Companies Take Different Strategies to Navigate High Inflation
P&G is ramping up advertising for premium brands; Verizon is raising prices for wireless services
Procter & Gamble Co. is ramping up advertising on premium brands. Verizon Communications Inc. is raising prices on wireless plans, while Whirlpool Corp. has slashed production of appliances.
By THOMAS GRYTA
Mon, Oct 24, 2022 8:41am 3min
A close up of a contactless payment being made using a smartphone at the supermarket.
High levels of inflation in the U.S. and shifts in underlying demand are putting the spotlight on the strategies executives are taking to navigate a global economy where costs are rising and consumer appetite for some products has waned.
The first batch of earnings reports from companies for the September quarter show that corporate profit margins are feeling the squeeze of the macroeconomic trends. With a fifth of the S&P 500 index already reporting, data-provider Refinitiv projects quarterly earnings will decline 3.5% from a year ago, excluding the energy sector. Companies are taking different tacks to manage the pressures on their businesses.
“The average consumer [has] become increasingly price-sensitive as the year has progressed,” Hasbro Inc. Chief Executive Chris Cocks said during an earnings call Tuesday. The maker of Nerf and other toys reported third-quarter sales fell 15% because of the timing of product releases and that profits were pinched because it had to increase promotional activity amid a buildup in inventory before the holidays.
P&G, which sells household staples such as Pampers and Tide, is spending on high-profile advertising campaigns and new product features to keep cash-crunched consumers from switching to cheaper brands. In its most recent quarter, higher commodity, materials and freight costs reduced its gross profit margin by 5.5 percentage points, which was fully offset by cost cuts and price increases.
Chief Financial Officer Andre Schulten said the company has enough brands and price levels to give consumers options within its own portfolio. There was growth in mid tier brands during the quarter but also customers spending more on large-size packages to lower the per-use price.
“The strategy to provide pack sizes that stretch from below $10 for some channels and consumers to above $30 or $40 for others seems to be meeting consumers’ needs,” Mr. Schulten said.
Verizon and AT&T Inc. both raised prices on some of their cellphone plans over the summer, a strategy that yielded widely different outcomes. AT&T reported a third-quarter net gain of 708,000 postpaid phone connections—its most valuable customer category—a sign that few of the subscribers affected balked at higher monthly bills.
Verizon’s more widespread rate and fee increases drove down the same types of phone connections in its consumer segment. New business lines barely offset that decline, and the telecom company ended the September quarter with a relatively weak 8,000-phone gain.
Executives at both companies said the higher rates helped boost profits. Matt Ellis, chief financial officer at Verizon, said overall wireless-service revenue grew despite the customer defections, partly because many of its remaining customers chose to upgrade their wireless plans to more expensive packages with perks such as Disney+.
Telecom companies have also said that they benefit from providing an essential service to customers who are mostly able to keep paying, despite signs of trouble in the broader economy. Mr. Ellis said the company “won’t be shy” about raising prices for certain services if it makes sense over the coming months.
“I look at my payment data, and the payment patterns are better than they were pre-Covid,” Mr. Ellis said. “Our base has never looked as strong from a credit standpoint.”
The top U.S. cellphone carriers have avoided raising the price of their most expensive plans, which can cost as much as $90 a line, choosing to target older plans. And many consumers agree to enrol in premium monthly plans in exchange for valuable discounts on new smartphones.
AT&T has sought to regain market share over the past two years by giving new and existing customers deep equipment discounts contingent on customers sticking with the service for two or three years. The company has said its strategy is working but is still less extreme than some of its rivals’ current offers.
Others, such as Whirlpool, are feeling whiplash from a sudden drop in demand for their products at the same time they are confronting high costs for materials, energy and other expenses.
“Demand is down, and cost is up,” Whirlpool CEO Marc Bitzer said during a conference call. “You would expect costs to come down in a recessionary environment. We’re operating in unprecedented times.”
Whirlpool isn’t turning to discounting to move unsold fridges and dishwashers. Instead it slashed production by 35% to shrink inventories. The company cut its profit forecast for 2022 by about half, warning that high costs were likely to persist into next year as appliance demand remains muted.
Fastenal Co., a major distributor of industrial supplies such as nuts and bolts, has been raising prices to offset rapidly rising costs, but the recent quarter showed signs of stability in costs along with some resistance from customers.
“At this stage of the cycle, the marketplace is less receptive to further price increases,” said Fastenal finance chief Holden Lewis on an Oct. 13 conference call. “Product pricing in the marketplace is stable, and there are tenuous signs of product inflation easing.”
—Bob Tita contributed to this article.
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China’s EV Juggernaut Is a Warning for the West
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China’s EV Juggernaut Is a Warning for the West
Competitive pressure and creativity have made Chinese-designed and -built electric cars formidable competitors
By GREG IP
Thu, Jun 8, 2023 4min
China rocked the auto world twice this year. First, its electric vehicles stunned Western rivals at the Shanghai auto show with their quality, features and price. Then came reports that in the first quarter of 2023 it dethroned Japan as the world’s largest auto exporter.
How is China in contention to lead the world’s most lucrative and prestigious consumer goods market, one long dominated by American, European, Japanese and South Korean nameplates? The answer is a unique combination of industrial policy, protectionism and homegrown competitive dynamism. Western policy makers and business leaders are better prepared for the first two than the third.
Start with industrial policy—the use of government resources to help favoured sectors. China has practiced industrial policy for decades. While it’s finding increased favour even in the U.S., the concept remains controversial. Governments have a poor record of identifying winning technologies and often end up subsidising inferior and wasteful capacity, including in China.
But in the case of EVs, Chinese industrial policy had a couple of things going for it. First, governments around the world saw climate change as an enduring threat that would require decade-long interventions to transition away from fossil fuels. China bet correctly that in transportation, the transition would favour electric vehicles.
In 2009, China started handing out generous subsidies to buyers of EVs. Public procurement of taxis and buses was targeted to electric vehicles, rechargers were subsidised, and provincial governments stumped up capital for lithium mining and refining for EV batteries. In 2020 NIO, at the time an aspiring challenger to Tesla, avoided bankruptcy thanks to a government-led bailout.
While industrial policy guaranteed a demand for EVs, protectionism ensured those EVs would be made in China, by Chinese companies. To qualify for subsidies, cars had to be domestically made, although foreign brands did qualify. They also had to have batteries made by Chinese companies, giving Chinese national champions like Contemporary Amperex Technology and BYD an advantage over then-market leaders from Japan and South Korea.
To sell in China, foreign automakers had to abide by conditions intended to upgrade the local industry’s skills. State-owned Guangzhou Automobile Group developed the manufacturing know-how necessary to become a player in EVs thanks to joint ventures with Toyota and Honda, said Gregor Sebastian, an analyst at Germany’s Mercator Institute for China Studies.
Despite all that government support, sales of EVs remained weak until 2019, when China let Tesla open a wholly owned factory in Shanghai. “It took this catalyst…to boost interest and increase the level of competitiveness of the local Chinese makers,” said Tu Le, managing director of Sino Auto Insights, a research service specialising in the Chinese auto industry.
Back in 2011 Pony Ma, the founder of Tencent, explained what set Chinese capitalism apart from its American counterpart. “In America, when you bring an idea to market you usually have several months before competition pops up, allowing you to capture significant market share,” he said, according to Fast Company, a technology magazine. “In China, you can have hundreds of competitors within the first hours of going live. Ideas are not important in China—execution is.”
Thanks to that competition and focus on execution, the EV industry went from a niche industrial-policy project to a sprawling ecosystem of predominantly private companies. Much of this happened below the Western radar while China was cut off from the world because of Covid-19 restrictions.
When Western auto executives flew in for April’s Shanghai auto show, “they saw a sea of green plates, a sea of Chinese brands,” said Le, referring to the green license plates assigned to clean-energy vehicles in China. “They hear the sounds of the door closing, sit inside and look at the quality of the materials, the fabric or the plastic on the console, that’s the other holy s— moment—they’ve caught up to us.”
Manufacturers of gasoline cars are product-oriented, whereas EV manufacturers, like tech companies, are user-oriented, Le said. Chinese EVs feature at least two, often three, display screens, one suitable for watching movies from the back seat, multiple lidars (laser-based sensors) for driver assistance, and even a microphone for karaoke (quickly copied by Tesla). Meanwhile, Chinese suppliers such as CATL have gone from laggard to leader.
Chinese dominance of EVs isn’t preordained. The low barriers to entry exploited by Chinese brands also open the door to future non-Chinese competitors. Nor does China’s success in EVs necessarily translate to other sectors where industrial policy matters less and creativity, privacy and deeply woven technological capability—such as software, cloud computing and semiconductors—matter more.
Still, the threat to Western auto market share posed by Chinese EVs is one for which Western policy makers have no obvious answer. “You can shut off your own market and to a certain extent that will shield production for your domestic needs,” said Sebastian. “The question really is, what are you going to do for the global south, countries that are still very happily trading with China?”
Western companies themselves are likely to respond by deepening their presence in China—not to sell cars, but for proximity to the most sophisticated customers and suppliers. Jörg Wuttke, the past president of the European Union Chamber of Commerce in China, calls China a “fitness centre.” Even as conditions there become steadily more difficult, Western multinationals “have to be there. It keeps you fit.”