By Christina Passariello
PARIS—Signaling that consumer spending is gaining strength, Groupe Danone SA said it will raise prices this year on products such as yogurt and Evian water to absorb higher raw-material costs.
"The mistake we can't make is to ask for more than consumers are willing to pay," Chief Executive Franck Riboud said in an interview. "We have to stay competitive." Mr. Riboud said prices for its goods will rise 2%-2.5% this year in France, the company's biggest single market. He didn't address increases elsewhere.
Danone, which buys milk, wheat and cacao for ingredients and oil for packaging, expects its costs to jump between 6% and 9% this year.
Nonetheless, Mr. Riboud expects the Paris-based company's operating margin to rise 0.2 percentage point this year, in part by cutting costs for such items as advertising. Last year, Danone's operating margin fell slightly, to 15.2%.
Danone on Tuesday reported a 38% jump in 2010 profit to €1.87 billion ($2.52 billion). Sales rose 14% to €17 billion, boosted by an acquisition in Russia.
Companies across the consumer-goods sector are scrambling to offset rising commodity costs, unsure of whether consumers are ready to pay more at the cash register.
Danone has the benefit of being a leader for such products as yogurt, bottled water and baby food in many markets, giving it sway with consumers, as well with distributors and suppliers.
"Our ability to negotiate is much stronger," Mr. Riboud said.
Textile manufacturers at a trade show here last week lamented a doubling in the cost of cotton, which hit a record high last year. Many mills are passing the higher costs on to apparel makers. Analysts expect mass-market fashion retailers to raise their prices in turn, testing the recovery in consumer confidence.
Rising commodity costs sliced profit margins in the food and home-goods sectors in the fourth quarter. Unilever's margin decreased 0.2 percentage point, Procter & Gamble /zigman2/quotes/202894679/composite PG +0.97% Co.'s declined 2.1 percentage points and Colgate-Palmolive /zigman2/quotes/200774077/composite CL +0.99% Co.'s fell 0.6 percentage point. But some companies, such as cosmetics giant L'Oréal /zigman2/quotes/204720038/delayed FR:OR -0.10% SA, are less affected because raw materials make up only a small portion of a product's cost, with advertising and sales expenses weighing as heavily.
Many consumer-goods companies predict commodity costs will continue to increase sharply this year. Unilever, the maker of Ben & Jerry's ice cream, Lipton tea and Dove soap, forecast this month that its commodity costs will rise €1.5 billion to €2 billion, reaching as much as 4% of revenue. Unilever said it is most likely to raise prices on so-called pure-commodity products, which are made almost exclusively of edible oils, such as margarine and salad dressing.
Kraft Foods Inc. CEO Irene Rosenfeld said last week that raising prices will allow the food maker to meet its 4% growth target for this year. Still, the increases the company has begun pushing through haven't kept up with rising costs. Kraft lowered its forecast for earnings per share.
Drinks and snack maker PepsiCo /zigman2/quotes/208744353/composite PEP +1.31% recently forecast that its costs for commodities—such as corn and oil—could rise 9.5%, or $1.6 billion, this year. But the company said it is limited in its ability to pass on the higher costs to consumers and cut its earnings forecast. Rival Coca-Cola /zigman2/quotes/209159848/composite KO +0.76% Co. is less affected by higher commodity costs because food isn't as important in its portfolio.
Analysts are optimistic that companies can contain the effects of higher commodity costs. Danone's expectation that it will increase its operating margin supports "our thesis that commodities are not an insurmountable problem for the European food group in general, including Danone," said Sanford Bernstein analyst Andrew Wood .
Though costs for key commodities such as edible oils and petrochemicals have been soaring, many companies have said the landscape is better than in 2007 and 2008, when costs jumped just as the world descended into recession.
This time around, the global economy is gathering strength, albeit slowly, and consumer confidence is higher.
When the global recession pushed raw-material costs lower, Danone and its competitors had room to cut prices to accommodate stagnant consumer spending. Danone slashed prices on yogurt and offered promotions on bottled water.
The overall value of Danone's goods fell for seven straight quarters until the last three months of last year, when it rose 1.8%.
Danone began feeling the pinch from rising raw-material prices after a summer drought and fires in Russia, the company's second-biggest market.
Rising prices for wheat, which is used to feed cattle, led to higher prices for milk, Danone's primary ingredient.
Despite its plans to raise prices this year, they will remain below where they were when the company cut prices two years ago.
Paul Sonne in London and Ilan Brat in Chicago contributed to this article.