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Gross margin growth expected in personal care, despite surge in oil price

By Guy Montague-Jones , 15-Jun-2009
Last updated on 15-Jun-2009 at 12:43 GMT

European personal care companies should enjoy “strong gross margin growth” despite the recent surge in the oil price, says Bernstein Research.

The price of crude oil has more than doubled since December, increasing from a low of $31 a barrel to $68 as of 1 June, but the sudden spurt is unlikely to put significant pressure on 2009 margins.

While oil, used directly for energy and indirectly in chemicals and plastics, is perhaps the most important commodity for personal care firms, its price still lags well behind the 2008 peak.

Price comparison

Bernstein said oil is 49 per cent below its high of $134 in June, and working with its 2009 average price estimate of $60, the researchers expect the average price to be 40 percent below the 2008 average.

So despite recent increases, the oil price is still well below 2008 levels and the reduction should lead to strong gross margin growth in 2009, according to Bernstein.

Other commodities are also well below 2008 levels. Given that personal care firms use a broad range of commodities, it is important to note that Bernstein expects its general commodities index to be down significantly on 2008.

Beneficial effects

Executives in the cosmetics industry have made positive noises about commodity prices. Bernstein quoted the CEO of Henkel as saying “we are starting to see an acceleration of the decrease in raw material pricing”.

Bernstein expects the leading players in European personal care to benefit from the overall downward movement in commodity costs.

“We expect all companies to deliver gross margin improvement in 2009 with Henkel and Reckitt Benckiser the strongest,” said Bernstein analyst Andrew Wood, in an investor note covering Beiersdorf, Reckitt Benckiser, Henkel and L’Oreal.

Nevertheless, Wood said Bernstein expects Reckitt Benckiser to be the only company to show positive operating margin growth due to weaker sales growth, higher advertising spending and acquisitions.

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