A Whiff Of Deflation In the Corporate Air

February 3rd, 2014 9:11 pm | by John Jansen |

I think the classic definition of deflation includes the situation in which corporations have lost pricing power. Here is a long WSJ piece on an eclectic group of American companies which confront that distasteful situation.

Via the WSJ:

Firms Pinched by Pressure to Hold Down Their Prices

Low Prices Keep a Lid on Revenue Growth and Hiring, Hindering Recovery


Theo Francis
Feb. 3, 2014 7:40 p.m. ET

American companies are struggling with falling prices for a number of their key products, keeping a lid on revenue growth and hiring.


Executives from companies as varied as General Electric Co. GE -3.10% , Kimberly-Clark Corp. KMB -3.55% and Royal Caribbean Cruises Ltd. RCL -3.23% said some prices slipped in the last three months of the year—sometimes significantly—amid intense competition, weaker demand and pressure from cost-conscious customers.

Falling prices for adhesives weighed on Eastman Chemical Co. EMN -2.37% , cheaper packaged coffee dragged on Starbucks Corp. SBUX -3.02% , and “value and discounts” hit McDonald’s Corp. in the fourth quarter in what the fast food chain called a “street fight” for market share. Xerox Corp. XRX -4.06% is eyeing acquisitions that can “help us be more competitive on price pressure.”

Corporate revenues are showing the strain, whether from lower prices, weak demand or a combination of the two.

With about half of companies reporting year-end earnings, Thomson Reuters estimates revenue for companies in the S&P 500 stock index rose just 0.9%—capping two years of lackluster revenue growth and tying the third-weakest quarterly sales growth since the fall of 2009. Part of the problem is that weak revenue leads companies to cut prices to boost sales, which reduces the value of those sales, and trickles down through the supply chain.

The persistent weakness in revenue also prompts companies to cut back costs and plow their spare cash into share buybacks instead of investments like new factories. Fourth-quarter earnings, as a result, are expected to be up 9.4%.

“When you have such weak top-line growth, such weak demand, the competitive environment becomes much tougher,” says Jason DeSena Trennert, chief investment strategist with Strategas Research Partners. “One of the ways to compete for top-line is through price.”

Not every company reported price drops. 3M Co. said prices increased 1.4% in the fourth quarter, attributing the gain to research gains and adjustments made in emerging markets designed to offset currency devaluation. Harley-Davidson Inc. HOG -0.75% said price increases helped boost motorcycle revenues by 1.4% in the quarter even as shipments fell 1%. Altria Group Inc. MO -3.15% said a 13.2% rise in income for cigarettes and cigars in 2013 came “primarily through higher pricing.”

But the trend is evident in government data. While economic growth in the fourth quarter came in strong, helped by expanding consumer spending, firms aren’t raising prices. For the last two years, the consumer-price index has increased less than 2%, the first time in 15 years it has been that low in consecutive years. And in the year since December 2012, the consumer-price index for goods, excluding food and energy, declined 0.1%.

The pressure on prices isn’t ubiquitous, instead cropping up in certain markets or business lines. For instance, low Arabica coffee prices last year at one point prompted Starbucks to follow competitors in cutting the price of the beans it sold in groceries to $8.99 from $9.99 for a 12-oz bag; but the company kept prices stable for single-serve coffee.

Take the business of blood. Hospitals are squeezed by shrinking reimbursements, rising costs and a rapidly changing health-care system, so hospital executives are making cuts like paying less for their supplies. That means Haemonetics Corp. HAE -0.58% , which sells needles, tubing and other equipment for collecting and transfusing blood, has to lower its prices to win business.

“It’s coming all the way down the chain from the hospital that’s under cost pressure, all the way down to us,” said Gerry Gould, the company’s vice president for investor relations. “We now have to go and see what we can do to reduce our cost.”

Major customers are increasingly seeking to control supply costs with single-source competitive bids. In January, Haemonetics said it won an exclusive three-year contract from a group of blood-donation centers, boosting its market share significantly. But price concessions mean the deal will pinch margins in fiscal 2015. Another pending bid also includes price cuts, the company said.

Pressure on prices is also coming from consumers, who continue to seek out discounts on basics even as they occasionally splurge on products they really want. Kimberly-Clark reported soft prices in parts of its North American personal-care business last quarter due to discounting. The maker of Huggies diapers and Kleenex tissues also noted that competitors lost market-share in the facial-tissue business to lower-cost private-label products.

“We wanted to be a bit more competitive on shelf every day, and so you saw a negative price,” said Kimberly-Clark Chief Executive Thomas Falk.

The downward pressure is likely to continue, a company spokesman said, though Kimberly-Clark saw its own market-share for tissues hold steady and hopes to “help negate” baby-care price cuts with previously announced plans to reduce the number of diapers in packages of Huggies.

Elsewhere, the culprit is global competition. Leggett & Platt Inc., LEG -3.20% which makes bedsprings, carpet pads and other goods, was selling steel rods for less as steel prices dropped. The Carthage, Mo., company blamed “steel-related price deflation” for about half of an 8% decline in same-location sales for its industrial metals business over the full year.

The company said prices for its steel rod and steel wire products fell in the early part of the quarter, because steel rods were “flooding into the country from primarily China and Turkey.” Although the excess supply drove prices down, domestic scrap prices remained steady, the company said. Other products, including carpet padding, saw prices increase.

The U.S. benchmark price for steel rods and other long products has fallen to $632 from $641 since Oct. 1, amid a 14% rise in imports of such products, even as prices for other forms of steel have increased, according to data from Platts, the provider of commodities information.

A Leggett & Platt spokesman declined to comment.

Plenty of companies are pointing to softness in at least some of their products. Honeywell International Inc. said depressed prices for a specific refrigerant will continue to impact results through the first quarter. Airgas Inc. ARG -2.97% faced the same coolant issue, leading to a drop in sales for the quarter.

GE cited pricing pressure in its key gas turbine business in the fourth quarter, at a time of slack electricity demand in developed markets. GE won big contracts in Saudi Arabia and Algeria in the quarter but total order prices for heavy duty gas turbines were down 4% in the fourth quarter.

And the company doesn’t appear to expect a recovery in prices any time soon: It said it plans to maintain the turbine business’s profitability by reducing its own costs. Heavy duty gas turbines “probably had the most intense pricing pressure,” GE Chief Executive Jeff Immelt said. “But we have a very active plan to get about 10% of the cost out.”

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