Mixed Prospects for U.S. Consumer Products, Durables Sectors

Steady demand for everyday products should keep the credit fundamentals for US consumer products stable over the next 12-18 months, according to Moody’s. But a sharp drop in purchases of discretionary, big-ticket items like boats and appliances means a negative outlook for the US consumer-durables sector.

Despite a weakening global economy, Moody’s expects revenue will grow modestly in 2009 for rated issuers in the consumer-products sector, which includes companies like Proctor & Gamble (NYSE: PG), Colgate-Palmolive (NYSE: CL), and Avon (NYSE:AVP).

Companies that will fare the best in the year ahead will be the ones with strong brand and market franchises, global sales diversity, and a limited reliance on sales of more-discretionary products.

The picture is quite different for the consumer-durables sector, however, which has seen a sharp drop in demand. Issuers in this sector include appliance manufacturers such as Whirlpool (NYSE:WHR), boat-maker Brunswick (NYSE:BC), and mattress-maker Sealy (NYSE:ZZ).

“We don’t see any signs of letup in the consumer-durables downturn until at least the second half of 2009, and then only if the government passes a substantial financial-stimulus package,” said Kevin Cassidy, Moody’s vice president and senior credit officer.

Covenant compliance is the key near-term liquidity risk for issuers in the consumer durables sector.

“We are concerned that the consumer-spending downturn will make it increasingly hard for many durable-goods companies to comply with financial covenants, which are coming under increasing pressure, especially in cases where contractual stepdowns kick in,” said Cassidy.

Moody’s expects ratings for durable-goods makers will continue to move lower, and says several issuers are at risk of losing their investment-grade rating.

About two-thirds of the consumer-durables companies Moody’s rates are currently on review for possible downgrade or carry a negative outlook.

Thus far, higher pricing for consumer products has offset modest volume declines to yield a modest increase in revenue, Moody’s said, but gross margins for a majority of issuers in the sector are contracting.

For details see “U.S. Consumer Products” and “U.S. Consumer Durables.”

Comments

[SteadfastMason:]

I would like to see an active debate start on restoring a diverse, growing, and profitable American manufacturing base.

Why is it a cheaper proposition for a consumer to walk into their neighborhood discount store and purchase a $.99 plain plastic bowl that was originally punched out of an assembly line in China for under a nickel, packed, shipped half-way around the world, trucked from one of 6 major freight ports to a short list of cheap import distributor warehouses, and then to a retail shelf in any small town in the USA - ...than it is for that same consumer to pay the same $.99 for an identical bowl punched out on a machine at a US factory...perhaps located in their state or region...at a per unit cost of a dime or two....is just plain embarrassing.

If we can't even compete with a factory on the other side of the world at making a plain plastic bowl that sells for under a buck that was nearly 100% made by a machine (aka: no issue with labor differentials between China and USA), then how can we begin to secure financing necessary to make larger capital expenditures to build more complex and comparable quality products and that the consumer will want to buy...that are made with more efficient machines, in more efficient factories, and with more effective techniques...to keep more of America's dollars circulating within the our economy...contributing to our country's tax revenue, cash in circulation, and trickle-down employment growth?

Jan 08 12:16 AM

[John Spencer:]

Steadfastmason, you have a good point, however, it is in fact cheaper to make the product in China, ship it here, and put it on your store shelf at a bargain price, cheaper than we can make it here. It is not just the cost of the manufacturing, but also the cost of the raw materials, which are also a reflection of wages in places like China.

The cost of any product (from economics books) is the sum total of the cost of all the wages that went into making it. I tend to agree with the, although there are some modifiers.

Let's assume the bowl is steel. The labor to punch it out might be 5 cents there, 10 cents here. You mentioned packaging. The cost of labor to package the bowl in a box let's say is cheaper there than here. The cost of the box itself cheaper there than here because the labor to make that box is cheaper. The cost of the steel is probably less there than here as the labor to make the steel there is cheaper than here.

The entire manufacturing life cycle of a product is a reflection of labor costs, all the way back to the cost to mine the materials to make it, or if it is made from recycle material, the cost to recycle it.

So, for us (US) to make a product cheaper on the store shelf than China, every aspect of the manufacturing of the product has to be looked and, and we should. One quick step we can do is to stop using so much packing material. Have you recently bought scissors? It comes in a heavy cardboard backing, with a plastic front face, all printed with expensive inks. And there is no way to even open the package holding the scissors without a pair of scissors. Hmmm. That packaging add bulk, so shipping is less efficient and a shipping container that holds say 100 of them is less efficient (bigger). Packaging can add 40% to the cost of the product or more.

Oh well, we have a long learning curve to go through, don't we.

Jan 09 11:55 AM

[John Spencer:]

Steadfastmason, you have a good point, however, it is in fact cheaper to make the product in China, ship it here, and put it on your store shelf at a bargain price, cheaper than we can make it here. It is not just the cost of the manufacturing, but also the cost of the raw materials, which are also a reflection of wages in places like China.

The cost of any product (from economics books) is the sum total of the cost of all the wages that went into making it. I tend to agree with the, although there are some modifiers.

Let's assume the bowl is steel. The labor to punch it out might be 5 cents there, 10 cents here. You mentioned packaging. The cost of labor to package the bowl in a box let's say is cheaper there than here. The cost of the box itself cheaper there than here because the labor to make that box is cheaper. The cost of the steel is probably less there than here as the labor to make the steel there is cheaper than here.

The entire manufacturing life cycle of a product is a reflection of labor costs, all the way back to the cost to mine the materials to make it, or if it is made from recycle material, the cost to recycle it.

So, for us (US) to make a product cheaper on the store shelf than China, every aspect of the manufacturing of the product has to be looked and, and we should. One quick step we can do is to stop using so much packing material. Have you recently bought scissors? It comes in a heavy cardboard backing, with a plastic front face, all printed with expensive inks. And there is no way to even open the package holding the scissors without a pair of scissors. Hmmm. That packaging add bulk, so shipping is less efficient and a shipping container that holds say 100 of them is less efficient (bigger). Packaging can add 40% to the cost of the product or more.

Oh well, we have a long learning curve to go through, don't we.

Jan 09 11:55 AM

[CANINUS:]

RE: SteadfastMason comment -
This is an excellent point made regarding US and also North America production in general. Why indeed can we not adjust to manufactring consumer products that compete with China and other eastern countries by being more flexible in what we are manufacturing. We are now in a good position where the US dollar is more competitive compared to other currencies, therefore exports become cheaper. Hopefully the US dollar will continue to depreciate...actual fact is that US exports are growing.. business analysts continue to miss reporting this important change. Export manufacturers are doing very well because of the US dollar depreciation, which is what we want to make manufacturing more competitive.

On Jan 08 12:16 AM SteadfastMason wrote:

> I would like to see an active debate start on restoring a diverse,
> growing, and profitable American manufacturing base.
>
> Why is it a cheaper proposition for a consumer to walk into their
> neighborhood discount store and purchase a $.99 plain plastic bowl
> that was originally punched out of an assembly line in China for
> under a nickel, packed, shipped half-way around the world, trucked
> from one of 6 major freight ports to a short list of cheap import
> distributor warehouses, and then to a retail shelf in any small town
> in the USA - ...than it is for that same consumer to pay the same
> $.99 for an identical bowl punched out on a machine at a US factory...perhaps
> located in their state or region...at a per unit cost of a dime or
> two....is just plain embarrassing.
>
> If we can't even compete with a factory on the other side of the
> world at making a plain plastic bowl that sells for under a buck
> that was nearly 100% made by a machine (aka: no issue with labor
> differentials between China and USA), then how can we begin to secure
> financing necessary to make larger capital expenditures to build
> more complex and comparable quality products and that the consumer
> will want to buy...that are made with more efficient machines, in
> more efficient factories, and with more effective techniques...to
> keep more of America's dollars circulating within the our economy...contributing
> to our country's tax revenue, cash in circulation, and trickle-down
> employment growth?

Jan 09 03:04 PM