The Econmist - USA (2021-11-06)

Pricingpower

Passing the buck

M

cdonald’s hasemployed a “barbell”
pricing  strategy  for  decades,  luring
customers with low­cost items in the hope
that they will then splurge on pricier fare.
This balancing act is now at risk. On Octo­
ber  27th  the  fast­food  giant  said  that,  due
to  rising  costs,  prices  at  its  American  res­
taurants will increase by 6% this year com­
pared with 2020. The burger chain says la­
bour expenses have risen by 10% at its fran­
chised restaurants and 15% at its company­
owned locations. Add the rising cost of in­
gredients and the result is higher prices for
burgers  and  fries.  For  now,  it  seems,  cus­
tomers can stomach it. Chris Kempczinski,
McDonald’s  boss,  said  the  increase  “has
been  pretty  well  received”.  After  digesting
the news, investors have sent shares in the
fast­food firm up by 6%.
A  growing  number  of  companies  are
raising  prices  as  costs  for  labour  and  raw
materials  rise,  often  with  no  ill  effects.
This  summer  PepsiCo,  an  American  food
giant,  lifted  prices  for  its  fizzy  drinks  and
snacks  to  offset  higher  commodity  and
transport  costs;  it  plans  further  increases
early next year. Ramon Laguarta, the firm’s

boss,suggestedinanearningscallinOcto­

berthatcustomersdonotseembothered.

“Acrosstheworldconsumersseemtobe

lookingatpricing alittlebit differently

thanbefore,”hesaid.InSeptemberProcter

& Gamble, a multinational consumer­

goodsgiant,raisedpricesformanyofits

products.Theeffectondemandwasmini­

mal.“Wehavenotseenanymaterialreac­

tionfromconsumers,”AndreSchulten,the

firm’schieffinancialofficer(cfo), toldan­

alystslastmonth.

“Pricingpower”,theabilitytopasscosts

tocustomerswithoutharmingsales,has

longbeenprizedbyinvestors.WarrenBuf­

fetthasdescribedit as“thesinglemostim­

portantdecisioninevaluatinga business”.

Itiseasytoseewhy.Whenhitwithanun­

expectedexpense, firmswithoutpricing

powerareforcedtocutcosts,boostpro­

ductivity or simply absorb the costs

throughlowerprofitmargins.Thosewith

pricingpowercanpushcostsontocustom­

ers,keepingmarginssteady.

Today, firmsare eagerto flaunttheir

price­setting clout.“We can reprice our

producteverysecondofeveryday,”Chris­

topherNassetta,bossofHiltonWorldwide,

a hoteloperator,toldinvestorslastmonth.

“Webelievewe’vegotpricingpowerreally

betterthanalmostanybodyifnotevery­

bodyintheindustry,”boastedJohnHar­

tung,cfoofChipotle,a restaurantchain,

inOctober.CompaniessuchasStarbucks,

Levi Strauss and GlaxoSmithKline make

similarclaims.“Wearea luxurycompany,

sowedohavepricingpower,”braggedTra­

ceyTravis,cfoofEstéeLauder,a cosmetics

firm,onNovember2nd.

Theyarenotalone.Ofthes&p 500 com­

paniesthathavereportedthird­quarterre­

sults,overthree­quartersbeatprojections,

according to Bank of America Merrill

Lynch.“Thisearningsseasontherewasa

Businesses’ ability to pass on costs is highlyprizedbyinvestors

TheEconomistNovember6th 2021 57

Business

→Alsointhissection

58 Basketball’sChinaproblem

59 Newsprint’spriceshock

59 A payfightinGermany

60 OldITlearnsnewtricks

61 Bartleby:Whybossesbacktheoffice

62 Schumpeter:Bigoil’sgaspuzzle

Mark-up language

Pricing-power score* of S&P 1500 companies

Jan 2010-Apr 2021, standard deviations from mean

Source:UBS

*Basedonmark-up,marketshare,

andvolatilityandskewofprofitmargins

1

Sector 0-0.5-1.0 1.00.5

Energy

Financials

Materials

Utilities

Industrials

Realestate

Healthcare

Consumer discretionary

Information technology

Communication services

Consumer staples

→ Can raise

prices without

harming sales