When you're a company like Procter & Gamble
Unfortunately, we're also continuing to see cost inflation dinging the company's profits. In the quarterly report, we see it in phrases like "higher input costs" and "higher commodity costs" and in the financials through a lower gross margin. For the third quarter, P&G's gross margin fell from 51.9% last year to 50.5% this year.
Time to worry?
The easy answer is that this situation is far from ideal. As it stands, these higher commodity costs mean that more sales dollars are going out the door to pay suppliers and fewer are making their way down to the profit line.
But one of the main reasons investors buy companies like P&G in the first place is because strong brands supposedly give the company the ability to raise prices in situations like this without losing a whole lot of business. This is where it gets interesting.
Earlier this week, I covered Coca-Cola's
This is significant because to date these companies largely haven't been raising their prices to offset the rising costs -- they've just been eating it. That means that in the coming quarters we'll get a view of how consumers react to price increases and whether brand power still has significant pricing power.
Who are we really worried about here?
With all -- or at least most -- of the major branded-goods manufacturers raising prices or getting ready to do so, the concern is that the move will push more consumers toward private- and store-label products offered through retailers like Costco
While that's a valid concern, it's important to remember that private-label manufacturers face the same rising input costs as the branded-good manufacturers do. And because they operate on slimmer profit margins, they have far less room to absorb those costs.
But even if private labels do have to incrementally raise prices, there's still the potential that as branded-goods prices rise, consumers will get fed up and trade down to lower-priced products -- even if those prices are rising incrementally as well. While this is hardly a "sky is falling" issue for P&G, it is something that investors should pay attention to in the coming quarters.
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