More than two-thirds (68 percent) of large U.S. consumer products companies are currently outsourcing some portion of their workforce, according to a new PricewaterhouseCoopers Retail & Consumer Industry Practice report released June 7. Consumer products companies, concerned about rising energy costs and tight margins, also anticipate lower growth rates in the months ahead.
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Executives surveyed in the first quarter by PricewaterhouseCoopers' Retail & Consumer Industry Practice expressed less optimism about the domestic economy (53 percent were optimistic vs. 67 percent among a cross-section of industries). Additionally, consumer products executives are expecting revenue growth of 6.2 percent over the next 12 months, well below the cross-industries average growth target of 8.6 percent.
"Large consumer products companies are tightening their belts, in part because of energy costs," said John Maxwell, leader of PricewaterhouseCoopers' Retail & Consumer Industry Practice. "Sixty-five percent of the consumer products executives we spoke to see the price of energy as a barrier to growth. In contrast, only 50 percent of the cross-industries executives we surveyed thought energy costs would hinder their growth."
Forty percent of those surveyed named legislative/regulatory pressures as another major barrier. Concerns about higher interest rates and demand were voiced by 30 percent and 25 percent, respectively.
Vulnerability to higher energy prices
The impact of escalating energy prices can be seen in the hiring plans, gross margins and investment plans of companies surveyed. Sixty-five percent of consumer products companies view escalating energy prices as a potential barrier to growth, compared to 35 percent who do not see high energy prices as a barrier.
-- New hiring: Forty-six percent of energy-vulnerable companies plan
to add to their workforce over the next 12 months, and 27 percent
expect to cut back, for a net of 19 percent increasing - vs. a
net of 50 percent increasing for non-energy-vulnerable companies.
On average, vulnerable businesses expect a 5.4 percent decrease in
workforce, versus a flat expectation for the rest.
-- Gross margins: Twenty-seven percent of energy-vulnerable companies
reported increased margins, and 46 percent had slipping margins -
for a net of 19 percent decreasing. In sharp contrast, companies
where energy prices are not seen as threatening had a net of 29
percent with increasing margins.
-- New investments: Forty-two percent of energy-vulnerable companies
plan to make major new investments averaging 5.8 percent of
revenue - compared to 50 percent of non-threatened companies
planning to invest at a much higher level, 9.1 percent of revenue.
"Rising energy prices have had a far-reaching impact on two-thirds of large companies in the consumer products industry. Businesses seeing themselves as vulnerable have been wise to promptly make adjustments," noted Maxwell.
Squeezed margins
Higher costs and only limited pass-through price increases have led to a margin squeeze for consumer products companies. Fifty-five percent reported increased costs, while only 35 percent have increased their prices. In fact, 15 percent have lowered their prices.
This led to flat gross margins - 30 percent reported an increase and 33 percent a decrease. In contrast, the cross-section of industries had a net of 12 percent with an increase, fifteen points ahead of consumer products businesses.
"As energy costs have continued to escalate, leaders of consumer products companies have found themselves in a bind, seemingly less able than others to pass along increased costs," said Maxwell.
Holding off on new investments
Forty-five percent of surveyed consumer products companies plan to make major new investments of capital over the next 12 months. Spending is expected to average 7.2 percent of revenue. Both measures are in line with all-industry averages of 49 percent spending at a 6.8 percent level.
The leading areas of increased investments over the next year are information technology (planned by 63 percent), new product/service introductions (58 percent) and facilities expansion (50 percent). On the opposite end of the spectrum, only 23 percent plan increased investments in business acquisitions and 28 percent in advertising.
The barometer found that companies planning major new investments over the next 12 months are faster-growing and more profitable. They expect revenue growth of 8 percent over the year ahead, versus 4.8 percent for all other consumer products companies. Over the past quarter, 44 percent of these companies reported increased gross margins and only 17 percent a decrease, for a net of 27 percent with an increase (compared to a net of minus 27 percent for all others).
Negative hiring plans
Overall, consumer products companies expect the size of their workforce will decrease by an average of 3.4 percent over the next 12 months, attributable to deep cutbacks by several large companies and caution stemming from rising energy prices. Only 50 percent are planning to increase their workforce over the next 12 months, while 20 percent of those surveyed expect a net reduction.
"In response to unprecedented business conditions, many consumer products leaders have demonstrated caution in their hiring plans. Those in businesses that are more vibrant and less impacted by rising energy costs are continuing to press forward," said Maxwell.