10 Feb New Worry for CEOs: Rising Costs From Metals to Meat
U.S. manufacturers and food companies are grappling with rising material and ingredient costs on top of pressure from higher wages—a potential double whammy that could force them to raise prices or accept lower profit margins.
“We just see the inflation trends creeping in on many parts of our value chain,” Whirlpool Corp. Chief Executive Marc Bitzer told analysts recently. The Michigan-based appliance giant projected that additional raw-material costs, driven by rising prices of steel and resin, would shave as much as $250 million off its profit this year.
Fears that higher wages would push central banks to raise interest rates more aggressively to tamp down inflation have fed the global market selloff. U.S. inflation has largely been muted since the 2007-2009 recession, which economists attribute in part to weak demand, soft wage growth and cheap imports due to a strong dollar. Over the past six months, however, the world’s major economies have been enjoying a rare spell of synchronized growth, boosting commodity prices.
Picking Back Up
Manufacturers and food companies are bracing for rising material and ingredient costs, as robust global economic growth stirs demand after years of weak inflation.
Source: Bureau of Labor Statistics
The economic rebound is raising demand for materials like steel, aluminum and copper used to build everything from houses and office buildings to automobiles and smartphones. Prices of steel and aluminum could also rise for U.S. companies if the Trump administration imposes the tariffs it is considering for those metals.
Many companies, including auto maker Ford Motor Co. and heavy-machinery giant Caterpillar Inc., have pointed to rising material costs as a hurdle in the coming year. Some food wholesalers, retailers and caterers say they are contending with escalating costs for staples such as beef, vegetables and eggs that end up on supermarket shelves, in restaurants and corporate kitchens. Sysco Corp. , the world’s largest food-service distributor, saw overall food inflation of more than 3% during its most recent quarter.
Few economists see inflation taking off, partly because consumer prices gains have been running below the Federal Reserve’s annual 2% target for years.
Yet at 4.1% in January, the unemployment rate was at its lowest level in 17 years, and average hourly earnings for private-sector workers rose 2.9% from a year earlier, their largest year-over-year increase since June 2009. Restaurants, manufacturers and other businesses are now fretting over increased payroll costs amid the tight labor market, especially for skilled workers.
B&G Foods Inc. CEO Bob Cantwell told a conference recently: “We’re seeing the inflation that the rest of the industry is,” referring to higher packaging as well as transport costs. Increased cargo shipments have led to a nationwide shortage of trucks, forcing many companies to pay more to transport goods or cut back.
The Federal Reserve said in last month’s report on regional economic conditions known as the beige book that companies in several parts of the country “noted increases in manufacturing, construction, or transportation input costs.” Most areas reported modest to moderate growth in prices.
Motorcycle maker Harley-Davidson Inc. has benefited from a weaker dollar in recent months that has helped U.S. manufacturers boost overseas sales. But Chief Financial Officer John Olin told analysts last month that the help from the currency exchange will be “more than offset” by expenses including rising steel and aluminum costs this year.
Paint maker Sherwin-Williams Co. said its outlook this year was tempered by industrywide raw-material inflation as high as 6%. Food distributor Performance Food Group Co. on Wednesday reported higher inflation for meat, eggs, and produce during its most recent quarter, and executives at the supplier to restaurants and other businesses expect food costs to continue to grow around 2.5% during the year.
Higher costs are already rippling into broad measures of what manufacturers pay and receive for commodities and other products. The Institute for Supply Management’s manufacturing index in January reported its price index surged to the highest level since May 2011, as 47% of respondents reported paying higher raw-materials prices.
The Labor Department’s producer-price index, a measure of inflation experienced by businesses, increased 2.6% last year. January data are due next week. In 2017, prices of steel-mill products rose 7.8%, while industrial chemicals rose 11.7%, according to the Labor Department.
Food prices were more volatile: raw-milk prices dropped 10% while prices of slaughter hogs jumped 14% and the cost of wheat increased nearly 13%.
“The question is to what extent will that turn into inflation in the retail level,” said Richard Moody, chief economist of Regions Financial Corp. Current high corporate profit margins offer companies the capacity “to eat some of these price increases” rather than pass them on to customers, Mr. Moody said.
The overall profit margin of the S&P 500 index was 10.3% in 2017, up from 9.9% the previous year, according to FactSet.
Some companies can pass costs on to consumers and maintain profit margins, but raising retail prices has rarely been an easy task. In fact, in the years of weak inflation and consumer caution following the recession it has been increasingly difficult.
3M Co. , the St. Paul, Minn.-based maker of myriad products including Scotch tape and industrial films and adhesives, has signaled it may raise its prices more than expected to offset inflation if it accelerates this year.
Most restaurant companies have been raising menu prices to help offset rising ingredient, labor and rent costs. For instance, McDonald’s Corp. said its overall menu prices in the fourth quarter were up 3% from the year-ago period to help counter increased expenses and protect margins in advance of launching a new dollar menu.
Some food providers are trying to blunt the impact of rising prices by changing their menus.
Philadelphia-based Aramark , which provides food services to colleges, sports facilities and businesses, has swapped out foods such as meat and potatoes for poultry and other options not undergoing such rapid cost increases, Chief Executive Eric Foss said in an interview.
Not all companies are concerned about rising ingredient costs. Indeed, prices of some items like cocoa are down while others like shortening are up over last year. Oreo maker Mondelez International Inc. and Hershey Co. , for example, are expecting net commodity costs to be flat this year.
Aluminum products maker Arconic Inc. expects some relief from last year’s surge in aluminum prices. “There’ll be some raw-material costs, but not of the magnitude that we had in 2017,” Chief Financial Officer Ken Giacobbe told analysts this week, citing a 30% jump in aluminum prices last year.
—Julie Jargon contributed to this article.
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