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Business
The Economist November 6th 2021
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60 Old IT learns new tricks 61 Bartleby: Why bosses back the offi ce 62 Schumpeter: Big oil’s gas puzzle
Pricing power
Passing the buck
Businesses’ ability to pass on costs is highly prized by investors
M
cdonald’s has employed 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, suggested in an earnings call in Octo ber that customers do not seem bothered. “Across the world consumers seem to be looking at pricing a little bit diff erently than before,” he said. In September Procter & Gamble, a multinational consumer goods giant, raised prices for many of its 1
Mark-up language Pricing-power score* of S&P 1500 companies Jan 2010-Apr 2021, standard deviations from mean Sector
-1.0
Consumer staples Communication services Information technology Consumer discretionary Health care Real estate Industrials Utilities Materials Financials Energy Source: UBS
-0.5
0
0.5
1.0
→ Can raise prices without harming sales
*Based on mark-up, market share, and volatility and skew of profit margins
products. The eff ect on demand was mini mal. “We have not seen any material reac tion from consumers,” Andre Schulten, the fi rm’s chief fi nancial offi cer (cfo), told an alysts last month. “Pricing power”, the ability to pass costs to customers without harming sales, has long been prized by investors. Warren Buf fett has described it as “the single most im portant decision in evaluating a business”. It is easy to see why. When hit with an un expected expense, fi rms without pricing power are forced to cut costs, boost pro ductivity or simply absorb the costs through lower profi t margins. Those with pricing power can push costs onto custom ers, keeping margins steady. Today, fi rms are eager to fl aunt their pricesetting clout. “We can reprice our product every second of every day,” Chris topher Nassetta, boss of Hilton Worldwide, a hotel operator, told investors last month. “We believe we’ve got pricing power really better than almost anybody if not every body in the industry,” boasted John Har tung, cfo of Chipotle, a restaurant chain, in October. Companies such as Starbucks, Levi Strauss and GlaxoSmithKline make similar claims. “We are a luxury company, so we do have pricing power,” bragged Tra cey Travis, cfo of Estée Lauder, a cosmetics fi rm, on November 2nd. They are not alone. Of the s&p 500 com panies that have reported thirdquarter re sults, over threequarters beat projections, according to Bank of America Merrill Lynch. “This earnings season there was a
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