Strategic Movements June 2021
5% Benchmark Price Increase
Inflation was measured by the U.S. Labor Department and revealed consumer prices are 5% higher in May 2021 over May 2020. Will you raise your prices more than, equal to, or less than this benchmark? What is the strategy and logic behind the decision? Which offerings will get a greater price increase and which a lower one? Is there data to support the hypothesis behind your strategy? What is the communication and enforcement plan to ensure your price increase plan is accomplished? How often will you pursue price increases: monthly, weekly, or daily? Inflation is likely to be tamer later in the year. Basic heuristic in pricing is to be a fast follower when prices go up and a slow follower when they go down. The unexpected can bring opportunities for gains or losses. Which is this for you?
Campbell Soup is Late and Tepid to the Inflation Game
Campbell Soup Co. (CPB) signaled in early June a plan to raise prices to offset higher costs of transportation, input commodities, and labor – much like many of its industry peers did in April of this year. Concurrently, as people begin to leave their homes, comparable sales plunged 12% at Campbell. Warning sign: Mark Clouse, CEO, stated “We are going to be very thoughtful about it. The last thing we want to do is shut down the growth that we’ve worked verily hard to have.” While thoughtfulness and careful examination of the expected outcomes from any price change is always recommended, if price increases are pitted as a threat to revenue rather than an opportunity for profit improvements, progress towards outperformance is challenged. In response, shares dropped 6.5% upon his announcement. 2020 Revenue of $8.6 billion and P/E of 17.3.
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Ford to Tap Latent Demand with Electric Powered Truck
Ford Motor Co. (F) is developing the F-150 Lightening, an all-electric light truck. Currently, the plan is to list it at a manufacturer’s suggested retail price (MSRP) of $39,974 when it begins selling in fall 2022. The stated target market segment is fleet operators. U.S. buyers could also benefit from a $7,500 federal tax credit bringing the overall price in alignment with traditional carbon-fuel powered trucks. Known potential future competitors include GMC with a $113,000 Hummer based truck, Rivian with a $75,000 truck for outdoor people, Tesla with a $39,900 Cybertruck and a version similar to Ford’s at $49,900, Lordstown Motors Corp. with a $52,000 truck targeting commercial customers, and Bollinger Motors with a $125,000 boxy truck. From a purely competitive viewpoint, the F-150 Lightening appears underpriced. However, Tesla’s Model 3 priced at $37,990 experienced extremely high demand. This fact gives credence to the hypothesis that a lower priced electric truck will be in high demand and will propel business performance. Stock prices rose from $12.52 to $13.33 in the two days following the announcement and have continued rising in the following weeks. 2020 Revenue of $127.1 billion and P/E of 15.3.
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Corn Prices Rose 50% in 2021 Alone
Corn, a traded commodity (and therefore usually outside of our remit as pricing professionals), has experienced high price increases. It started the year at $4.49 per bushel on December 31, 2020. It hit $7.60 on May 6, 2021 and has since hovered around $6.90. The last time I recall corn experiencing such a rapid price increase was when George W. Bush was president and legislation subsidized the conversion of corn into ethanol for internal combustion engines (cars). That time, chicken producers were slow to respond to rising input costs of growing chickens and corn prices, and Pilgrim’s Pride, our nation’s first or second largest or largest chicken producer depending on the news source, went bankrupt. This time, the demand increase is from China as they seek to recover hog production that was decimated by swine flu in 2018-2019. This time let’s avoid the Pilgrim’s Pride error. If you are in a company that uses corn (like Kraft, Pepsico, Kellogg’s, General Mills, Post, Tyson, JBS, and the list goes on), even if your production is done elsewhere, raise prices and potentially reduce supply quickly in response to the increase in cost of input commodities. Profit, measured in currency, not market share nor margin percentages, is how money is made.
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Chicken Prices Up
Covid-19 production challenges are driving scarcity in the supply of processed chicken meat. Concurrently, fast-food franchises such as Popeye’s, Wendy’s, KFC, McDonalds, and Chick-fil-A, engaged a chicken-sandwich war driving up consumption. When demand outstrips supply, economic laws predict a price rise. Last year, boneless skinless chicken breast usually sold from producers at $1 a pound. This year, it is sold near $2 per pound. Tyson Foods Inc (TSN), JBS (JBSAY), and Sanderson Farms Inc (SAFM) will all need to practice proper price management to make the most from this opportunity.