Pressure on GIC margins no longer surprises Wall Street

Procter & Gamble points out that the combination of commodities, freight and currencies has a combined headwind of 22% on core EPS in its fiscal year 2022 (ending June 30). The company’s organic sales increased 10% in its fiscal 2022 third quarter, broken down by price, volume and sales mix, contributing 5, 3 and 2 points, respectively. Despite prices 5% higher and productivity gains of 170 basis points, the company’s core gross margin contracted by 400 basis points. The implication is that the company’s cost of goods sold increased by about 10.7% year-on-year. P&G’s cost pressure is most acute in its baby care, personal care and fabrics/home categories. All products that use resin as an absorbent material are among the most inflationary. Yet contrary to the earnings fallout of many CPG companies in recent quarters, P&G’s cost pressure did not surprise the market and the company’s overall performance beat analysts’ expectations, with shares trading up 2% on Wednesday.

Similar cost pressure is occurring across much of the CPG space, with CPG companies suffering significant gross margin losses despite the sharp rise in prices. There are several reasons why GIC costs are rising faster than prices. One reason is simply timing – GICs must honor price commitments with retailers and cannot immediately increase prices in response to changes in commodity costs. Additionally, CPGs recognize that there is at least some degree of elasticity for all CPG products and consumers are much more tolerant of single-digit price increases and more likely to alter their buying behavior and try cheaper brands when prices go up in the double digits. P&G describes this pricing methodology as having a reasonable payback time (with no specific timeline specified) on the dollar impact of inflation.

A few other takeaways from P&G that may be relevant to other GICs:

  • P&G doesn’t see consumers turning to cheaper brands, and high-end categories continue to sell well.
  • Price elasticities are 20-30% lower than P&G had assumed.
  • The confinements in China will have an impact, especially for the beauty category.
  • P&G is accelerating its supply chain investments, particularly in North America and Europe.
  • P&G lists the potential for further large increases in raw material and freight costs as possible headwinds to its fiscal 2022 guidance. In other words, the company is not seeing immediate relief in its freight rates.

JB Hunt’s comments suggest CPGs should expect higher freight rates in 2022. FreightWaves has written extensively about its expectation of a slack in truck capacity and the slowdown we are already seeing in freight demand. But earnings reports this week from carriers have reminded that a bearish outlook does not immediately translate into rate relief for shippers. Although FreightWaves’ analysis is forward-looking and expresses a view of likely market developments over the next several quarters, freight rates often reflect recent history of market conditions, such as the relative tightness of capacity in the during the past peak season. In fact, Shelley Simpson, Commercial Director of JB Hunt, said she sees the best results (from the carrier’s perspective) in contract negotiations in recent memory. Meanwhile, JB Hunt’s core intermodal segment is refusing thousands of loads per week.

Average rates for intermodal contracts have risen sharply since mid-2020. With JB Hunt refusing intermodal loads, rates could rise further despite recent evidence of slowing freight markets. The prices shown in the table above do not include fuel surcharges.

Marten Transport’s results illustrate the tightness of the reefer. The carrier’s revenue grew 24% year-on-year in the first quarter of 2022 excluding fuel surcharges or 29% with fuel surcharges. Marten’s operating statistics show how well freight rates have performed over the past year and how this has allowed the carrier to operate more efficiently. In the company’s basic segment, revenue per loaded mile increased 28.7% on a 7.7% decline in loaded miles. The company managed its fleet for greater profitability with a 22.6% year-on-year improvement in revenue per truck per week, net of fuel surcharges, leading to a record operating ratio of 85 .4%, its best since its IPO in 1986.

Refrigeration contract prices increased by a double-digit percentage year-over-year in Q1 2022 (blue line – does not include fuel surcharges), but refrigeration tender rejection rates (orange) have fallen sharply lately.

Separately, I encourage readers of The Stockout to join us at The Future of Supply Chain event on May 9-10 at the Rogers Convention Center in northwest Arkansas. The CPG industry will be well represented with speakers from Nestlé (Greg Kessman, Senior Director of Supply Chain) and Tyson (Ildefonso Silva, Executive Vice President of Business Services). Click on here to buy tickets.

To subscribe to The Stockout, FreightWaves’ CPG supply chain newsletter, please click here.

the FREIGHTWAVES TOP 500 The list of for-hire carriers includes J.B. Hunt (#4) and marten transport (No. 31).

Register today for the Future of Supply Chain #FOSC22

Leading supply chain voices will travel to Rogers, Arkansas, May 9-10.

*Limited time pricing available.

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