Supply Chain Matters highlights the latest financial performance from bellwether firms in CPG, online retail, high tech and consumer electronics regarding ongoing supply chain related inflationary cost and supply impacts on performance.
Last week provided a flurry of quarterly financial performance reporting that provided added evidence of ongoing supply chain cost inflation impacting various industries. Let’s explore a few examples.
Consumer Product Goods Industry
Various reports of financial performance among bellwether CPG companies would indicate that while ongoing price increases related to products are fueling healthy sales growth, warning signs of financially stressed consumers are evidenced. Supply chain cost inflation remains prominent.
Global consumer product goods provider Nestle in its latest report of quarterly financial performance indicated that despite being able to raise prices for a wide variety of marketed products, higher costs for commodities, freight and energy continue eroding profit margins. Higher costs reportedly have resulted in a 2.8 percentage drop in gross margins for the first half of 2022l. The company’s organic sales grew 8.1 percent in the first half of 2022, reportedly driven by price growth of 6.5 percent and volume growth of 1.7 percent. The company reportedly raised prices by an average 9.8 percent in North America.
Procter & Gamble’s latest report of quarterly financial performance featured the company’s largest annual sales growth in 16 years, due mainly to aggressive price increases. Organic sales growth was 6 percent for the fiscal year that ended in June. Prices were reportedly up 8 percent during the quarter. On the cost side, executives pointed to an anticipated $3.3 billion impact related to either foreign exchange headwinds, and higher costs for materials and freight. CEO Jon Moeller specifically indicated that sales growth for the upcoming year will moderate to a range of from 3 percent to 5 percent and acknowledged that consumers are beginning to shift their buying preferences to less expensive, private labeled products. The company will reportedly initiate another round of price increases later this calendar year.
Unilever similarly acknowledged some loss of sales volume to private brands, particularly across Europe in its most recent report of quarterly financial performance. However, the company raised its sales outlook for the second half of this year.
Kraft Heinz indicated that overall sales volumes declined 2.3 percent in the second quarter due to either recent prices increases or continued supply chain constraints.
Online Retail
All eyes were on Amazon’s reported quarterly financial performance last week as the online retail platform provider reported that online retail revenues fell for the third straight quarter. The retailer’s online sales business segment reportedly incurred a 4 percent decline in the latest quarter. Increased revenue and growth momentum for the company’s Amazon Web Services Cloud (AWS) computing division again helped to buffer sales declines overall. Reportedly, strong revenue performance among third-party hosted sellers in the Fulfilled by Amazon segment were a bright spot of growth in the latest quarter. Services revenues associated with the offering of logistics and order fulfillment services to third-party sellers reportedly rose 9 percent in the quarter.
While total revenues in the latest quarter increased 7.2 percent across all business segments, the rise generally matched the previous quarterly sales growth. An overall operating loss of $2 billion was primarily attributed to the ongoing equity stake in EV vehicle start-up Rivian Automotive, causing a pretax loss of $3.9 billion while the online retail segment incurred its third consecutive operating profit loss, albeit somewhat lower than previous quarters.
Company executives cited good progress in addressing the previously acknowledged overbuild of customer fulfillment and warehousing capacity while overall number of employees was reduced by 6 percent. Further cited was that surging supply chain inflation remains a primary ongoing challenge and some progress is being made. CFO Brian Olsavsky specifically indicated that plans to expand online fulfillment operations are being slowed while capital needs will instead be invested in the company’s Cloud computing or other businesses.
Online retail platform provider Shopify, which generally caters to small and medium business online fulfillment presence and needs, recently warned that previously established growth plans are now being scaled back and head count reductions of up to 10 percent would be initiated. This online tech provider had already warned investors that revenue growth is expected to slow in the coming months. Walmart suddenly warned of lower growth expectations for the remainder of this year as well.
Amazon’s latest revised outlook for the current third quarter to range between zero and $3.5 billion, a significantly wide range. This compares to $4.9 billion of profitability reported for the third quarter of last year. Headwinds thus remain.
High Tech and Consumer Electronics
Two noted bellwethers of consumer electronics and high-tech supply networks are Samsung Electronics and Apple.
Samsung Electronics reported an over 21 percent rise in quarterly revenues for the South Korea based company, but the numbers reportedly ended a streak of three consecutive quarters of record revenue growth. Profitability in the second quarter reportedly rose 15.3 percent as the company benefitted from continued high market demand for semiconductor devices . Profitability from this manufacturer’s semiconductor division reportedly rose 44 percent in the quarter, while revenues increased 24 percent.
Acknowledged was that prices for the two major categories of memory chips, DRAM and NAND flash, continue to decline due to slowing demand for personal computers, smartphones and other electronic laden devices.
The company’s mobile division that includes smartphones reportedly experienced higher revenues fueled by sales of premium models but were impacted by rising material and logistics costs. While revenues increased over 24 percent, operating profits declined nearly 19 percent. The manufacturer has now reduced its expectations for industrywide smartphone shipments to flat or minimal growth.
Apple’s report of fiscal third quarter financial performance reportedly again exceeded Wall Street expectations but reflected indications of slower growth, an operating profit decline and some continued supply network challenges. Operating profit reportedly fell to $19.4 billion, the worst quarter since the July-through-September period in 2020. Total revenues rose 1.9 percent. In April, the company reported its first quarterly loss in over seven years.
The company experienced impacts from China’s recent Covid lockdowns with the company’s China region experiencing a sales decline of 1 percent from the same period a year earlier. Analysts had reportedly expected an almost 7 percent decline.
Revenues associated with the sales of iPhones were up 3 percent on a year-over-year basis while sales for the company’s iPad were down 2 percent, and Mac computers, down 10 percent on a year over year basis. Apple CEO Tim Cook indicated to financial media continued supply chain related cost inflation including logistics, direct materials and contracted labor costs. Noted was the reduction in Mac computer and iPad sales were due to supply constraints during the quarter.
Our readers may recall that Cook had warned last quarter, that supply constraints could impact revenues of up to $8 billion. He indicated that in the most recent quarter, the impact came in under $4 billion. He additionally indicated that the company is now making deliberate decisions about where to invest in the coming months. Apple has for the past two years, begin shifting some of its contract manufacturing capacity for certain models of iPhones outside of China to areas such as Vietnam and India. It is unclear as to whether these shifts made a discernable supply network resiliency impact during the recent lockdowns in China’s manufacturing intensive high-tech region. There were reports that contract manufacturers such as Foxconn were allowed to maintain some production levels, but workers had to confined to manufacturing campuses and restricted from any other movement.
CEO Cook has now indicated to The Wall Street Journal and other business media that the company is observing some pockets of market softness: “But in the aggregate, we expect revenue to accelerate in the September quarter as compared to the June year over year performance.”
Additional Supply Chain Matters Perspectives
The latest financial performance reports of what are considered bellwether industry players indeed indicate that continuing supply chain fueled material and services cost inflation are having an ongoing effect on bottom lines, and that without consequent product price increases, would have even more impacts. In retail segments, evidence continues to mount of unsold inventory, and with global wide interest rate hikes, impacts to added working capital costs mount.
The previous enthusiastic forecasts for online sales growth as a result of two and half years of pandemic impacts are now more grounded in the reality of changed consumer sentiments and particularly, a more economically stressed consumer base.
There are now emerging risks that consumers are changing or have changed their buying motivations and actions, as fears of an economic downturn or recession become more palpable.
All of the above will continue to be on the radar scope of business integrated planning teams, procurement supply management and supply chain leaders over the coming months.
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