Dow Chemical Co., the second largest chemical company in the world after Germany’s BASF, is raising some prices by as much as 25 percent this month, following June price increases that were as high as 20 percent on all products. The increase is sure to put more pressure on manufacturers, since Dow’s chemicals are used in a variety of products including packing peanuts, frozen-food trays and diapers.

advertisements