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Thread: weekend commentary - Huge Profit Margin Squeeze for some corporations

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    Default weekend commentary - Huge Profit Margin Squeeze for some corporations

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    (snip)Energy, meat, vegetable and coffee prices are up. Pricing power is not. The result is a huge margin squeeze that affects profits at restaurants, hotels, cruise lines, and travel-related businesses in general. The Wall Street Journal picks up the story in As Food Prices Soar, Eateries Scramble

    Soaring global food prices, particularly for meat, sugar and coffee, are putting pressure on the restaurant, travel and hotel sectors as they pursue a fragile recovery. In a bid to offset added costs without passing them on to price-sensitive consumers, many companies are scrambling to renegotiate contracts, find cheaper suppliers and reconfigure menus.

    Marriott International Inc. has been coping with higher prices for beef, fish and chicken over the past six months, says Brad Nelson, a vice president andthe global corporate chef for the hotel chain. The company is also paying higher prices for sugar and arabica coffee beans, which have both soared over the last year. "It's a global challenge," says Mr. Nelson.

    The company swung to a profit in the third quarter but, like many of its peers, struggled to raise room rates, doing so for the first time in two years in the second quarter. So far, it has ruled out raising food prices at its restaurants, instead re-engineering its menus to offer alternatives to popular and pricey cuts of beef such as filet mignon and New York strip.

    Restaurant chain Johnny Rockets, known for its burgers, uses about eight million pounds of ground beef a year, and its prices have risen 20 cents a pound over the last two months, says Ray Masters, senior vice president of purchasing and distribution. To offset part of the increase, the privately held company has renegotiated its poultry costs, cutting them 5% for 2011, and its ice-cream prices are down 4%. Still, this won't offset the higher beef costs, Mr. Masters says.

    While cruise operator Royal Caribbean Cruises Ltd. hedges against increases in cattle prices, that hasn't fully offset its rising costs for beef, says Chief Executive Richard Fain. Since the fall, meat prices have risen steadily for the cruise operator, which serves about 53 million pounds of beef, poultry, lamb, veal and pork a year. The most popular restaurants on the ships are steakhouses, Mr. Fain says.

    "Meat is important to our guests," Mr. Fain adds. "We aren't prepared to sacrifice the quality and we can't raise prices enough to reflect it, so it ends up being a cost we have to absorb." Royal Caribbean is also paying more for citrus fruits and fish, particularly shrimp, another popular dish on its cruises.

    Norwegian Cruise Line began using e-auctioning last year to find better food prices as commodity costs rose, says Chief Executive Kevin Sheehan. The company, which uses 34 million pounds of meat and 9.5 million pounds of seafood a year, has had higher costs for dairy items, meat and fish, he says.

    Through e-auctioning, the cruise operator can specify what food items it needs and accept bids from suppliers. The competition keeps prices lower, says Mr.Sheehan.


    PPI Index Up Again

    Please consider the Producer Price Index Report for December 2010.

    The Producer Price Index for Finished Goods rose 1.1 percent in December, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance followed increases of 0.8 percent in November and 0.4 percent in October and marks the sixth straight rise in finished goods prices.

    Finished Goods

    About three-fourths of the December rise in the finished goods index can be traced to prices for energy goods, which increased 3.7 percent. Also contributing to the broad-based advance in the finished goods index, prices for consumer foods and for goods other than foods and energy moved up 0.8 percent and 0.2 percent, respectively.

    Finished Energy

    The index for finished energy goods climbed 3.7 percent in December, its third consecutive monthly advance. Roughly sixty percent of the December rise is attributable to a 6.4-percent jump in gasoline prices. Increases in the indexes for home heating oil and liquefied petroleum gas also contributed to higher prices for finished energy goods.

    Finished Foods

    The index for finished consumer foods rose 0.8 percent in December after moving up
    1.0 percent in November. Over three-fourths of the December advance can be linked to prices for fresh and dry vegetables, which surged 22.8 percent. Higher prices for meats also were a major factor in the increase in the finished consumer foods index.

    •At the Crude Goods Level, producer prices are up 15.5%
    •At the Intermediate Goods Level, producer prices are up 6.5%
    •At the Finished Goods Level, producer prices are up 4.0%

    Every step of the way, a decreasing portion of costs are passed on. Even less passes through to consumer prices. This is why those screaming about "rampant inflation" always point to raw commodity prices.(snip)

    ... with many thanks to Mike Shedlock for his insights !


    The unspoken message here is that, for the past year or so, US corporations have been able to post good profits as a result of labor cost cutbacks ( i.e. laying off workers ). This in turn has resulted in rising US stock market valuations, increased consumer spending by that portion of high earning Americans that own the majority of US stock shares, and some resulting improvement in the US economy.

    However, as time goes forward, US corporations cannot continue to keep laying off existing workers and still function at present levels - thus there are few additional future corporate profits to be gleaned on the labor side. At the same time, the inflationary effects of US Dollar policy have now worked their way through the global economy to the point where many of the non-labor 'input' costs for these US corporations are rising significantly. This refers to the costs of raw food for restaurants, to copper / steel for manufacturers, to energy for every company.

    With the exception of 'rich' Americans having increased consumer spending in the upscale / luxury goods market segment ( see reference to higher earning American stock share owners being the only major consumer beneficiaries of US Dollar policy ), US consumers in the low end and 'mid range' market segments simply do not have additional dollars left over for discretionary spending. Thus, attempts to raise retail prices for low end and 'mid range' consumer goods have translated into falling sales. As such, US corporations are finding it a de-facto impossibility to pass on the increased 'input' costs they are incurring in the form of higher prices to US consumers.

    The likely result of this situation will be notable declines in future profit margins of those US companies most heavily affected by rising costs of food, energy, copper / steel, and other raw materials, and most dependent on the low end and 'mid range' consumer market segments. The likely consequence will be a decline in the price of their stock shares.

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    Default Re: weekend commentary - Huge Profit Margin Squeeze for some corporations

    Given the current political climate, those same companies that "cannot continue to keep laying off existing workers" will be increasingly eliminating these jobs domestically and replacing them with foreign labor. This labor shift will allow them to plug profit drains related to labor but they still face a government which wants to redistribute these profits down to the lower class.

    Through a de facto penalization of corporations and wealthy individuals via increased taxes and regulatory requirements, this is only going to result in an increased shift in jobs, overwhelmingly industrial and non-technical, overseas and a cannibalization of the middle class. The thing that worries me the most is not a decline in stock prices or declines in profit margins. There will be no dependence on the "mid range" consumer market segment because there will be no middle class. We'll only be left with the very rich and the very poor.

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    Default Re: weekend commentary - Huge Profit Margin Squeeze for some corporations

    those same companies that "cannot continue to keep laying off existing workers" will be increasingly eliminating these jobs domestically and replacing them with foreign labor. This labor shift will allow them to plug profit drains related to labor but they still face a government which wants to redistribute these profits down to the lower class.
    Obviously true for some companies ... like GM and GE ... that are heavily involved in manufacturing and other 'offshorable' activities. But not true for the corporations referred to in the news blurb i.e. the Hotel industry, the Restaurant industry, the Cruise industry etc. The obvious difference is that an American car / appliance buyer walking into an American retailer does not care how much US versus foreign content is actually 'hiding' in that new GM car or new GE appliance ( i.e. all that is really needed to service the US customer are retail sales personnel and maintenance personnel ). However, for the most part, hotels or restaurants or cruise liners need to have chefs, waitstaff, cleanup staff, etc. that cannot be outsourced and cannot be reduced below a certain level without a drastic negative effect on their customers. This was the earlier reference that further reductions in labor costs for these types of businesses aren't likely.


    There will be no dependence on the "mid range" consumer market segment because there will be no middle class. We'll only be left with the very rich and the very poor.
    We're in complete agreement on THIS point !!! And the aftermath of this is particularly bad re future economic prospects for the ~80% of exotic dancers who are NOT working in upscale clubs serving the 'rich and famous'. It is also particularly bad re future after-tax earnings prospects of 'serious professional dancers' trying to generate passive income from their 'nest eggs'.

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