P&G, Colgate profit squeeze means prices to rise

CINCINNATI — Shoppers can expect some higher prices as the makers of toothpaste, soap and other everyday household products see their profit margins pinched by rising ingredient costs.

Both Procter & Gamble Co. and rival Colgate-Palmolive Co. reported lower profits Thursday and posted revenue below Wall Street expectations for the last quarter. They both said commodity costs are rising more than expected, with P&G saying they are adding $1 billion in costs for the year, double what it anticipated.

P&G, which counts Pampers diapers, Gillette shavers and Crest toothpaste among its major brands, said fast-rising costs for product-making materials and fuel likely will mean some price increases, with hikes already planned for its Duracell batteries in March.

Colgate-Palmolive President and CEO Ian Cook said during a conference call that the price increases would run 1 to 2 percent and be "appropriate."

Consumers can expect to see not only household product makers, but beverage, food and other companies to try to pass along price increases, said Jack Russo, an Edward Jones analyst. That will test whether they are feeling confident enough about the economy to pay higher prices again for their favorite brands.

"That's the million-dollar question," Russo said, adding that P&G and Colgate are better positioned than many consumer companies because of their solid reputations and relationships with retailers, and strong presences in emerging markets that are growing faster than sluggish developed countries.

P&G shares fell $2.44, or 3.7 percent, to $63.67. Colgate shares dropped $2.31, or 2.8 percent, to $77.69 in afternoon trading. Standard & Poor's analyst Tom Graves cut Colgate stock from a "hold" to "sell" recommendation, citing the sales shortfall and "a challenging commodity cost environment."

Among materials P&G uses a lot of that are jumping in price are palm oil used in beauty products, wood pulp for paper towels and tissue, and resin used in packaging.

After months of discounts and other promotions to lure shoppers away from lower-priced competitors, P&G sees cheaper store brands weakening — while their makers also feel pressure to raise prices. P&G also will use its scale to hold down its own costs.

Bob McDonald, chairman and CEO, said P&G will continue to roll out new products that add value with their higher prices — such as the popular Gillette Fusion ProGlide shaver and Crest 3D teeth-whitening system introduced last year.

"In terms of ability to pass through, we are really in a very good position," McDonald told investors on a conference call.

However, while some consumers are willing to pay more for a clean shave or whiter teeth, they still appear to be drawn to lower prices for other everyday items. P&G reported "strong growth" for Charmin Basic, a lower-priced version of its toilet paper brand.

P&G shares fell $2.44, or 3.7 percent, to $63.67. Colgate shares dropped $2.31, or 2.8 percent, to $77.69 in afternoon trading. Standard & Poor's analyst Tom Graves cut Colgate stock from a "Hold" to a "Sell" recommendation, citing the sales shortfall and "a challenging commodity cost environment."

P&G, based in Cincinnati, said a 28 percent second-quarter net income decline — $3.33 billion, or $1.11 per share, compared with $4.66 billion, or $1.49 per share last year — was largely because of the big boost in last year's quarter from sale of the company's prescription drug business. P&G says net income from continuing operations was up about 10 percent — from $1.01 per share and $3.15 billion.

Revenue rose 2 percent to $21.3 billion as the company sold more products in most of its markets. Analysts expected $1.10 per share on $21.51 billion.