Procter & Gamble Co. said on Thursday that its fiscal first quarter profit fell 2 percent because the higher prices consumers are paying for its products like Gillette razors and Crest whitening strips were not enough to offset its rising costs for oil and other raw materials.
The world's largest consumer-products company, which makes Tide detergent and Pampers diapers, is locked in a battle that's familiar to companies of all stripes. Faced with higher costs themselves, they have been raising prices at a time when Americans are worried about the economic downturn. But companies' profits continue to be strained as they are careful not to increase prices so much that customers won't buy.
P&G's strategy has been to raise prices mostly on premium products like Crest 3D whitening strips and Gillette ProGlide razors, which have sold well even in the weak economy, executives said Thursday. They think those customers will continue to pay up if the company can keep introducing new products to grab their attention, while customers on the lower end may not be willing to shell out more money for goods.
"An unemployed consumer continues to look for good value and continues on occasion to trade down," said Bob McDonald, P&G's CEO. "But on the other hand you've got people on the other end of the economic portfolio who continue to trade up."
Overall, P&G raised prices an average of 4 percent in the fiscal first quarter, which covered July through September. That was on top of price hikes of 3 percent and 1 percent the previous two quarters. P&G said that its price increases caused it to lose some market share in Western Europe, where it gets 20 percent of its revenue, and North America, where it gets about 40 percent. But P&G held or gained market share in Asia, Latin America, and the region that includes Central and Eastern Europe, the Middle East and Africa, where it sells lower-priced items with lower profit margins, hoping those customers eventually move to buying higher-priced products.
The price increases helped to boost revenue, as did the weak U.S. dollar, which meant that P&G got more dollars back in the U.S. from goods sold overseas. In the fiscal first quarter, which covered July through September, revenue increased 9 percent to $21.92 billion from $20.12 billion. That beat the $21.58 billion expected by analysts polled by FactSet.
But the price hikes were not enough to offset the company's higher costs for raw materials like oil. Net income fell to $3.02 billion from $3.08 billion. Per-share earnings were $1.03 per share, in line with analysts' estimates, and up from $1.02 per share in the same period a year ago. Gross margin fell to 49.5 percent from 51.9 percent.
Executives acknowledged that the costs of some materials have fallen, but they emphasized that many are still up significantly from a year ago. For example, Brent Crude oil is trading for about $112 per barrel, up from about $84 a year ago.
McDonald said P&G is working to find other, renewable materials, which won't be subjected to such big spikes, to use in its products. P&G said it expects revenue to increase 3 to 6 percent for the current fiscal year, which runs through June, though some of that would be due to higher prices.
The company also noted that the boost it and other companies have enjoyed from the favorable currency translation will likely decline as the dollar shows signs of strengthening.
But Chief Financial Officer Jon Moeller said the company wouldn't base its decision-making on short-term market trends.
"It's just more of the same in the volatile environment that we live in," he said.
P&G shares rose 31 cents to close at $65.26 Thursday amid a broad market rally.