Strategic Movements April 2022

Visa & Mastercard Fee Change

Visa and Mastercard are rolling out a new fee schedule that has been two years in the making.  The fees are paid by merchants to banks.  Some fees will increase, others will decrease.  The cited reason for increases is to cover the increased cost of fraud prevention and continued innovation.  Yet it is more complex than that.  Some of the fee increases can be reduced if the merchant provides specific transaction data and/or use a token service that masks card numbers.  Other merchants will see some relief however as they lower costs for small transactions (less than $5) or fees paid by small merchants (less than $250,000 in annual credit-card volume).

Changes like this often come after the company has considered tweaking their price structure to reflect new market realities.  Changes like this also risks creating a market opening for a competitor, such as Discover Card or American Express, to exploit.

Baseline numbers, implying a belief that usage patterns won’t change and therefore volume will remain the same, indicate merchants will pay $330 million more in interchange fees with the new price structure, according to research by CMPSPI, a consulting company.

V (Visa) rose from 119 to 228 in the weeks following the news.  2021 revenue of $25.5 billion with 53% margins led investors to value it with a P/E ratio of 43.

In parallel, MS (Mastercard) rose from 328 to 367 in the weeks following the news.  2021 revenue of $18.9 billion with 42% margins led investors to value it with a P/E ratio of 42.

Andriotis, AnnaMaria (2022, March 9). Mastercard and Visa Plan Fee Increases. Wall Street Journal, B5.

Barbeque Beef Ain’t Cheap No More

Skee Miller of The Count Line has had to raise the price of his barbeque four times in 2021 alone.  His Big Daddy Beef Rib Platter went from $18.99 to $32.99.  In Texas, barbeque brisket rules.  Costs for beef brisket have doubled in the past year.  Miller wasn’t alone.  Russel Roegels of Roegels Barbecue is changing $30 per pound of brisket up from $20 per pound two years ago.  Stephen Joseph of Joseph’s Riverport Bar-B-Q has both raised prices and tried lowering the costs of his product, which he admits wasn’t great.

Now just how do you spell the dish? Barbecue, Barbeque, Bar-B-Q, BBQ, or maybe the Tejano original: barbacoa. 

Findell, Elizabeth (2022, March 10). Rising Meat Prices Eat Away At a Texas Barbecue Tradition. Wall Street Journal, A1.

Inflation Doesn’t Lift All Prices Equally

Sales of apparel, footwear, toys, and sports equipment declined in the first quarter of 2022 while those of food and gasoline increased.  Getting more granular, luxury brands and high-end apparel seem to be able to take a price increase while basics, such as t-shirts and jeans, are hitting a wall.  Even at the mix level within a category, differences are apparent:  Macy’s was able to raise the price of a $2,000 sectional sofa to $2,200 but couldn’t raise the price of a $499 sofa by $100.

Inflation impacts neither costs nor prices equally, and consumer responses should be expected to vary.  How do you manage in this environment?  Pricing hypothesis creation, testing, measuring, and adjustment on a rapid (meaning monthly to daily) time scale is necessary.  Pricing at midsized firms and larger isn’t the job of a data jockey nor a price administrator, it requires a pricing strategist.

Kapner, Suzanne (2022, March 18). Shoppers Push Back on Price Hikes. Wall Street Journal, A1.

General Mills Might be Learning about Pricing Power

The pandemic has not been entirely kind to General Mills.  Supply disruptions, labor shortages, and higher raw-material costs have all hampered their performance and increased costs.  In outlook statements, General Mills expects inflationary input cost increases of 8% to 9% through 2022.

Yet General Mills reports that demand remains robust for their CPG products as work-from-home continues despite their recent price increases.  For instance, as an outcome of pandemic pet acquisitions, General Mills’ pet segment saw demand jump 30%.  Moreover, General Mills are not alone in raising prices in their industry.  U.S. Bureau of Labor Statistics reported that for all food consumed at home, prices rose 8.6% for the twelve months ending in February 2022.

Maybe Big CPG is learning they have some pricing power. But just maybe.  Until I learn that General Mills and other major CPG companies have elevated pricing from the role of data jockey and price administration to the role of a Chief Pricing Officer or Chief Value Officer, I fear this may be a transitory gain.  Imagine what 1% higher prices for General Mills would do for profits and corporate valuation.

GIS (General Mills) rose from 63 to 68 in the weeks surrounding the announcement.  2021 revenue of $18.1 billion with 13% margins led investors to value it with a P/E ratio of 18.

Feuer, Will (2022, March 24). Demand, Pricing Spur General Mills to Raise Outlook. Wall Street Journal, B1.

SpaceX is Raising Prices

Believably, a company spokesperson declared “The sole purpose of these adjustments is to keep pace with rising inflation”. Yet what are the adjustments?  Price guidance for launching the Falcon Heavy rose from $90 million to $97 million and that for the Falcon 9 rose from $62 million to $67 million.  Price guidance for other payloads on the SpaceX rideshare program rose from $1.0 million to $1.1 million.  Elsewhere, prices for Starlink satellite based broadband internet connections are increasing from $499 to $549 for customers with deposits and to $599 for new customers.

Will customers accept these prices?  I suspect many will but would hope SpaceX has a pricing strategist to measure the impact of the changes on sales volume against baseline expectations and therefore determine their profitability.

SpaceX reportedly had 2021 revenue of $1.6 billion.  It is a private company with unknown margins (likely negative as are many venture-capital backed growth companies) and a recent valuation of $100 billion.

Maidenberg, Micah (2022, March 25). Inflation Boosts SpaceX Prices. Wall Street Journal, B4.