Adapting to high oil costs

How companies survived the spike

NEW YORK -- Conventional wisdom had long held that some industries would collapse if oil topped $100 a barrel. As oil neared $150, sending costs higher for everything from jet fuel to plastic jars, the question was: How many companies would succumb?

The surprising answer: Not many. Some even thrived.

Companies have culled unprofitable products, cut production costs and passed along price increases.

Airlines have laid off thousands of employees, eliminated routes, sold planes and raised fares 20 percent in the past year, the fastest rate of increase in 15 years. Consumer product makers have shrunk everything from tubs of Smart Balance Buttery Spread to jugs of laundry detergent. Retailers from The Yankee Candle Co. to Target have passed on higher prices to consumers.

"We are squeezing every dollar out of our working capital," said James Craigie, chairman and chief executive of Church & Dwight, on the company's second-quarter earnings call in August. Sales have increased 50 percent over the past four years at the company, which makes detergent, toothpaste and Arm & Hammer baking soda, but the number of employees has stayed flat, at 3,700, Craigie said.

With oil prices at about twice what they were in January 2007, many companies have simply adjusted. Now that oil's daily price swings are moving down as well as up, that preparation has put them in a strong position -- leaner than they've been in years, with customers paying higher prices.

Of course, the adjustment has not been smooth.

Consumer inflation is at its highest level in 17 years, up 5.6 percent in the past year, and national unemployment is at a four-year high. Workers are doing more without earning more: Productivity, the output for every hour of work, jumped 4.3 percent at an annual rate in the April-June quarter, while labor costs fell.

The auto industry has been hammered as gasoline prices have climbed about $1.30 a gallon since 2007 began. Higher prices for gas and food crimped consumer spending and slammed department stores and restaurants. Every penny increase for a gallon of gas equals more than $1 billion in consumer spending over a year, according to Citigroup. Business bankruptcies are higher than they were a year ago, soaring in industries such as trucking, that have excess capacity and are unable to pass on higher costs.

But many businesses have been resilient. A surge in exports because of the weak dollar helped, but so have price increases and cost-cutting.

Underwear company Maidenform Brands said during its second-quarter earnings call in August that it had been able to offset all the fuel surcharges it received in 2008. "In 2009, we're going to have to work harder," said Chris Vieth, the chief operating officer and chief financial officer.

To that end, Vieth said the company had a team looking for new factories to work with in Vietnam and Thailand. It's also finding lower cost materials.

Craigie at Church & Dwight reminded investors during the company's quarterly earnings call in early August that management had made a promise, when oil was less than $100 a barrel, to add 1 percent to gross margins.

"We will still deliver on our objective, despite higher oil prices," he said.

The company has raised prices on 30 percent of its products. At the same time, it kept a lid on costs. Condensing laundry detergent and shipping it in smaller packages saved so much money, the change more than offset rising commodity costs.

As a result, Church & Dwight added 1.1 percent to its second-quarter gross margin, while net income increased 13 percent, from $40.5 million for the year ago quarter to $45.8 million.