Finance chiefs across industries are facing a classic problem that comes with economic growth: rising costs of raw materials, energy and transportation. Company executives now have to decide how to offset these increases to protect margins and whether or not to pass the extra costs on to customers.
Purchase prices for a range of products—from steel and copper to lumber and plastics—have gone up in recent weeks on the back of a resurgent U.S. economy. Bottlenecks around global production, supply chains and logistics are exacerbating the issue, resulting in shortages of key components such as computer chips.
Chief financial officers are facing a delicate balance as they weigh potential consumer-price increases against cost cuts and technology investments to respond to these inflationary pressures. Their course of action is dictated, among other things, by their industry, and by how the coronavirus pandemic has affected their businesses.
Inflation is a known problem, said Kofi Bruce, the CFO of cereal maker General Mills Inc. “There is an action plan for it,” Mr. Bruce said.
The Minneapolis-based food manufacturer has raised prices of some products already, and expects price increases for more of its food items over the next couple of months, according to a spokeswoman.
Kofi Bruce, the CFO of General Mills
Photo: General Mills Inc.
“It’s not just us feeling the effects of rising inflation,” Mr. Bruce said. “We are all likely looking at the same headwinds…and are planning to take action,” he said, referring to other packaged food companies.
While it is “somewhat easy” for consumer products companies, home builders and pharmaceutical firms to pass on higher costs, retailers and restaurants are facing “some difficulty” doing so, analysts at ratings firm S&P Global Inc. said in a recent report. Airlines may hesitate to raise ticket prices too quickly, despite higher fuel costs, as international travel remains depressed, the analysts said.
“Companies are…tracking what competitors are doing,” said Tim Ryan, U.S. chairman at professional services firm PricewaterhouseCoopers LLP, referring to price increases. “In certain markets [and] certain segments, they’re testing elasticity and what they’re able to do.”
Companies are likely to report lower profits despite these pricing actions and cost cuts in the coming quarters. Many businesses have regular annual cost-reduction programs in place, but inflation is outpacing the gains made through such efforts. Some businesses are renegotiating prices with their suppliers, investing in automation or delaying new hires to keep costs down.
Clorox Co. , the maker of antiseptic wipes and other household products, in July plans to increase some prices for its Glad brand, which makes trash bags and food wrappers. The company incurred additional expenses during the pandemic as it rushed to boost production and is now faced with higher materials and transportation costs, Chief Financial Officer Kevin Jacobsen said.
Clorox also has other levers it can pull, including reviewing what it pays retailers to promote its products in stores, improving its processes and investing in product innovation to increase revenue, Mr. Jacobsen said.
Clorox’s margin for earnings before interest and tax usually goes up by about 1.75% a year through its standard cost-savings programs, according to the company’s CFO. Clorox has reduced over $100 million in annual costs going back to its 2008 fiscal year.
“In a normal year, that would be enough to offset moderate cost inflation,” Mr. Jacobsen said.
This year however, Clorox expects to announce in August if it needs to take further steps to mitigate cost pressures, which could include further pricing actions. The company, after revenue increases of more than 20% last summer, reported flat sales, lower margins and smaller profits in the latest quarter compared with the same period last year.
Whirlpool Corp. in recent months has faced higher costs for steel, computer chips and plastics, finance chief Jim Peters said. The February winter storm in Texas affected chemical refineries in the state for weeks, resulting in shortages of resins that are used to make plastic.
The maker of KitchenAid and other household electronics recently raised prices between 5% and 12%, depending on the country. “That covers the raw material cost inflation,” Mr. Peters said, referring to the price reset.
The company also is battling higher operating expenses on other fronts, including from having to switch over its production lines more frequently to account for shortages of key components. “You don’t want to flex them as often as we do,” Mr. Peters said, referring to Whirlpool’s factories and the fact that they have to adjust more quickly. “This isn’t ideal.”
Whirlpool last year reduced costs by furloughing and laying off workers and offering voluntary retirement in response to the pandemic, similar to many other businesses.
Even if companies raise prices that customers pay now, it takes time to recoup the increase in costs. Emerson Electric Co. , which sells tools and home products, as well as climate technology and automation services, is facing a $75 million headwind from inflation this year, CFO Frank Dellaquila said. He expects to recover a portion of the amount through cost pass-through arrangements with the company’s customers.
“We would see the cost impact this year, but then over the next…two, three, four quarters, we’d start to get relief,” Mr. Dellaquila said.
Emerson is also looking to reduce costs and increase productivity to mitigate the impact of higher raw material prices, he said.
—Kristin Broughton and Mark Maurer contributed to this article.
Write to Nina Trentmann at [email protected]
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