PREVIEW-Discounts pressure consumer products makers’ profit

* WHAT: Packaged goods companies report quarterly profits

* WHEN: Mid-July to mid-August

* Promotions, euro pressure profits

* Cost inflation cropping up for food makers

By Brad Dorfman and Martinne Geller

CHICAGO/NEW YORK, July 16 (BestGrowthStock) – Profits for makers of
packaged goods such as soap, soda and food will likely be hit
by the hunger of consumers and retailers for discounts and may
prompt the sector to rethink its pricing strategy.

Analysts and industry executives think the aggressive
discounting that has flooded store shelves recently could ease
by the end of the year, as the costs for commodities such as
wheat and meat begin to rise.

“It’s going to be a fine balancing act because the consumer
appears to still be very, very price sensitive and value
oriented,” said Esther Kwon, a Standard & Poor’s equities
analyst, of attempts to reduce discounting.

Some manufacturers resorted to widespread promotional
discounting in 2009 and 2008 to lure back consumers who
switched to lower-priced store brands during the recession.
Using limited-time promotions instead of outright cuts in list
prices lets manufacturers recover pricing more easily when the
economy improves.

Discounting became a bigger issue earlier this year when
Wal-Mart Stores Inc (WMT.N: ), the world’s largest retailer,
ramped up competition with thousands of price “rollbacks.”

While some of the promotional discounts are made up by
retailers cutting costs, manufacturers are also called on to
contribute money to pay for the promotions, which is then
deducted from sales on company income statements.

That in turn pressures profits and is expected to be a key
factor when companies such as household product maker Procter &
Gamble Co (PG.N: ) and cereal maker Kellogg Co (K.N: ) report
quarterly results over the next several weeks.

“Promotion is going to show up in the form of pretty
sluggish (sales) growth numbers,” said Edward Jones analyst
Matt Arnold, who follows some food companies, as well as
Wal-Mart and other retailers.

For a graphic on key data for CPG companies, please click:


Among large manufacturers, P&G and Kraft Foods Inc (KFT.N: )
are both expected to post lower earnings per share in the
quarter, according to Thomson Reuters I/B/E/S, with the impact
of promotions and the falling euro hurting results.

At the end of the quarter, the euro shed more than 11
percent against the U.S. dollar compared with a year earlier, a
negative for companies with significant sales in Europe.

Bleach maker Clorox Co (CLX.N: ) and Marlboro cigarette maker
Altria Group Inc (MO.N: ) are expected to have about flat
earnings, while beverage makers Coca-Cola Co (KO.N: ) and PepsiCo
(PEP.N: ) are expected to show increases.

Despite price pressures and the impact of the euro,
packaged goods stocks have been living up to their billing as
“defensive,” meaning they do better than the overall market in
a rough economy.

The Standard & Poor’s Consumer Staples index (.GSPS: ) has
lost 3.9 percent over the past three months, but that is still
better than the performance of the wider S&P 500 (.SPX: ), which
is down 9.5 percent over the same period.

U.S. consumer prices fell for a third straight month in
June, while consumer sentiment dropped to an 11-month low in
July, underscoring the soft nature of the economic recovery.
But excluding volatile energy and food prices, core consumer
inflation rose 0.2 percent, easing concerns about deflation.

Still, some companies expect the pressure to discount will

“As we look at fiscal (year) ’11, quite frankly, we still
see a difficult environment,” said Campbell Soup Co (CPB.N: ) CFO
and COO Craig Owens at an analyst meeting this week, citing
pressure on the consumer. “In a pretty moderate inflation
environment, pricing will continue to be very difficult to
realize and the top line will continue to have to be volume

Others see some improvement, but say it may take months.

“While pricing may be slightly negative for the next
quarter or two, we don’t see this as a long-term headwind to
organic sales growth,” Procter & Gamble Chief Financial Officer
Jon Moeller said at a conference in June.

Once P&G’s pricing improves, rivals are likely to follow,
said John San Marco, an analyst with Janney Montgomery Scott.

When General Mills Inc (GIS.N: ) reported earnings last
month, it said its fiscal 2011 plan assumed a 4 percent to 5
percent increase in supply chain costs. General Mills said it
would help account for those costs with increased productivity,
a strategy it successfully implemented for several quarters.

Analysts said rising inflation could also help
manufacturers justify easing up on promotional spending in
their negotiations with the largest retail chains.

Retailers may have their own reasons to take promotions
down a notch. Walmart’s U.S. same-store sales have fallen for
each of the past four quarters, in part because it pushed
prices lower to win consumers back from dollar stores.

But as investors are anxious to see Walmart turn around its
sales in the United States, some analysts have pointed to the
possibility that prices could go up, at least a little, on some

A Walmart spokesman would not comment on how wide or deep
the company’s next round of rollbacks would be.

“Walmart would welcome a little inflation in their system,”
said Edward Jones’ Arnold.
(Additional reporting by Emily Stephenson in Chicago; editing
by Michele Gershberg and Andre Grenon)

PREVIEW-Discounts pressure consumer products makers’ profit