Strategic Movements September 2022
Dollar General Pricing Decision Spine: 3 of 5 Vertebrae
Dollar General Corp. saw revenue increase 4.6% over same quarter last year from comparable sales after raising prices.
If revenue increases following a price increase, the company was priced in the inelastic range. No profit-oriented company in a mature industry should price in the inelastic range for it leaves money (profits) on the table. Dollar General was in this position, therefore their price increase was appropriate.
Dollar General also reported that customers lowered spending on apparel, seasonal goods, and home products and raised spending on consumables such as food. This mix shift should be attributed to the exogenous factors of inflationary pressures on consumers in the current economic environment rather than an endogenous factor related to management decisions.
The management teams at Dollar General demonstrated pricing competence.
Dollar General Pricing Spine: 3 out of 5 vertebrae for these decisions.
DG (Dollar General Corp.) fluctuated in the weeks following the news, starting at 240, falling to 237, then rising to 247. Revenue of $34 billion in 2021 with a 2022 7.0% margin and P/E ratio near 25.
Nassauer, Sarah (2022, August 26). Higher Prices Lift Dollar Stores. Wall Street Journal, B2.
Dollar Tree Pricing Decision Spine: 3 of 5 Vertebrae
Dollar Tree Inc. saw revenue increase 4.9% over same quarter last year from comparable sales after raising prices.
If revenue increases following a price increase, the company was priced in the inelastic range. No profit-oriented company in a mature industry should price in the inelastic range for it leaves money (profits) on the table. Dollar Tree was in this position, therefore their price increase was appropriate.
Dollar Tree reported fewer customer expenditures on high-margin items. This mix shift should be attributed to an exogenous factor of inflationary pressures on consumers in the current economic environment rather than an endogenous factor of management decision-making.
Dollar Tree also reported fewer store visits but higher expenditure per visit, and that they are attracting more households with income of $80,000 or higher thus bringing in above median income families into what is perceived as a low-priced outlet. While these facts provide interesting insights into the dynamics of consumer behavior during this inflationary period, they do not provide great insight into managerial decision-making and their relationship to business outcomes.
The management team at Dollar Tree is demonstrating pricing competence.
Dollar Tree Pricing Spine: 3 out of 5 vertebrae for these decisions.
DLTR (Dollar Tree Inc.) fell sharply in the weeks following the news from 165 to 142. Revenue of $26 billion in 2021 with a 2022 5.0% margin and P/E ratio near 20.
Nassauer, Sarah (2022, August 26). Higher Prices Lift Dollar Stores. Wall Street Journal, B2.
Sony Pricing Decision Spine: 4 of 5 Vertebrae
Sony is increasing the price of a PlayStation 5 console in select markets including the Middle East, Africa, Europe, Asia-Pacific, Latin America, and Canada, but not the U.S. Inflationary pressures were cited as a driving force behind this decision.
The price increase will be market-dependent. A 20% price increase is expected in Japan. A 10% price increase in Europe. And again, 0% in the U.S.
Supply chain issues impacted this decision. Sony has had silicon chip challenges similar to its competitors as well as other supply chain challenges related to production in China and Covid restrictions. As a result, sales of PlayStation 5 plunged 26% in Q2 of 2022 over same quarter last year.
Sony also reported demand is outstripping supply.
The market specificity of the price increase, the factors influencing the decision, and the industry concentration of the gaming console industry, all lead to the following conclusion.
Sony’s Pricing Spine: 4 out of 5 vertebrae for these decisions.
SONY (Sony Group Corp.) fell in the weeks following the news from 84 to 74, yet it is highly doubtful that the price of the PlayStation 5 alone impacted this performance. Revenue of $882 billion in 2022 with an 8.9% margin and P/E ratio near 14.
Vipers, Gareth (2022, August 26). PlayStation 5 Prices to Increase as Much as 20% in Certain Markets. Wall Street Journal, B4.
Disney Membership Pricing Decision Spine: Unknown of 5 Vertebrae
In 1957, Walt Disney sketched the Synergy Map, a way to connect the many different properties and revenue streams within the larger Disney ecosystem. The concept has evolved since those early days and is now going through a refresh.
Now, in 2022, Bob Chapek, the current CEO, is exploring the rollout of a new membership program that could further support the cross-selling of Disney merchandise, parks, and experiences with Disney+ streaming customers.
Membership programs, such as those at REI, Sam’s Club, or Amazon Prime tend to attract the segment of the market which are likely to be both heavy purchasers within the category and price sensitive. They act like a two-part tariff in that the entrance fee (membership) provides discounts on the metered offering (merchandise or other experiences in Disney’s case). Two-part tariffs can be highly profitable and have been deployed and studied since 1920 (a hundred-year-old pricing strategy.)
Disney has long impressed me with their strategic pricing decisions. This too sounds promising. Yet, it cannot be fairly evaluated for we do not know its price point nor what membership would imply. That is, a decision hasn’t been made.
Disney’s Pricing Spine: Unknown out of 5 vertebrae for this decision.
DIS (Walt Disney Co.) has been relatively unchanged in the weeks following the news at 112. Revenue of $67 billion in 2022 with a 3% margin and P/E ratio near 64.
Toonkel, Jessica and Krouse, Sarah (2022, September 1). Disney Mulls Member Benefit Program. Wall Street Journal, B1.
Campbell’s Pricing Decision Spine: 2 of 5 Vertebrae
Campbell’s reported a 6% revenue increase. Drivers include higher prices amid greater promotional spend and lower volumes. Profits decreased despite the higher prices partly due to the higher promotional spend but largely attributed to variable cost increases driven by Covid-related supply chain restraints and Russia’s invasion of Ukraine.
On the plus side, Campbell’s market share has increased despite higher pressure from store brands in stock and other kitchen basics.
For many executives in consumer-packaged goods (CPG), market share is more important than other business performance metrics. The primacy of market share among many possible metrics is largely due to Profit Impact of Market Strategy (PIMS) studies first released in the 1970s and highly marketed by Boston Consulting Group (BCG). The PIMS study concluded that market share and profits are strongly correlated. Despite the numerous economics, finance, and marketing studies that have challenged the PIMS study and its conclusions, market share remains a priority for many executives that cannot be threatened by a price increase.
Moreover, sales and marketing executives are often biased towards pursuing volume over price to drive profits. Mark Clouse, CEO of Campbell Soup, comes from a background in sales and marketing of consumer package goods (CPG) after serving in the U.S. Army. (Thank you for your service.)
Due to the shrinking profits among higher variable costs and promotional spend, and due to known industry biases favoring market share over pricing quality, we have come to the following conclusion.
Campbell’s Pricing Spine: 2 out of 5 vertebrae for these decisions.
They should have raised prices faster and reduced their dependency on promotions.
CPB (Campbell Soup Co.) fell in the weeks following the news from 51 to 48. Revenue of $8.6 billion in 2022 with an 8.8% margin and P/E ratio near 48.
Kang, Jaewon and Seal, Dean (2022, September 2). Campbell’s Profit Slides as Shoppers Rethink Spending. Wall Street Journal, B3.
GM Pricing Decision Spine: 4 of 5 Vertebrae
GM is setting a $30,000 price target for an electric vehicle (EV) version of the Chevrolet Equinox SUV to be released in the fall of 2023.
Is $30,000 a good price target?
The Equinox is currently GM’s second-best seller behind only the Silverado pickup. This will join GM’s current EV offering lineup that includes a $110,000 GMC Hummer and a $62,000 Cadillac SUV. The EV Equinox will help GM meet its goal of selling one million EVs in North America by 2025. An EV Equinox will compete most directly against the Volkswagen ID.4 EV starting at $37,500, the Kia EV6 and Toyota bZ4X starting around $40,000, and the Tesla Model 3 starting at $47,000, given current prices. Regarding the lower price point, Doug Houlihan, an executive engineer on the program, stated “the more volume we can get, the lower we can get the price”.
To evaluate, consider the reality of this price target, how it might be set, and the role it plays.
Is the price target real?
Any price target set today for an offering that won’t be released for at least 12 months is likely to be missed, especially in a rapidly evolving product category such as EVs. Battery prices, chips, and other component costs are likely to vary as are the prices of the competing alternatives. Both of these factors will greatly impact the price of the EV Equinox when it is actually released. As such, it is best to realize this is a target and no more. It is not a promise nor a final decision. It is just a target and one that is likely to evolve. On the plus side, the price target is not unrealistic considering the highly favorable and asymmetric role of federal incentives to purchase a largely U.S.-produced EV.
Yet how might this target have been created?
For starters, GM has an internal “Good-Better-Best” product lineup between the Chevrolet, Cadillac, and GMC Hummer brands and price points within the EV category. Versioning is a proven profitable value proposition in auto manufacturing. Moving beyond this high-level directionally appropriate strategy, we get to the detailed challenge of defining a price point. Why around $30,000 and not higher or lower? The best practice approach to get to that level of accuracy, even if we are talking about ballpark accuracy and not a single specific price point, is to use conjoint analysis. Adding different GM models and price points to the Volkswagen, Toyota, Kia, and Tesla models and price points currently on the market, one would test the attractiveness of an EV Equinox that currently doesn’t exist through conjoint analysis and define the profit- or strategy-optimizing price point. If this wasn’t done at GM, I would be greatly surprised.
And why is the price target important?
For over 30 years, Ron Baker and other pricing strategy leaders have called on executives and brand managers to start with the customer to define the price rather than the other way around. That is, ditch the process which calls for marking up costs to define a price that you demand customers to pay (Product >> Cost >> Price >> Value >> Customers) and replace it with a process which calls for working from the customer’s needs and desires to identify the price which matches their willingness to pay and then engineer the cost and product to deliver to that need profitably (Customers >> Value >> Price >> Cost >> Product). GM’s price target could play that role. It provides a boundary to engineer the EV Equinox for delivering an offering that meets customer needs and desires profitably.
The above arguments lend towards a highly strong decision-making process until we get an executive’s dubious claim regarding higher volumes and lower prices. To my current understanding, the average variable costs of producing an EV do not decrease nearly as quickly as those of producing an internal combustion engine (ICE) automobile, hence the correlation implied in the statement is questionable or at best weak. I suspect that statement is a red herring.
After considering the above, we have come to the following conclusion.
GM’s Pricing Spine: 4 out of 5 vertebrae for this decision.
GM (General Motors Co.) rose the day following the news from 40.5 to 41.4. Revenue of $127 billion in 2021 with a 7.9% margin and P/E ratio currently near 7.7.
Colias, Mike (2022, September 9). GM Sets ’23 Release of $30,000 Electric SUV. Wall Street Journal, B1.