62 Business The Economist April 30th 2022
Topdogsandbabies’ bottoms
I
nflation is makingup for lost time. A word that many thought
had gone the way of peroxide hair and trench coats in the early
1980s is now back on almost every ceo’s lips as they run through a
barrage of compounding shocks—war, commodity crisis, supply
chain disruption and labour shortages—in their companies’ first
quarter results. From December to March, almost threequarters
of firms in the s&p 500 mentioned inflation in earnings calls, ac
cording to FactSet, a data gatherer. Such is the novelty, it runs the
risk of making such turgid occasions almost riveting.
In rich countries, producer prices are surging at their fastest
rate in 40 years. That sounds bad. On the ground some say it feels
awful. Thierry Piéton, chief financial officer of Renault, said the
French carmaker initially predicted rawmaterial costs would
double this year. Now it thinks they will triple. Elon Musk says
Tesla’s suppliers are requesting 2030% increases in parts for elec
tric cars compared to this time last year. Others talk of fivefold in
creases in the costs of sending containers between Europe and
Asia, a dearth of truck drivers in America, and a scramble for
everything from corn syrup to coffee beans and lithium.
Amid such a maelstrom, the perils of getting inflation wrong
are obvious. You only need to look at Netflix, trying to raise prices
in the midst of a brutally expensive streaming war, to get a sense of
the risks involved. Yet in general, some of the world’s bestknown
companies are coping. After years of negligible increases, they
have managed to push up prices without alienating their consum
ers. How long they can continue to do so is one of the biggest ques
tions in business today.
In some cases, as Mark Schneider, boss of Nestlé, the world’s
biggest food company, puts it, the public understands that “some
thing has to give.” War, after all, is on the tv, and the pandemic is
still fresh in people’s minds. Inflation is less alien by the day. In
other cases, pricing is done more sneakily: offering premium pro
ducts to those who are still able to splash out, or cutting costs for
those for whom affordability is the overriding concern. Many of
the biggest firms do both.
The immediate advantage goes to those with the strongest
brands and market shares. That gives them more flexibility to
raise prices. CocaCola, with almost half of the world’s $180bn fizzydrinks market, used price and volume increases to deliver
bumper earnings, which one analyst described as a “masterclass
in pricing power.” Nestlé, which has barely increased prices for
years, raised them by 5.2% year on year in the first quarter, its big
gest increase since 2008. There may be more to come, it reckons.
Mr Musk said Tesla’s price increases were high enough to cover the
full amount of cost increases he expects this year. Yet still the ve
hicles continue to fly out the door.
Such firms benefit from another factor associated with brand
power: premiumisation, or their ability to raise the cost of already
pricey products. The trend appears to be holding fast. In Nestlé’s
case there are, as yet, few signs that wellheeled consumers are
trading down from, say, Nespresso pods to Starbucks capsules to
(heaven forbid) spoonfuls of Nescafé.
Pet owners are the most bounteous. Nestlé’s Purina petcare di
vision, with telltale products like “Fancy Feast”, achieved the larg
est price increases across all categories during the quarter. Parents
are far more parsimonious; they are much less willing to pay a
high price for baby formula—though KimberlyClark, another
consumergoods company, has high hopes for premiumisation of
nappies in China. As Michael Hsu, its ceo, put it, “the value per ba
by is less than half of what it is in developed markets like the Un
ited States”. Consumers in rich countries are also better able to
cope with price rises than those in poorer ones. Firms like Coca
Cola offer betterpackaged premium products in America and Eu
rope, and more valueconscious ones in emerging markets.
So much for the haves. What about the havenots? If firms can’t
raise prices, why not shrink the products they sell instead. This
tactic, baptised in Britain in 2013 as shrinkflation, dates back a lot
further. Hershey’s, an American confectioner, proudly recalls how
in the 1950s it responded to fluctuations in cocoabean prices by
regularly changing the weight of the bar, rather than the fivecent
price. No one admits to shrinkflation these days. But they are re
branding it in ways that are cool, thrifty—and in some cases even
environmentally virtuous.
Renault, whose executives describe Dacia, a subsidiary making
its cheapest cars, as an “everydaylowprice sort of brand”—some
what like a soap powder—is hot on the trend. It is slashing the
number of different parts across its models; that means more le
verage with suppliers since fewer parts are bought but in larger
volumes. Likewise, there’s plenty of talk among snack producers
about reducing packaging sizes of cheap products, not just to cut
costs but to save on waste. CocaCola is selling drinks by the cup
ful in India. In Latin America it is expanding its use of refillable
bottles. In America’s southwest, it is piloting a scheme for use of
returnable glass bottles. Rather like hotels asking guests to use
fewer towels to spare the environment, it will surely be good for
the bottom line, too. Elastoplast
The good news is that consumers have, by and large, taken the in
flationary shock in their stride so far. As chief executives have re
peated in recent weeks, the sensitivity of shoppers to rising prices,
or what they (and economists) call price elasticity, is not as bad as
they had feared. But it is still only early days. Many consumers
may not know yet how convulsive an inflationary environment
can be. If prices continue to increase, and outpace growth in in
comes, eventuallytheshock will sink in. Then the biggest ques
tion will not be howpriceelastic people are, but whether spend
ing snaps altogether.nSchumpeter
The weird ways companies are coping with inflation