September 5, 2008
Oil’s Climb Forced Many Companies to Become Leaner
By ELLEN SIMON
By Ellen Simon
Conventional wisdom had long held that some industries would collapse if oil topped $100 a barrel. As oil neared $150, sending costs higher for everything from jet fuel to plastic jars, the question was how many companies would succumb.
The surprising answer: Not many. Some have even thrived.
Companies have culled unprofitable products, cut production costs and passed along price increases. Airlines have laid off thousands of employees, dropped routes, sold planes and raised fares 20 percent in the past year - the fastest rate of increase in 15 years. Consumer product makers have shrunk tubs of Smart Balance Buttery Spread and jugs of laundry detergent. Retailers such as The Yankee Candle Co. Inc. and Target Corp. have passed on higher prices to consumers.
"We are squeezing every dollar out of our working capital," James Craig-ie, chairman and chief executive of Church & Dwight Co., said on the company's second-quarter earnings call in August. Sales have increased 50 percent over the past four years at the company, which makes detergent, toothpaste and Arm & Hammer baking soda, but the number of employees has stayed flat at 3,700, Craigie said.
With oil prices roughly twice what they were in January 2007, many companies have simply adjusted. Now that oil prices have receded from their highs , that preparation has put them in a strong position - leaner than they've been in years, with customers paying higher prices.
Of course, the adjustment hasn't been smooth.
Consumer inflation is the highest in 17 years, up 5.6 percent this year, and unemployment is at a four-year high. Workers are doing more without earning more: Productivity jumped 4.3 percent at an annual rate in the April-to-June quarter, while labor costs fell.
The auto industry has been hammered as gasoline prices climbed roughly $1.30 a gallon since the beginning of 2007. Higher prices for gas and food crimped consumer spending and slammed department stores and restaurants. Every penny increase for a gallon of gas equals more than $1 billion in consumer spending over a year, according to Citigroup Inc. Business bankruptcies are higher than they were a year ago, soaring in industries such as trucking that have excess capacity and are unable to pass on higher costs.
But many businesses have proved resilient. A surge in exports thanks to the weak dollar helped, but so have price increases and cost cutting.
At Newell Rubbermaid Inc., where resin prices are one-tenth the cost of goods, oil's run-up could have been disastrous.
"When I found myself looking at the price of oil several times a day, it was too much," CEO Mark Ketchum said. "That's not the way a CEO or any member of management is going to build shareholder value."
Rubbermaid already had restructured, winnowing 40 percent of its product line between 2003 and 2004. As oil rose, management scrutinized the 12 percent of "commodity-like" products it had kept.
The products, including plastic shelving and its cheapest storage containers, had one thing in common: Resin was somewhere between one- third to one-half the cost of sales.
"We couldn't sell it for what it cost to make it," spokesman David Doolittle said.
Its cheapest clear plastic storage bins, which hold Christmas tree ornaments or sweaters and are pulled out of a closet twice a year, no longer made economic sense, Ketchum said. "Resin is never going to be a cheap alternative," he said. "Those may go back to cardboard boxes."
In contrast, the company kept its Roughneck containers, meant for hard use, such as for recycling bins.
"The consumer is willing to pay a price because they know they're going to beat the heck out of them," he said.
Every penny increase for a gallon of gas equals more than $1 billion in consumer spending over a year, according to Citigroup Inc.
Originally published by BY ELLEN SIMON.
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