Commodities prices have backed away from peaks hit over the summer. But you wouldn't know it by talking to some small companies.
They say they have yet to feel the salve of the price drops. And food and beverage companies, in particular, still are reeling from the summer highs, since these firms rely heavily on a variety of commodities to manufacture, package and deliver their products -- among them oil, natural gas, corn and chemicals.
[Firms Struggle With Commodities Costs] Hydrive Energy LLC
A Hydrive employee loads a truck with the company's energy drinks.
So small companies are continuing with efforts to mitigate the damage to the bottom line and to protect themselves from future fluctuations, including hiring experts, changing suppliers and even rethinking product lines.
"These are crazy times," says Michael Sands, chief executive of LesserEvil Brand Snack Co., a Tuckahoe, N.Y., maker of chips and popcorn. "You never know when something is going to go up or down. You've got to get as much money on the table as possible. I'm not counting on oil staying below $80."
Crude oil prices hit all-time highs in July but tumbled sharply last week, plunging nearly 17%. After falling 10% to $77.70 a barrel on Friday alone, crude oil climbed 4.5% Monday on to $81.19. Natural-gas prices more than doubled from a year ago in July, but have now declined. They are now down 10% from a year ago.
Expert Advice
NutraSweet Property Holdings Inc., a Chicago-based sweetener manufacturer, has recently hired a professional commodities buyer and plans to hire consultants with expertise in trading energy and other raw materials. The idea, says Chief Executive Craig Petray, is that these experts will help NutraSweet lock in the prices of the commodities it uses at the best rate possible.
"There hasn't been this level of violent fluctuation in commodity prices," he says. "It's too hard for us to predict it ourselves."
NutraSweet is a big consumer of natural gas, which is used in the making of products including aspartame, an artificial sweetener used in diet sodas. In June, the 300-employee company's natural-gas costs doubled from a year earlier. Though prices pulled back last week, Mr. Petray says he is still concerned about the possibility of big jumps given the current volatility in the financial and commodity markets.
Overall, the company's energy and raw-materials costs, which include chemicals to make sweeteners, have risen more than 50% over the past five years and 15% over the past year, Mr. Petray says. He declines to say how much that increase has cut into profits.
Cheaper Suppliers
LesserEvil's Mr. Sands says he wants to make sure his nine-employee company has sufficient cash on hand since it could take nearly nine months for lower commodity prices to push up profits -- and prices could always jump back up. Prices for some raw materials the company uses, such as plastic film, are still high, he adds.
So, LesserEvil has trimmed its offerings -- going from four to two flavors each of popcorn and potato snacks. The move has allowed Mr. Sands to focus on buying fewer flavors in higher quantities and getting those flavors at cheaper prices. He says if he hadn't taken these steps, the company's costs for flavors would have risen 10%.
Mr. Sands says trimming the product line has helped boost sales 55% so far this year from the year-earlier period because he was left with more shelf space in retail stores for the company's fastest-moving products.
LesserEvil also has been shopping for cheaper suppliers. By changing to boxes of a different shape, LesserEvil can now fit more products onto a truck -- lowering transportation costs because vehicles are making fewer trips. Mr. Sands estimates that without supplier and other changes, costs for corrugated boxes would have gone up 14% this year and transportation costs would have risen by more than 25%. Switching to a new supplier has saved the firm 7% and has kept transportation costs roughly flat from a year ago.
Some efforts have been harder to pull off. Mr. Sands tried out the plastic film used for wrapping from a cheaper supplier, but wasn't satisfied with the quality. He is still waiting to see if the supplier can improve the texture of the film before moving all his business there. His costs for plastic film have gone up by nearly 20% from a year ago.
LesserEvil wouldn't disclose details on its profits. But Mr. Sands says because of cost-cutting efforts, the company's profit margins are down 2.5 percentage points so far this year. They would have been down 12 percentage points otherwise, he estimates.
Mike Weinstein, chairman of energy-drink company Hydrive Energy LLC, says the sharp price swings in commodities makes it harder to plan ahead -- partly because he isn't sure how much the decline in crude-oil prices will lower prices for the plastic bottles the company uses. So, for now, he is making his budgets with the assumption that plastic costs will stay high for a while.
"You assume that when the price of oil comes down it will flow down to the cost of resin and plastic immediately," he says. "But sometimes it can take a while." The firm's overall raw-materials costs have gone up 20% since last year. Costs for plastic bottles are up 20%.
To offset the higher costs, Mr. Weinstein and his employees stay at cheaper hotels while traveling, which should save them a few thousand dollars a year. They also try to do more market research themselves instead of outsourcing the work. Using an Internet-based survey has saved the Rye, N.Y., firm $12,000.
Prices As Is
One move small companies have been reluctant to make is to raise the prices of their products.
NutraSweet says it hasn't raised prices on the sweeteners it sells to beverage makers or directly to consumers. Mr. Petray says raising prices on products is tougher for smaller companies like his because they could lose out to cheaper competitors from abroad, particularly China and Japan.
That's especially true these days as worried consumers cut back on spending. "Given the hard times," says LesserEvil's Mr. Sands, "I thought if we went north of those price points we would see sales drop off."
