Minnesota companies adapt to reality of costly energy

For much of the '90s and the early part of this decade, commodities prices were a nonfactor or even provided a boost to profits at many companies, as the price of oil and other materials held steady or fell. This year, commodity inflation is back at a pace not seen since the '70s, forcing Minnesota firms to put resource management at the top of their concerns. Some are finding ways to pass along costs to customers. Others can only tighten their belts. In both cases, Minnesotans are paying the price for the higher costs. Here is a look at how a number of industries in the state are reacting to the changed environment.

AIRLINES

Fuel is the No. 1 expense for Northwest Airlines, so the Eagan-based carrier has been raising fares to cope with some of the cost of rising oil prices.

Northwest recently raised many domestic round-trip prices $20.

If oil prices persist at record levels, Northwest is vulnerable because it has hedged only 10 percent of its fuel supply in the first quarter.

"We are very, very conscious about our fuel usage," said Tim Rainey, Northwest's senior vice president of flight operations. "We encourage our dispatchers and pilots that they carry the right amount of fuel, not a gallon too much."

During the fourth quarter, Northwest is operating a domestic schedule that is 6 to 7 percent smaller than a year ago, so that decision is allowing the carrier to save fuel. If fuel prices remain high and consumer demand falls in response to fare increases, Northwest could park some of the DC-9s it owns outright.

At Sun Country Airlines, the carrier recently paid $2.75 a gallon for jet fuel, including taxes, up from $1.95 a gallon in January.

"We have done some fare increases, similar to the big guys," said Steve Spellman, chief financial officer.

MANUFACTURERS

3M Co. has seen its material costs jump 2 percent this year as oil-based ingredients and other chemical prices jumped.

The company is working with suppliers, using its own energy-saving window films in its buildings and retooling AC and heating systems to slash its costs, spokeswoman Jackie Berry said.

Ecolab Inc., the St. Paul-based producer of cleaning products, saw oil-based and other chemical costs jump 10 percent in 2005 and 5 percent in 2006. In an attempt to hold the line on those costs this year, Ecolab has dropped some slower-selling soaps, reined in color choices on some products, altered a few costly formulas to use less expensive chemical substitutes and raised some prices, spokesman Mike Monahan said.

"Clearly raw materials have risen significantly for all companies and for us as well ... and so we are doing a combination of things," he said.

At Minneapolis paint and coatings firm Valspar Corp., the company has focused on factory efficiencies while pushing a more profitable product mix and making selective price increases.

For the first nine months of its fiscal year, Valspar's cost of goods jumped 11 percent from $1.5 billion to $1.67 billion, while net income rose just .17 percent to $123.3 million, excluding a $15 million stock accrual redemption.

Vadnais Heights paint and adhesives maker H.B. Fuller Co. has been passing rising material costs onto customers through price increases. They have been doing this for "11 straight quarters," said Deutsche Bank research analyst David Begleiter in a recent report. He noted that Fuller's costs will continue to rise.

Graco Inc., which makes pumps and paint sprayers in Minneapolis, also has been hard hit by rising supply costs, but refuses to surcharge customers.

"Graco really has exposure to all the bad commodities: the steel, the brasses, stainless steel, the aluminum and coppers. A lot of our paint sprayers have plastics in them and petroleum-related products as well. Pretty much all the stuff that has gone up in price significantly over the last couple of years," said chief administrative officer Mark Sheahan.

Graco has been searching for cheaper suppliers and invested in automated factory machines in an attempt to cope with commodity inflation.

RESTAURANTS

"When the price of gas goes above $3 a gallon, it affects everyone in the restaurant industry," said Glenn Drasher, marketing vice president for Famous Dave's of America Inc., the Minnetonka-based chain that operates 159 restaurants in 35 states, including 18 in the Twin Cities. "It definitely affects people's willingness to dine out."

Famous Dave's plans to emphasize its consumer takeout and corporate catering businesses if it sees slower traffic in its restaurants. Those segments currently represent a smaller slice of company revenue than does sit-down dining.

"Even if people don't go out to eat, they're not going to start cooking at home all of a sudden," Drasher said. "They'll bring something home from the grocery store or pick up some takeout food from a restaurant."

At Green Mill Restaurants Inc., the company is creating new appetizers at price points between $3.99 and $5.99, said Paul Dzubnar, president of the Arden Hills-based company, which has 32 restaurants in four states, including 15 in the Twin Cities. "That way families can still go out when gas prices are higher."

He said the company also has "gone back to our vendors and tried to renegotiate food contracts." Despite that, prices of cheese and lettuce are going up, he said.

"Our goal is to have very few price increases in the new year," Dzubnar said.

FOOD

The Eden Prairie-based grocery store giant Supervalu Inc. runs a distribution business that supplies 5,000 grocery stores from coast to coast with everything from apples to Apple Jacks. Company drivers log more than 100 million miles a year, said Matt Smith, vice president of the company's supply chain services.

"A tenth-of-a-mile-per-gallon savings across the network is very meaningful and we chase it very aggressively," Smith said.

The company works with suppliers to buy the best tires for each vehicle, then monitors air pressure to get the most out of each gallon of gas. Thanks to onboard computers, company trucks don't idle beyond a set time or go above a preset speed -- depending on the route.

The quest for efficiency intensified this year, but it's long been a concern, said Smith. "We're a big user."

Smaller shops are feeling the pinch, too.

"The rising cost of gas is affecting every aspect of our business, whether it be sugar or chocolate or tins," said Christine Lantinen, president of Maud Borup, a chocolatier founded 100 years ago in St. Paul by Maud herself. "Gas is used for everything."

Freight costs alone have gone up a percentage point each year over the last three years, she said.

Lantinen is estimating that Maud Borup will charge 10 percent more for its products at the wholesale level next year. The increase would be worse if not for the company engaging in such cost-cutting strategies as reducing packaging and seeking additional bids for large purchases such as tins.

"If you overprice things, it's not going to sell," Lantinen said.