(BFM Bourse) – In an inflationary environment, the issue of pricing is paramount. But besides, the purchasing power of consumers is eroding, forcing them to make arbitrations in spending. So, has pricing power reached its limits? Partially, replies Mirabaud.
Pricing power is the ability for a company to set its prices without consumers turning away from it. The most emblematic example is that of Apple. The apple brand is often cited as a textbook case. Despite increasingly expensive iPhones, demand still remains at its zenith for these phones, with sales registering a slight year-on-year increase to $51.33 billion in the first quarter. This is a real feat as demand for electronic devices has crumbled due to inflation.
Conversely, companies with low pricing power are forced to compress their prices and margins to maintain their sales. For these companies, only a low price is a selling point, for lack of a distinctive element such as a strong brand or advanced technology that is difficult to copy.
And in an inflationary context, purchasing power is under pressure and households tend to cut spending. And besides, companies are finding it increasingly difficult to pass on the increase in their production costs to the final selling price. In other words, consumers are no longer ready to put their hands in their wallets as easily as in a period of persistent inflation.
Pricing power seems to be reaching its limits for certain sectors, says John Plassard, director of investments at Mirabaud, in a recent note. The next wave of releases should be a good indicator to see which companies are still able to fix their prices without losing their valuable customer base. And according to John Plassard, the companies should reveal a “steeper drop in profits than expected” in their next results.
“The Elasticity of Acceptance”
The specialist comes out of his old boxes a house theory called “the elasticity of acceptance”. Imagined by the Mirabaud teams in August 2011 in the midst of a sovereign debt crisis, this theory “allows to determine to what extent a government can take action without the people sanctioning it at the ballot box”. He now transposes this theory for the prices to be paid.
“That is to say that at some point (today?), the consumer is no longer ready to pay “any price” for a good/product by choosing either to go downmarket (quality ), either to reduce the quantity or simply to do without it”, explains John Plassard.
Recent corporate publications are quite “surprising” in this respect, according to the specialist. John Plasard cites Mc Donald’s which is encountering “some resistance” in terms of prices in certain regions. Consumers at the world’s leading fast-food restaurant are increasingly opting out of adding extra items to their order, “like fries”.
Despite a clientele reluctant to add more items, Mc Donald’s recorded like-for-like sales growth of 12.6% in the first quarter, significantly exceeding analysts’ expectations. Its chief executive, Chris Kempczinski, explained in a statement that these sales were driven by “a healthy balance between strategic increases in menu prices and positive growth” in restaurant traffic.
Other companies manage to drive up both their prices and their sales. PepsiCo, for example, saw its turnover increase by 10% despite price increases. Finally, Procter & Gamble, known for its brands such as Pampers, Ariel and Gilette, reported a jump in sales despite a 10% quarterly increase in prices.
The price hikes also haven’t deterred consumers from visiting Chipotle restaurants, which saw footfall rise in the first quarter, even as menu prices jumped 10% year-over-year. . However, the fast-food chain specializing in Mexican specialties told CNBC earlier this week that it plans to suspend price increases. Other companies are expected to follow suit, or have already outstripped the restaurant chain.
“But there is good news for buyers: as inflation begins to plateau and consumers show some signs of resistance, a number of companies say they will halt or slow the pace of price increases” , our John Plassard. To illustrate this paradigm shift, he goes back to Coca Cola’s decision to slow down price increases this year, as does the food group Conagra, which declared in January that it was no longer increasing its prices for the moment.
Like consumers, mass retailers like Whole Foods and the giant Walmart are beginning to show their teeth and resist rising prices. In France, the resistance is also organized. “A multinational which asks us for a 30% increase without any justification, I stop working with it”, had launched Michel Biero, executive director of purchases and marketing of Lidl France on the set of BFMTV at the beginning of February.
Which companies still have leeway?
So which are the rare companies to be able to pass on their prices in an inflationary context which is putting a strain on the purchasing power of households. For John Plassard, it is difficult to establish a sectoral trend. Price increases must be observed on a case-by-case basis even if in the “broad lines” certain sectors such as luxury, consumer staples or certain healthcare segments are still able to increase their prices without seeing their customers turn to them. the back. “The energy sector can in some cases have quite high pricing power, especially for oil services companies,” adds John Plassard.
The luxury industry benefits from a clientele that is much less sensitive to price increases. This is of course the case of the French flagships LVMH or Hermès whose strategy is centered on the desirability of their iconic brands and the quality of their products. LVMH benefits from a “solid portfolio of brands” which distinguishes the group from “companies specializing in high-quality consumer goods”, Bank of America recently judged.
In addition to luxury, Pernod Ricard is a past master in the art of passing on price increases without causing demand to decline. In the first half of its staggered 2022-2023 financial year (ended at the end of December), the group which owns the Absolut vodka brands, Ricard pastis, Ballantine’s scotches whiskeys or Mumm champagne saw its sales increase despite a 10% increase. of its prices.
Pernod has also announced that it wants to practice further price increases in the second half to offset inflationary pressures. “The very significant price effect underlines the desirability of our brand portfolio, allowing us to maintain our margins in an inflationary context”, declared its chairman and CEO Alexandre Ricard at the time.
So should we hope for a return to times when life was cheaper, to use a famous slogan? The answer is unfortunately no. “To think that there will be a big rollback that will result in significant price drops would be very naive. What we can predict, however, is that the pace of these increases will moderate. and that, in certain categories, we may begin to see certain promotions return”, concludes the specialist.
Sabrina Sadgui – ©2023 BFM Bourse
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