WSJ: Pricing Power (CdeR)

By JOHN SHIPMAN And PAUL VIGNA

More companies that had resisted raising prices are conceding they have few alternatives with commodity costs continuing to climb on everything from steel to cocoa beans.

In the quarters following the recession, the ability to raise prices and make them stick re-appeared primarily at industrial companies selling to other businesses. Now, consumer-oriented companies that haven't been able to raise prices are running out of ways to hold the line on margins.

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The result is more retailers, construction-related and consumer-oriented companies are finding they must raise prices, even at the risk of undermining sales. Some vow to find new cost cuts but with little specificity. Airlines, which have had some post-recession success in raising prices by constraining capacity, appear to be reaching a limit on additional increases.

Auto-parts manufacturer Johnson Controls Inc. last week said it will boost its auto and marine battery prices by between 5% and 9%. Johnson Controls doesn't report its fiscal second quarter until April 25, but the company has already raised its profit forecast for the year and posted a 31% fiscal first quarter profit gain.

In contrast, parts retailer Genuine Parts Co., which owns Napa stores, said first-quarter gross profit slipped to 28.5% from 29.2%, due in part to "competitive" pricing pressures. Struggling to raise prices, the company is working to shave more costs, executives said Friday. Chief Financial Officer Jerry Nix said customers are "pushing back" on price increases.

Major airlines, which release calendar first quarter profits beginning next week, have had six significant price increases this year. However, their most recent efforts, including a bid this month to boost domestic fares by between $5 and $10 each way, unraveled.

Food sellers are among the few retailers hoping for inflation to bail them out of declining pricing power. Grocery store operator Supervalu Inc., which last year struggled with food deflation, reported lower fiscal fourth-quarter profit last week. Chief Executive Craig Herkert said that the company did see a "modest amount" of inflation in the quarter and was "successful in passing it through to retail prices."

The Federal Reserve said last week "manufacturers generally [are] finding less resistance to price increases than either retail or construction (where weak demand was a limiting factor)." Fed branches in Richmond, Va., and San Francisco, for instance, noted strong competition and lukewarm demand are limiting local retailers' ability to raise prices.

For companies that have balked at raising prices so far, falling profits are leaving them little room to maneuver. "Firms that are seeing input costs jump are likely worrying that if they pass through those increases they will lose sales as consumers cut back to pay for gasoline," wrote economist Joel Naroff of Naroff Economic Advisors. "But the constant drum beat of rising costs has to be affecting earnings."

For instance, toy makers Hasbro Inc. and Mattel Inc. each have said they are raising prices in the face of rising costs. Hasbro last week reported profit fell 71% on flat revenue while Mattel's net dropped 33% amid higher expenses.

Hasbro Chief Operating Officer David Hargreaves said Thursday that the company hasn't had any pushback from retailers after raising prices earlier this year. Retailers understand commodity costs are increasing, he said, and "I think they accept that the prices need to go up a bit to cover these costs."

But resistance to price increases can hurt sales. Revenues at United Forest Products Inc., which makes a variety of housing-related wood products, fell 1.5% and the company reported a $3.7 million loss.

Chief Executive Michael Glenn said in an effort to increase sales "some of our operations simply took ... business priced at levels that were unacceptable." United Forest added fuel surcharges late in the quarter to counter rising diesel costs, but it has been "a little bit of a battle" to get customers to accept them, he said.