Newell Rubbermaid Inc. announced July 15 that it will enact a quarterly price adjustment mechanism beginning Jan. 1 — with increases as high as 22 percent — in the latest move by a major plastics processor to cope with high resin costs.
President and Chief Executive Officer Mark Ketchum also said the company will stop making some plastic products — as much $500 million worth, or about 8 percent of the $6.4 billion in sales the company had in 2007.
``In categories where resin is a high percentage of cost of goods sold, and the consumer's willingness to pay for innovation is low, the economics are no longer viable,'' Ketchum said in a news release announcing the move.
He did not specify how many of the Sandy Springs, Ga.-based company's 22,500 employees might face layoffs. In Securities and Exchange Commission filings, Newell Rubbermaid said its 3-year-old cost-cutting plan will involve cumulative restructuring costs between $80 million and $100 million. About $25 million to $30 million of the total will involve employee-related costs, including severance and pension benefits.
The company's goal is ``to have products that are innovative enough where the consumer can achieve the value and is going to pay a higher margin,'' company spokesman David Doolittle said July 16 by telephone. He acknowledged price increases are not likely to sit well with Newell Rubbermaid customers.
``We know that our retail customers, especially, are feeling the effects of consumers who have less spending power because of higher gas prices. … But the fact is that in some of these categories we just can't sell these goods for less than what it costs to produce them.''
Doolittle said Newell Rubbermaid buys about 700 million pounds of resins annually and during the past year costs increased 60 percent. The company estimates its 2008 resin costs will be about $600 million.
Doolittle said Rubbermaid products likely to be discontinued include low-cost storage bins, office- chair floor mats and some trash cans.
The move should come as no surprise to many within the industry. Prices of all three major grades of polyethylene — the market's largest commodity plastic and a major Newell Rubbermaid component — are up an average of 55 percent since January 2007, according to the Plastics News resin pricing chart. Prices of polypropylene, another major commodity, are up an average of 53 percent.
Philip Brandl, president of the International Housewares Association in Rosemont, Ill., said companies producing housewares are feeling the economic pinch along with those in the automotive and building materials markets. Newell Rubbermaid is not alone in divesting underperforming product lines.
``As resin and indeed all commodity prices go up across the board, companies are either giving up segments of their business or they're giving up primary materials of production,'' Brandl said.
Newell Rubbermaid said its price adjustments will be based on ``independent industry raw material indices'' to pass resin price increases on to its customers. A company official said the firm is considering several indices, including those produced by Houston-based consultants Chemical Market Associates Inc. and Chemical Data Inc.
Since the company began its cost-cutting plan in the fourth quarter of 2005, Newell Rubbermaid has closed 15 facilities and plans to close eight more, according to SEC filings. Doolittle said the firm has consolidated its manufacturing operations from 135 plants to 45.
The company estimates annual savings from the plan to be between $175 million and $200 million once it is fully implemented in 2010.
Newell Rubbermaid's situation points out one of the plastics market's challenges in times of rapid price gains: the lack of a universally recognized and sanctioned price index for resins and other raw materials.
Resin markets may have evolved that way because they're more complicated than commonly priced commodities like glass and steel and cover ``a tremendous range of grades,'' said Peter Mooney, president of Plastics Custom Research Services, a consulting firm in Advance, N.C.
``One of the greatest advantages of plastics is its diversity, but that becomes a disadvantage at times,'' Mooney said. ``It's difficult to get your hands around the entire market.''
Even lower-priced materials are feeling pressure. One broker said his average material price already has climbed 15 percent this year and may go up another 10 percent in the next month or two.
``Everyone's asking if they should thin-wall or downsize or put in recycled material,'' Mooney added. ``But in some cases, there's not much they can do. If a major retailer tells them they want a square container so they can get more shelf space, [processors] have to do it.
``There's been a shift in the balance of power. The retailer doesn't need that brand name anymore.''
Mooney said Newell Rubbermaid is among firms affected by that change. He also pointed out that a lack of low-cost North American labor and delays in investing in new processing equipment have hurt Newell Rubbermaid and other firms, particularly since the global market has had ``an obsession with cost reduction'' since 2001.
In 2005, Newell Rubbermaid made about 85 percent of the products it sells, Doolittle said. That figure has shrunk to about 50 percent.
``For years, [Newell Rubbermaid] would say that they weren't plastic processors, they were consumer products makers. If a competitor was selling a garbage can for $1, theirs would be priced at $2. But now, they're not able to do that,'' Mooney said.