By JUDITH BALEA
abs-cbnNEWS.com
(First of two parts)
As companies face skyrocketing costs with rising food and fuel prices, they have to make tough choices: raise prices, cut production and let go of workers or shift to less costly materials.
These are unpleasant choices—and usually made after exhausting all other options to maneuver and offset the rising costs of producing a product or delivering a service. At the end of the day, the companies’ profits or losses will dictate their next move.
From abs-cbnNEWS.com’s interviews with various Philippine companies, some of these options are not yet in companies’ radar.
Lower profits
Last year, several companies made record earnings. These are helping them cushion the impact of the blow from oil prices.
But this year, investors in some companies may no longer bask under sunny profits. High inputs to production and expected lower demands storming profit margins are here to stay.
With oil prices shooting up to record highs, most—if not all—companies are expected to feel the impact. Analysts cited consumer firms, which are suffering from rising costs of raw materials and sluggish demand because people are becoming short on cash.
Last week, oil prices reached $138.54 a barrel, five times its level in 2003, and local pump prices have already increased as much as P9.00 since the start of the year to an average P55.00 per liter today. Goldman Sachs had forecast fuel prices to top $200.00 per barrel by 2010, hinting that the era of cheap oil was really over.
Food prices are not lagging behind.
Transport-related
The utilities perhaps are one of the few enjoying a bit of comfort due to the "inelastic" demand for their products and services, said Edgar Bancod, an analyst at ATR KimEng Securities.
"They are the more defensive companies during tough times like this. Oil firms are also a bit defensive. They reported a one to two percent drop in demand for fuel because of high prices, but that’s really nothing. Fuel is a necessity for a lot of industries," Bancod said.
But businesses that are transport-related are hit worst.
Airlines and shipping firms, whose lifeblood runs on fuel, have seen this main input take a larger chunk of their operating expenses.
Candice Iyog, vice president for marketing of budget carrier Cebu Pacific, said, "Fuel is our single largest cost. It has more than doubled in a year. On routes where fuel used to compose 30-40 percent of the cost, it has increased to a 50-60 percent contribution to cost."
This was echoed by Aboitiz Transport System’s chief finance officer, Lilian Cariaso, who noted that fuel already accounted for over 30 percent of the company’s total cost during the first quarter. Aboitiz Transport operates the country’s most popular ship brand, SuperFerry.
And the relentless increase in fuel prices, Cariaso concluded, "will have a large negative impact to the bottomline" just as Iyog said it has been "challenging us to look for ways to maintain profitability."
Cebu Pacific’s net income for the first quarter sagged to P389.23 million from P559.85 million as its costs and operating expenses grew from P2.67 billion to P3.52 billion, of which P1.48 billion was spent on fuel alone. Aboitiz Transport, on the other hand, posted a net loss of P36.1 million as "the continued rise in fuel prices eroded the company’s margins."
Bancod commented, "Judging the first-quarter numbers, we’ve already seen the impact. I don’t think the second quarter would be any better, given that prices really soared during this period. The whole year in fact will be difficult for everyone."
Yet Cebu Pacific and Aboitiz Transport remain upbeat on their growth prospects this 2008, saying they will continue to find ways to mitigate high costs.
Consumer firms too
As high fuel prices suck up people’s disposable incomes, consumer companies struggle to keep their market share. They said rising costs of other raw materials do not help either.
Take for instance, Alaska Milk Corp., which sells liquid, canned and ready-to-drink milk products. The company has projected a flat growth in its net profit this year due to an anticipated clip on sales and surge in prices of key raw materials such as skimmed milk and tin plate.
"People feel the impact of higher cost of commuting, higher cost of putting rice on the table. We’re competing for the same share of their wallets," said Alaska president Wilfred Uytengsu Jr.
During the first three months, Alaska saw its net income drop 50 percent to P86 million after its cost of sales and operating expenses rose 40 percent to P2.02 billion. Its gross profit margin was lower at 6.51 percent compared to last year’s 14.47 percent.
The same rang true for Jollibee Foods Corp. (JFC), whose fast-food restaurants have been classic favorites of Filipino families. JFC reported a 9.4-percent fall in its first-quarter net income to P480 million as "cost of sales increased faster than revenues."
"The high cost of raw materials continued to exert pressure on our gross profit margin," the company said.
What to do, How to cope
Most of the companies interviewed by abs-cbnNEWS.com mentioned one common way to recover mounting operational costs—pass these on to customers.
In the aviation industry, the increase comes in the form of surcharges. SEAIR Philippines president and chief executive Avelino Zapanta said the carrier has jacked up its surcharges to an average of about P1,700.00 per seat. "We recover our fuel costs here."
But even this poses threat to profitability.
Cebu Pacific’s Iyog said, "We have increased our fuel surcharges to offset costs but we cannot keep on increasing this because it will dampen demand for air travel." What the company does instead is rationalize its route network in the Philippines and abroad to save on fuel or offer the lowest year round fares to stimulate travel, Iyog explained.
Aboitiz Transport said it was still mulling a 10-20 percent increase in fares. Meantime, it found quick relief in right-sizing its fleet, lessening its passage capacity and reducing travel speed. The company sold three SuperFerry vessels in 2007, generating P404 million.
Consumer firms, for their part, have also increased product prices but only by small amounts to maintain affordability.
Jollibee hiked prices of its meals by P1.00-P2.00 last April and said it would consider the costs it could absorb first before implementing another round of price increases.
Alaska, meanwhile, said it "entered into hedging and forward-buying arrangements and plotted reformulation strategies" to keep its costs down aside from the traditional hiking of prices. To further trim costs and eliminate double-handling, the company built a four-hectare manufacturing plant in San Pedro, Laguna "so it can transport goods directly to major distributors."
Inflation not yet at peak
Whether companies’ efforts to alleviate spiraling expenses would actually translate to higher earnings remains to be seen. But based on how the country’s overall business climate currently looks—surging prices, running inflation and rising interest rates—one would be in "a state of denial" to be bullish on growth, Bancod said.
In May, inflation accelerated to a nine-year high of 9.6 percent, pushed by the usual culprits, high energy and food prices. This prompted the central bank to raise its benchmark interest rates by a quarter-percentage point.
"Inflation hasn’t peaked yet. Food prices are expected to start to cool down by the second half but the forecast for fuel is that it won’t get cheaper anytime soon. Slow business activity is well expected throughout the year," he said.
The central bank said inflation could peak at around 11.0 percent this year, heightening expectations for more interest rate hikes, and thus, painting a gloomy picture for the highly sensitive banking and property sectors.
