Jim, what do you think of this real world business story?
chicagotribune.com
Hidden costs sock business
Rising insurance rates cited as biggest culprit
By Ameet Sachdev
Tribune staff reporter
Published November 10, 2002
The Federal Reserve says inflation is below 2 percent, but small-business owner Stephen Stack begs to differ.
The costs of running his Chicago-based industrial sewing company keep spiraling upwards. Health-care costs? Up 15 percent. Worker's compensation insurance? Up 29 percent.
It gets worse. When he renewed his property insurance last month, his premium jumped 60 percent.
"Of all the increasing costs, the business insurance is the real shocker," said Stack, president of SeamCraft Inc., which supplies custom-sewn bags to the likes of Ford Motor Co. and General Motors Corp.
Business owners and corporate executives are used to such hidden expenses creeping up every year, but the spikes for 2003 have wreaked havoc on budgets across the business landscape. That's putting incredible pressure on profit at a time when companies face weak global demand and have limited ability to raise prices.
Although skyrocketing medical costs grab most of the headlines, companies are being pinched everywhere. In the face of uncertainty generated by war, terrorism and accounting fraud, commercial insurance premiums are escalating. Companies also must pump hundreds of millions of dollars into underfunded pension plans, barring a dramatic stock market recovery.
In addition, labor costs continue to rise faster than revenue. A survey of 1,045 companies this year by Lincolnshire-based Hewitt Associates found that the average salary increase for 2003 is projected to be almost 4 percent. Moreover, a small but growing minority of publicly traded corporations is starting to expense another form of compensation: stock options.
Add it all up and "it's like a perfect storm," said Judy Whinfrey, a managing consultant at Hewitt, an employee-benefits consulting firm. "In the past, you had one or two cost elements that might have been of concern. Now you have all of them."
The relentless cost pressures, combined with slow sales growth, are forcing companies to make some painful choices.
Safeway Inc. has threatened to sell Dominick's, the Chicago-area grocery chain it acquired in 1998, if employees don't accept lower pay and benefits. As Dominick's sales shrink, Safeway is pushing to bring its labor costs in line with local competitor Jewel Food Stores.
Maytag Corp. last month announced plans to close its 1,600-worker refrigerator plant in downstate Galesburg and transfer production to Mexico, where labor is cheaper. The cost-cutting measures "are critical to improving our profitability in the very competitive appliance marketplace," said Bill Beer, president of Maytag's appliance group.
Beating inflation
To meet profit targets, companies will cut costs again and again, shuttering factories and offices and shedding unprofitable lines of business. But there are some increases that companies just have to swallow. These increases are so high, chief executives are making a special point to acknowledge the costs.
Jamie Dimon, chief executive of Bank One Corp., told analysts during the Chicago company's conference call last month that the bill for medical and business insurance, higher wages and stock options will rise $200 million next year. Those things alone would raise Bank One's operating costs by 2.1 percent.
"These are pretty large expenses, and we hope that we're going to try to find a way to keep them down," Dimon said. "But there will be some going up."
And they're going up much faster than inflation. The premiums for liability insurance covering corporate directors and officers, for instance, rose an average of 29 percent in 2001, according to a survey by consulting firm Tillinghast-Towers Perrin.
Some companies renewing their policies are finding that their premiums are more than doubling, said Mark Larsen, director of the survey. The increases reverse years of premium declines in the late 1990s when insurers enjoyed outsize investment gains. But with stock returns plummeting and securities litigation rising, insurers are jacking up rates.
Insuring any kind of risk has become more expensive since the terrorist attacks on Sept. 11. Business executives anticipated increases, but nothing like they have witnessed.
"This [insurance] market is tougher than anything I've seen, including the 1970s," said Gary Schmidt, who oversees risk management as general counsel and vice president of beauty products-maker Alberto-Culver Co.
Indeed, the market is so out of whack that Schmidt said he's "very proud" that the Melrose Park-based company's property insurance premiums went up 31 percent. He explained, "I've heard horror stories from other companies of increases of 200 to 300 percent."
And there's little relief in sight. Chicago insurance executive Patrick Gallagher predicts that premium increases for property and casualty insurance won't abate until 2005.
Employees to pay more
Taken alone, business insurance costs are not a drag on profits for larger corporations. But the increases could not have come at a worse time.
Employer health-care costs are expected to increase 15.4 percent in 2003, and this comes after last year's rate hike of 13.7 percent, according to Hewitt.
Instead of absorbing the entire hit, companies are asking workers to share the pain. Individually insured employees will find they are paying at least $269 more for their share of annual company premiums, a 29 percent increase from 2002's contribution, according to a Hewitt analysis.
In some cases, retirees are being asked to chip in. Retirees at GM will see their health-care premiums jump by about $25 a month on average. GM says the increase is necessary to cover fast-rising prescription drug expenses that cost the world's largest automaker $1 billion last year.
Pension payments
Retirees may have bigger things to worry about. The two-year stock-market swoon has turned overfunded pension funds into underfunded ones. Just as firms try desperately to show profit growth, they face big hits to the balance sheet from the pension losses and may have to siphon off more cash to fund the plans.
UAL Corp., the parent of United Airlines, said in a federal filing that it anticipates taking a $1.5 billion charge for 2002 and contributing $5 billion more to its pension plans by 2008.
The money being directed to retirement plans might otherwise have been spent on new planes, factories and other job-creating investments badly needed to prop up a faltering economy.
The Federal Reserve is trying to encourage more investment. On Wednesday, it slashed interest rates an unexpectedly large one-half of a percentage point, the first cut in 11 months.
But, said Stack of SeamCraft, the impact may be minimal: "Lower rates aren't going to lower my health-care costs." |
