Good luck raising prices -- even if the economy is humming.
Grocery chains have long awaited the right conditions to charge more for
their products, and a broad view of the U.S. would suggest this is their
moment: Unemployment is near historic lows, consumer confidence is high and
inflation is inching upward.
But companies are finding they’re losing the power to hike prices.
That’s because Amazon.com Inc. and Walmart Inc. are engaged in a battle to the
death on consumer spending, while low-cost chains Aldi and Lidl pressure
brick-and-mortar companies. At the same time, shoppers are becoming less loyal
to legacy brand names than ever before -- meaning they’ll go generic instead of
paying up for labels.
“Retailers took advantage of lower food costs to push down prices, and
customers became acclimated to that environment,” said Jennifer Bartashus, an
analyst at Bloomberg Intelligence. “Now that inflation is returning, not only
is competition in play, but customers are no longer used to seeing marginal
price increases come through.”
Concern about companies’ inability to raise prices has spread from the
board room to the halls of government, and policy makers are struggling to
understand the dynamics as e-commerce and new business models disrupt
long-standing economic theories. The Federal Reserve, charged with steering the
U.S. economy, has debated technology’s relationship to inflation and
The forces at play are illustrated by General Mills Inc., which has
acknowledged that attempted price hikes for its Progresso soup and Yoplait
yogurt ultimately hurt sales. The misstep exacerbated a slump in those key
businesses, as shoppers migrated to other brands. Nestle SA has also experienced difficulties in getting price increases to
“There’s no question the balance of power has shifted,” said Gary
Stibel, who runs the New England Consulting Group, which advises consumer
companies. Packaged-food and consumer-product companies aren’t “creating the
kind of intense” loyalties that retailers need to be able to pass on higher
prices to shoppers, he said.
It’s not just big food. Consumer companies are finding they’re being
pinched by the same forces. Reckitt Benckiser Group Plc’s hygiene and home
division, which sells brands such as Lysol spray and Air Wick air fresheners,
showed solid volume gains in the most recent quarter, but suffered because of
lower prices, sending its shares plummeting.
Kimberly-Clark Corp., maker of Huggies and Kleenex, reported flat or lower
prices across its categories in its latest quarterly results.
With food and consumer-products companies failing to generate buzz with
shoppers, retailers are boosting investment in their own higher-margin house
brands and giving shelf space to fast-growing upstarts.
Prior to the Amazon’s purchase of Whole Foods Markets Inc., Kroger Co. was
struggling to cope with low food prices, which weighed on results. The return
of inflation, however, hasn’t been a savior -- in fact, already-thin margins
have taken a hit as the largest U.S. grocery company has been reluctant to
raise prices on customers because of the intense grocery competition.
Kroger and other grocery chains are keeping prices low to protect market
share, as competition ramps up with the continued expansion of Aldi, which
almost exclusively stocks private label items. The arrival of Lidl, a longtime
Aldi rival in Germany, to the U.S. last June, has only added pressure.
In the U.K., Tesco Plc and its competitors have started to push up prices to compensate for the post-Brexit
weakening of the pound -- but it hasn’t been able to fully pass on higher costs
to shoppers. In France, competition has prevented Carrefour SA and Casino
Guichard Perrachon SA from implementing price hikes.
The new environment is magnified in the U.S. by Walmart, which has been
particularly aggressive in enacting price cuts to fend off the German
discounters. A recent study of prices in Virginia and North Carolina found that
a basket of items at Walmart was cheaper than at a nearby Aldi. That’s a
reversal from a study conducted in December, according to Chuck Grom, an
analyst at Gordon Haskett Research Advisors.
At the same time, Amazon and Walmart’s e-commerce battle has also
pressured prices and forced competitors to invest in costly technology
improvements and delivery services. And grocers are increasingly looking to
exclusive private label products to lock in shoppers, another headwind for big
Retailers “are no longer waiting for the companies to innovate,”
Bartashus said, referring to packaged-food companies and their struggles to
attract new consumers. “They’re doing some of that themselves.”
Click here for the original article from Bloomberg.