Oil, metal inflation play 'heavier' role in hard goods' costs

SNEWS takes a look at inflation pressures on fitness, outdoor and wintersports hard goods. Unlike inflating apparel costs, which we covered in March, rising oil and metal prices play literally a heavier role for hard goods.
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At Exercise & Leisure, a specialty fitness retail shop in Cincinnati, Ohio, owner Mark Becker increasingly prefers doing business with fitness equipment manufacturer Bodycraft, just a two-hour drive up Interstate 71 in Columbus.

Beyond Bodycraft making quality products and being a fellow Buckeye business, there’s the advantage of proximity, Becker recently told SNEWS. The short travel distance helps keep freight costs down as fuel prices continue to climb--especially when the equipment being shipped frequently weighs in at 200 pounds or more.

The rising cost of freight is just one pressure point for fitness, outdoor and wintersports manufacturers and retailers battling the inflating costs of building and selling hard goods.

Inflation--basically a situation of too much money chasing too few goods--is becoming a key issue for most product categories in our industries in 2011 and beyond. SNEWS is tracking the trend throughout the year with a series of stories. In early March, we looked at the increasing price pressures on apparel. This month, we take a look at hard goods, which face similar inflation factors, such as increased labor costs and a depreciating dollar, but are more affected by higher oil and metal prices.

“Black gold” on the rise, again

Combating record-high oil prices is a fresh memory for many manufacturers and retailers. Three years ago in July 2008, crude oil hit record-high prices near $140 a barrel.

But the economic downturn and investor speculation showed how fickle the commodity is, as oil prices plummeted to as low as $35 a barrel six months later when demand dropped.

As of late April 2011, oil has crept back up to near $110 per barrel.

For fitness, outdoor and wintersports hard goods, the higher cost of oil creates a double-whammy of price pressures--one in product materials made with oil, the other in freight.

“The cost of plastics, or any material related to petroleum, we’ve seen rise at least 20 percent this year,” said Mark Ritchie, vice president of operations at Salt Lake City, Utah-based Black Diamond Equipment, which makes climbing, outdoor and skiing hard goods. The company has also seen increases in its aluminum parts.

As the rising price of textiles is to apparel, the rising price of metals is to hard goods. Aluminum (up 14 percent), copper (up 20 percent) and steel (up 30 percent) all continue to rise from last year’s prices as demand increases.

Besides the fact that many hard goods contain oil and metal materials, they also have the disadvantage of being heavier products. Those extra pounds mean higher shipping costs, and a larger burden for hard goods today as the costs of freight continues to rise with increasing fuel prices--averaging $3.84 a gallon for regular unleaded and $4.10 a gallon for diesel.

“It ends up being double the transportation cost for us,” said Steve Kelly, CEO of Bob Block Fitness a specialty retailer in Indianapolis, Ind. “We see it when the product comes in, and then when it goes out for delivery to the consumer.”

Kelly said a typical treadmill, boxed on a pallet, is 350 pounds – “and if it’s coming from the West Coast, that’s about $400, from the Midwest, maybe about $200. That all eats into our margin. It’s hard to pass onto the consumer, because they don’t see that side of it.”

And with more manufacturing being done overseas, covering even longer distances, freight cost are increasingly coming into play.

According to the latest Bureau of Labor Statistics report, U.S. import prices rose 2.7 percent in March, the largest monthly jump since June 2009 and part of a six-month string of increases. Annually, U.S. import prices are up 9.7 percent through March 2011.

Manufacturers like Black Diamond likely will need to pass some of those increased costs to retailers and consumers starting in 2012, Ritchie told SNEWS, but it also means the company is finding way to cut costs that don’t affect product quality.

“Better long-range planning and efficiency in our operation is critical,” Ritchie said. “We’re aggregating our freight in China--as opposed to partial containers, we’re waiting to ship full containers. There’s a lot of logistics that go into that.”

There can be some downsides of those efficiencies for the consumer, however, pointed out Justin Golliher, head of sales at Reusch Snowsports, a ski glove and apparel manufacturer. The desire to wait until all the boats are completely full, and/or boats moving at slower speeds to save fuel, can lead to product delays, he said.

Labor and exchange rates

Higher labor costs, particularly in Asia, present another problem for manufactures. Labor costs overseas are increasing for two main reasons, we were told. The quality of manufacturing in places like China is improving--therefore it costs more--and the dollar continues to depreciate against most Asian currencies, meaning it takes more dollars to buy the same amount of labor.

“The days of running to Asia for low-cost labor is over,” Ritchie said. But don’t expect businesses to run back to the U.S., he said “They say it will be 2020 before wage rates in Asia are even half of those in the U.S..”

Gauging consumer sentiment

“So the question is ‘what do we do?’” said Tim Porth, executive vice president of product development and marketing at Brooklyn Park, Minn.-based Octane Fitness, which makes elliptical machines. “Do we raise prices, cut costs, or hold out and hope they will come back down?”

Porth said he thinks most companies have gotten to be as efficient as possible in the past few years with the economic downturn. Any company looking to further cut costs, will likely risk compromising product quality--something most companies won’t want to do. So if production prices continue to increase, as most economic experts predict, then the answer remaining for manufacturers is to increase prices.

Many companies are making those pricing decisions now for their 2012 product.

It can be a tough choice--particularly with the consumer in mind, who may still be feeling the effects of high unemployment rates or gotten used to the recent deals, Nordica USA President Willy Booker told SNEWS.

“On the manufacturing side—especially in the alpine side of hardgoods—the difficult thing is actually downward price pressure, where the consumer is expecting great technology at lower prices, and for the past couple years we have been really able to deliver. But those margins keep getting tighter and tighter.”

Back at Black Diamond, Ritchie said he sees the company’s typical consumer base recovering, but he agreed that it’s hard to predict how they’ll react to higher prices.

“Things aren’t perfect for our consumers, but they feel well,” he said. “We have yet to set prices for spring 2012, but its hard for me to imagine not seeing some price increases. For the past two years there’s been a general feeling of price decreases. It might be tough for consumers to see that reverse.”

--David Clucas with Peter Kray

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