NEW YORK, N.Y. - Colgate-Palmolive is navigating a delicate tightrope, as it raises prices in North America for the first time in more than two years.
The company, best known for its toothpaste and dish soap, said Thursday it had raised prices in North America by an average of 0.5 per cent in the fourth quarter, after cutting prices every quarter since the summer of 2009. The news emerged as the company reported a 5 per cent decline in net income that it blamed on higher costs for raw materials.
Raising prices can be a risky move, because cash-strapped customers can drop even their favourite brands to save a few cents. Paychecks are already stretched thin and the government's most recent data on jobs, also released Thursday, show that the number of people seeking unemployment benefits rose last week. There are signs that the economy is healing, but raising prices in North America had been something that Colgate, until recently, had been unwilling to try.
Many of Colgate's rivals raised prices last year, as well as many restaurants, clothing stores and other industries. But Colgate had taken a different strategy, raising prices in fast-growing Latin America, where customers seemed willing to stomach the higher costs, but lowering prices in North America through discounts and other promotions.
In a call with analysts, CEO Ian Cook said customers were still willing to pay for premium products, like toothpaste for sensitive teeth, if they provided a benefit that customers want. Colgate is also aware that budget-conscious customers are generally more likely to trade down in other household products before swapping out their favourite toothpaste for store brands.
Overall, Colgate raised prices 3 per cent in the quarter and 1 per cent for the year, and Cook said price changes for the coming year would be "on the same order of magnitude."
The higher prices would come even though costs for many materials appear to be declining: Cook said he thought commodities costs would rise 2 to 3 per cent this year, a far smaller burden than 2011's increase of 12 to 13 per cent. As Colgate paid more for raw materials, its profit margin fell 1.7 percentage points.
But Colgate, like other U.S. companies, probably won't enjoy the same benefit that it got in 2011 from the weak dollar, which caused revenue raised overseas to translate into more dollars at home. Cook noted that other U.S. companies face the same challenge. "That is a global factor," he said, "not a Colgate factor."
Javier Escalante, an analyst at Consumer Edge Research, asked whether the higher prices would hurt Colgate's sales. Cook replied that the volume of sales had continued to grow in the quarter despite higher prices. "We believe we can continue that in 2012, balancing the volume between the rollover of the pricing that we have already," he said.
Colgate has consistently cut North American prices since the third quarter of 2009, by an average of 1.5 per cent to 4.5 per cent each quarter. To be sure, its 0.5 per cent increase in the fourth quarter was far less than the 8.5 per cent price increase in Latin America. But it did represent a snapped trend. In Europe, a region the company described as "volatile," Colgate dropped prices by an average of 3 per cent.
The higher North American prices may be because the company thinks it can, or that it must, or perhaps a little bit of both. At the same time, Colgate is aggressively seeking to protect market share, even if it has to spend to do so. Cook said the company would continue to invest in creating and advertising new products.
The pricing strategy also reinforces Colgate's decision to lean on emerging markets for growth as U.S. customers get tapped out. Of Colgate's four main geographic regions, North America accounts for the smallest portion and it is where revenue grew the slowest. Latin America grew the fastest, and made up the biggest portion of revenue
For the quarter, the higher prices helped fuel a 5 per cent rise in revenue to $4.17 billion, up from $3.98 billion. It was dwarfed by the 9 per cent increase in what the company had to pay to make and transport its products.
Colgate earned $590 million, or $1.21 per share. That was down from $624 million, or $1.24 per share. Excluding one-time expenses like putting cost-saving plans into place and other charges, Colgate earned $1.30 per share. That beat the $1.29 that Wall Street expected, according to a poll by FactSet.
Barclays Capital analyst Lauren Lieberman described fourth-quarter results as "more or less in line with our lacklustre estimates."
Colgate's decision to try to recoup its margins comes during a fragile time for the U.S. economy.
The jobs data released Thursday show more people sought unemployment benefits. However, the overall trends point to a recovering job market. At least 100,000 jobs have been added for six straight months and the unemployment rate has declined to 8.5 per cent, its lowest in almost three years.
But it's not a healthy number yet and the government also released data Thursday showing that fewer people bought new homes in December, sealing 2011 as the worst year for new home sales on record.
For the year, Colgate's revenue rose 7.5 per cent, to $16.7 billion, and net income rose 10 per cent to $2.4 billion.
Shares of Colgate-Palmolive Co. rose $1.91, or 2.1 per cent, to close at $91.35 Thursday.
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