Price rises now driving profit growth

Price rises now driving profit growth

The strongest indicator of the success of a brand at an enterprise level, or the strength of shopper confidence at an industry or country level, is the ability to take and hold price increases.

Price is the single most powerful generator of profit in any enterprise. It beats volume increase, cost cutting, mergers and acquisitions, new product launches and geographical expansion. It’s why every OECD government has some form of competition body to ensure that companies cannot raise prices via monopolistic power or market collusion.

It’s the reason why so much thought, emotional energy and time is invested by business people and boards to build and protect a brand. It’s also the reason why brands take few price increases, and so many actually drop prices as their product or service becomes less and less unique over time.

Price degradation in the consumer electronics industry, fast fashion, home entertainment and seasonal products is almost like falling off a cliff at times. Aside from Apple and the luxury goods industry, very few brands are able to sustain price, let alone take price increases.

In the consumer packaged goods (CPG) industry around the world, price hasn’t appeared positively in any annual report since 2008. Price commentary has all been around the shoppers’ need for lower prices and the challenge faced by retailers and manufacturers to meet those lower prices via cost cutting and innovation around technology-driven productivity.

So have I made the case for how important price is and how rare it’s been over the past seven years? Well things are looking up because Pepsi Co in the US just announced its profit performance for the year. It’s up, and the key driver is increased price. The humble, very high volume, easily replaced carbonated soft drink has taken a price increase, the retailers’ buying offices have accepted it and passed it on and shoppers have paid the extra. No volume drops, no huge competitive reaction, just increased profit.

Why? Well in the US house prices are rising, there is job growth, albeit not much wage growth, interest rates are low and the prices of almost everything at shelf are less than they were five years ago. So shoppers are happy to start to spend a little more for the same.  

So what does that mean? Well it means we’re once again in the price rise cycle for the US economy. It means that if you own shares in US consumer packaged goods companies they will now run through a three to five year cycle of taking and holding price increases, without dropping volume and will just make more money. And they’re doing this on the back of five hard, long years of cost cutting and productivity efficiencies. That means they’ll make what economists call “super normal profits” for a year or two. And they’re going to be great places to invest and work. Unless of course you own Australian dollars and are buying US stocks. But that’s another story.

Rest assured, our own Australian CPG companies will start on the same price rise cycle early next calendar year. If you own a small business in this CPG space or have CPG shares in your super fund you should profit from your knowledge this cycle. Enjoy.

Kevin A Moore is a retail expert and the chairman of Crossmark Asia Pacific Holdings and Mirador Retail Technology. He is also the founder of TheRoadToRetail.

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