Pricing power

No one is laughing when they do grocery shopping, as prices have climbed by a whopping 10 per cent in recent months. Companies are passing on the higher costs of inputs, such as corn-based products, which have risen by more than 30 per cent in the past year. There have been other comparable upswings in prices.

So far, producers have had to absorb much of the increase in the price of many raw materials, even the packaging, and that is taking a toll on profits. Retailers and manufacturers have been watching those trends, and trying to decide what they can do. Will consumers be made to pay more? Frugality has become a necessity and fashionable too. It has become the “in” thing to try to economize.

Well before the economic downturn, retailers and manufacturers worried that they were losing their “pricing power.” That was not a problem when business was booming, even when prices were sliding, inasmuch as volume helped to sustain profitability. However, now the surge in commodity prices – according to some, price indices have soared by more than 50 per cent – is compelling manufacturers to find out if they still had some pricing power.

Passing on higher commodity costs used to be the norm. Higher input costs hit all, so they wanted to raise prices, something that was easy to explain to consumers. Usually, there was a lag of about six months between the prices of goods on the shelves and the increases became obvious.

In the present era of economic stagnation, retailers want to know just why prices had to be raised. Heretofore, price rises simply were accepted. Retailers are trying to squeeze producers as much as possible in order to maintain profit margins.

In order to minimize price increases, retailers are trying to do so in ways that suggest they continue to deliver value for money. One approach is to provide a wider range of products in a particular category, such as a “no-frills” version that will remain inexpensive and continue to market the higher quality type that cost more. Another “solution” is to offer smaller products and a diminished quantity in each package. That very well may backfire as consumers feel that they are being cheated.

Formerly, manufacturers were allowed to stock some shelves with their products, but nowadays retailers want to do that for themselves in order to sell more private label goods. That pinches manufacturers’ profit margins.

Hence, after years of relatively stable prices, the steep rise in commodity prices means that consumers will have to be prepared for everyday higher prices.


Bruce Whitestone