The Economist - USA (2022-06-11)

64 Business TheEconomistJune11th 2022

memosenttoemployeesthismonthElon

Muskrevealedplanstotrimsalariedhead­

countatTesla,hiselectric­carcompany,by

10%.Digitaldarlings,manyofwhichhad

boomedduringthepandemic,collectively

sackednearly17,000workersinMayalone.

Aftertemptingworkerswithincreasedpay

andperks,inthelatestquarterlyearnings

callsmoreAmericanceos havebeentalk­

ingupautomationandlabourefficiencies.

Inthecurrentclimate,though,hard­

headed (and hard­hearted) cost control

won’tbeenoughtomaintainprofitability.

The remaining cost inflation must be

pushedthroughtocustomers.Manybusi­

nessesareabouttolearnthedifficultyof

raisingpriceswithoutcrimpingdemand.

Thecompaniesthatwieldthissuperpower

oftensharea fewattributes:weakcompeti­

tion,customers’inabilitytodelayoravoid

thepurchase,orinflation­linkedrevenue

streams.Astrongbrandalsohelps.Star­

bucksboastedonanearningscallinMay

that,despitecaffeinatedpricerisesforits

beverages,ithasstruggledtokeepupwith

“relentlessdemand”.

Recent data hint at softer consumer

sentiment,however.Thismakesitriskier

forfirmstorolloutfrequentpriceincreas­

es.Amberlightsare blinking,fromMc­

Donald’s,whichhasspeculatedabout“in­

creasedvaluesensitivity”amongburger­

munchers,toVerizon,whichdetectedcus­

tomer“slowness”inthemostrecentquar­

ter. The ability to push through price

increasesascustomerstightentheirbelts

requirescarefulmanagement.Incontrast

tothelasthigh­inflationera,managerscan

use real­time algorithmic price setting,

constantlyexperimentingandadjustingas

consumersrespond.Nonetheless,allfirms

willstillhavetotakea longer­termviewon

howlonghighpriceswilllastandonthe

limitsofwhattheircustomerswilltoler­

ate.Thatisfinger­in­the­windstuff.

Eveniftheykeeprevenuesandcosts

undercontrol,ceos arediscoveringwhat

theirpredecessorsknewalltoowell:infla­

tionplayshavocwiththebalance­sheet.

Thatrequireseventightercontrolofwork­

ingcapital(thevalueofinventoriesand

whatisowedbycustomersminuswhatis

owedtosuppliers).Manyfirmshavemis­

judged demand for theirproducts. Wal­

martlostalmosta fifthofitsmarketvalue,

oraround$80bn,inmid­May,afteritre­

porteda cashflowsqueezecausedbyanex­

cessbuild­upofinventories,whichroseby

a thirdyearonyear.OnJune7thitssmaller

retailing rival, Target, issued awarning

that its operatingmargin willfall from

5.3%lastquarterto2%inthecurrentone,

asitdiscountsgoodstoclearitsexcessin­

ventories.Paymentcycles—ie,whena firm

payssuppliersandispaidbycustomers—

becomemoreimportant,too,asthepur­

chasingpowerofcashdeliveredtomorrow

withersininflation’sheat.

All this makes a business’s perfor­

mancemoredifficulttoassess.Forexam­

ple,calculationsofreturnoncapitallook

moreimpressivewithaninflatednumera­

tor(presentreturns)andthedenominator

(capitalinvestedinthepast)inolddollars.

Between 1979 and1986,duringthelastbout

ofhighinflation,Americanfirmswerere­

quired by law to present income state­

mentsthatwereadjustedforrisingprices.

Thisedictisunlikelyto berevived.But

evenasbosses boastofhighernominal

revenuegrowth,investmentandcompen­

sationdecisionsshouldaccountforsuch

artificialtailwinds.JustaskMrBuffett.In

hislettertoshareholdersfor 1980 here­

mindedthemthatprofitsmustriseinpro­

portiontoincreasesinthepricelevelwith­

outanincreaseincapitalemployed,lest

thefirmstarts“chewingup”investors’cap­

ital.Hismissivetoinvestorsin 2023 may

needtocarrythesamemessage.n

That’70sshow

UnitedStates,%changeona yearearlier

Source:WellingtonManagement

1

15

10

5

0

-5

-10

221020009080701961

GDP

Consumerprices

Marginal evolution

United States, after-tax corporate profits

As % of GDP

Sources:FederalReserve Bank of St Louis; Goldman Sachs

2

10

8

6

4

2

0

22102000908070601950

↓ Inflation % or more

Fastfashion

A pretty picture

“F

or the last  two  months  it  has  been

busy  like  the  weekend  every  day,”

sighs a sales assistant at a large Zara store

on Tauentzienstrasse, a shopping street in

the  centre  of  Berlin.  On  the  Tuesday  after

the long Pentecost weekend about a dozen

ladies  were  queuing  for  the  fitting  room,

each carrying several items, many of them

in  hot  pink  or  canary  yellow,  colours  en

voguethis  season.  They  don’t  seem  to  be

deterred  by  Zara’s  higher  garment  prices.

At least not yet.

Shoppers  are  still  “revenge  buying”  to

make up for all the time when shops were

closed and socialising banned amid waves

of covid­19. After grafting pajama bottoms

onto their legs over the past two years, buy­

ers are snapping up office and party wear.

On  June  8th  Inditex,  which  own  Zara,

Bershka  and  Massimo  Dutti,  among  other

brands, reported glittery results for its lat­

est quarter. Revenues rose by 36% year on

year,  to  €6.7bn  ($7.2bn),  surpassing  levels

before the pandemic. Net profit jumped by

80%  year  on  year.  Online  sales  dipped

compared  with  the  same  period  in  2021,

when  the  internet  was  the  only  place  to

shop  for  clothes  owing  to  lockdowns  in

America and Europe. But the decline of 6%

was  much  slower  than  expected,  which

suggests that people have got used to buy­

ing garb on the internet. In another boost,

China is reopening after the latest bout of

lockdowns. Only four of Inditex’s Chinese

outlets remain closed, down from 67 in the

three  months  to  April.  h&m,  Inditex’s

Swedish  fast­fashion  rival,  is  expected  to

report similarly perky results on June 15th.

The  big  question  for  Óscar  García  Ma­

ceiras, who took over as chief executive of

Inditex  in  November,  and  his  opposite

numbers  at  other  fast­fashion  firms,  is

whether  the  party  can  last.  The  short  an­

swer is that it probably won’t. But if anyone

can keep it going for a bit longer, it is Indi­

tex.  As  Georgina  Johanan  of  JPMorgan

Chase,  a  bank,  notes,  the  Spanish  giant

looks  best­placed  to  withstand  the  com­

bined pressures of war, competition, infla­

tion and, possibly, recession. 

Start  with  the  problems.  Fast­fashion

firms had to put a complete halt to their op­

erations in Russia and Ukraine after Vladi­

mir Putin invaded his southern neighbour

B ERLIN

But for how long?