Strategic Movements March 2022
Luxury Price Increase
Chanel SA Classic Flap bag went through multiple price increases recently moving the price from $5,200 in 2019 to $8,200 in 2022 citing cost increases as the driver. John Idol, Hermès International SA raised prices roughly 3% for 2022. Rolex raised prices by 3.4%. LVMH Moët Hennessy Louis Vuitton SE raised prices globally by up to double percentage points. CEO of Capri Holding Ltd, owner of Michael Kors, Jimmy Choo, and Versace, stated “All the luxury industry is raising prices. … We’ve seen absolutely no consumer resistance to any of the price increases that we have taken and there will be more.”
Kapner, Suzanne (2022, February 7). Chanel Raises Prices Steeply, Citing costs. Wall Street Journal, B1.
Moss, Trefor (2022, February 18). Luxury Brands Raise Price and Find Little Resistance. Wall Street Journal, B1.
Domino’s Selective Discounting
Domino’s Pizza Inc. (DPZ) offers customers a $3 “tip” (coupon) for their next purchase over $5 if they pick up the pizza rather than have it delivered. “The carryout business will continue to be a focus of ours given the significantly lower amount of labor involved in those transactions” stated Richard E. Allison Jr., CEO. Price segmentation aligned with costs savings and addressing the fast-food labor shortage leave both seller and buyer better off. Good pricing practice.
DPZ dropped from a high of 562 to 400 in the weeks surrounding the announcement largely due to a decline in same-store sales. In 2021, revenue of $4.4 billion with 38% margins led investors to value it with a P/E ratio of 33.
Prang, Allison (2022, February 5). Domino’s Tempts Pizza Eaters to Pick Up, Save on Delivery. Wall Street Journal, B10.
My Morning Coffee Is Going to Cost Me More
CFO of Nestlé SA (maker of Nescafé and Starbucks) stated in October that higher prices are expected in 2022 on coffee. CEO Mark Smucker of J.M. Smucker (maker of Dunkin’ Donuts, Café Bustelo, and Folgers) stated higher raw coffee prices hurt his bottom line. Droughts in Brazil followed by frosts reduced farm output of coffee beans globally. As a commodity, the reduction in supply was quickly followed by an increase in prices with futures up 76% for 2021. Even smaller shops like Café Du Monde in New Orleans and Kafe Kerouac in Columbus Ohio have had to raise their prices. Higher prices for my morning coffee may be unpleasant, but coffee is a luxury I choose. I accept.
Singh, Hardika (2022, February 2). Coffee Surges on Weather, Snarls. Wall Street Journal, B1.
Starbuck Price Increase Generates Online Complaints … Again.
In 2009, American bloggers expressed extreme dissatisfaction with a Starbucks price increase. Now, in 2022, Chinese bloggers are doing the same. Thirty-cent price increase for a Grande Americano in China was unwelcomed. Overall, Starbucks increased prices by 1 or 2 yuan (0.16-0.32 USD) on its beverages in China. Pundits cite cost increases of coffee and labor then move to discussions regarding challenges US businesses face in China. Recall, after the 2009 negative American blogger incident, same-store sales at Starbucks stayed on trajectory and increased and overall revenue increased. I suspect similar will happen in China, meaning the small price change will have little impact on their traffic trajectory. Unfortunately, the traffic trajectory for Starbucks in China is negative. Same-store sales at Starbucks in China were down 14% in 2021. Price increase or decrease won’t have a significant impact on same-store sales. Branding and customer experience remain Starbucks’ key calling card.
Xie, Stella Yifan, (2022, February 18). Starbucks Increases Its Prices in China, Angering Customers. Wall Street Journal, B6.
Tyson Succeeds in Price Increases above Cost Increases
Labor shortages. Wage increases. Plant closures. Logistics challenges. Beef cost increases by 33%. “We’re seeing inflation across our supply chain,” states Donnie King, CEO of Tyson Foods Inc. (TSN) Profits rose from $467 million in 2020 to $1,12 billion in 2021, however. How? Price increases higher than cost increases. Well done, Donnie King.
TSN has been hovering in the 90s since the announcement, up from the 70s a year earlier. In 2021, revenue of $49.5 billion up by 15.6% from the year prior with 7.5% margins. Investors value it with a P/E ratio of 9.2.
Thomas, Patrick, (2022, February 8). Higher Meat Prices Boost Tyson. Wall Street Journal, B3.
Unilever Needs Pluckiness
Unilever reported 4.9% sales growth driven entirely by price increases with volume flat. Executives signaled an expectation of margin shrinkage to 16% or 17% in 2022 from 18.4% in 2021. James Edwardes Jones, an RBC Analyst, stated it was “quite shocking” to learn of the margin decrease and that it indicated Unilever’s ability to raise prices is very limited. Big CPG is suspicious of their pricing power, implying that Warren Buffet might not declare them a good business. That does not align with my beliefs about Big CPG. Big CPG needs to discover its pricing prowess and convert pricing from a price administration and data jockey role into a strategically important pillar.
Chaudhuri, Saabira, (2022, February 11). Unilever Warns of Shrinking Profit Margin. Wall Street Journal, B3.
Amazon Prime Pricing Progresses
Amazon (AMZN) plans to increase the price of its Prime membership service from $119 to $139 in 2022. The last price increase came in 2018. This bodes well for Amazon considering their Net Product Sales were $160 billion yet their Cost of Sales was $165 billion. Those figures don’t include the cost of fulfillment and marketing. If they can’t make money off online sales, at least they can try to get a subscription fee.
AMZN has been trending downward from 3200 to 2750 in the month following the announcement. 2021 total revenue of $458 billion up by 31% from the year prior with 12% margins. investors value it with a P/E ratio of 42.
(2022, February 4). Amazon.com Flexes Its Pricing Muscles. Wall Street Journal, B12.
Inflation in Farming Inputs
Agrochemicals. Fertilizer. Equipment Maintenance. Seasonal Labor. “I just don’t see how I’m going to get paid this year,” says Brooks Barnes, a second-generation farmer in North Carolina. Bayer has raised the price of Roundup (glyphosate) by 250%. Corteva has raised the price of crop protection chemicals by 6%. But the biggest impact on farmers appears to come from more pedestrian sources: fuel, labor, and equipment maintenance. I understand Mr. Barnes’ concerns, but I also suspect that we both know the solution: higher prices for farm produce. As a sole farmer in a commodity market, he has little to no pricing power, but the industry will respond. Fortitude is an attribute required of all entrepreneurs and small businesspeople, including farmers.
Thomas, Patrick, (2022, February 16). Inflation Hits Farmers, Stalks Food Costs. Wall Street Journal, A2.
Cars Selling for More than MSRP
Dealerships have been selling Fords and GMs for more than the Manufacturer’s Suggested Retail Price (MSRP), and Ford and GM are unhappy about that. Dealerships are independent businesses. As independent businesses, they are free to set their own prices. Recently, dealerships have added “market adjustment fees” and required high-priced dealer-installed optional equipment upgrades. Yet charging customers above MSRP or forcing them to buy things they don’t want creates a bad taste in the mouth. Customers are feeling cheated. The issue of “fairness” has arisen.
For auto manufacturers, this is about trust and brand loyalty. For dealerships, this is about survival and profits during a period where supply was constrained, and therefore the quantity sold reduced.
What would a pricing strategist suggest? For the manufacturers to have raised MSRP prices mid-year rather than once a year at the release of the new model, maybe even more than once. This would have created a more realistic pricing umbrella for the dealerships to work within thus reducing the incentive to, in a sense, break the rules of the road.
Unfortunately, I suspect the big automakers are ill-equipped and unprepared to raise prices midyear, much less more than once. Even though required chips are in shortage, labor costs increased, and logistics costs have increased dramatically, they aren’t ready to respond to mid-year business challenges with price increases.
Recall, the Professional Pricing Society was founded in 1984 by a disgruntled ex-pricing professional of an automaker. Thirty-eight years later, I suspect many automakers still haven’t learned why that pricing professional was unsatisfied.
Mary Barra and James Farley, we would prefer to help than to see you on the list of companies struggling with pricing.
Eckert, Nora and Colias, Mike, (2022, February 9). Ford, GM Warn Dealers on Pricing. Wall Street Journal, B1.