Inflation: Companies rely on the principle „ Price before quantity “
The current reporting season in the USA has confirmed again what has emerged everywhere in the past few months: the companies are relying on a new strategy. Instead of increasing sales figures, they are now increasingly relying on higher prices in order to achieve their sales and profit targets. This affects almost every industry. From car manufacturers to hoteliers, more and more companies are foregoing sales volumes in favor of higher prices. Sometimes they do this on purpose, sometimes they have no choice. So far, the strategy has worked, as the predominantly good quarterly figures show. Consumers still seem to ignore the high inflation ( ) and are still willing to pay the higher prices. This dynamic makes it harder for the Fed to fight inflation,and she could also be for others Central banks prove to be a problem.
Price increases as a driver of inflation
If one goes according to the statements in the recently published quarterly reports, the companies will not move away from the principle “ price before quantity ”. Already at the height of the pandemic, the strategy was the preferred choice in certain industries because the supply chains were significantly disrupted.
Example Ford: The carmaker maintains the higher sales prices, even if fewer cars roll off the assembly line. Example Marriott: The hotel operator increases room prices, especially for corporate customers. Southwest Airlines also relies on the principle: the airline achieves record sales in view of the limited flight capacity and keeps prices high. As the main vacation time is approaching, price power is not expected to fade, Bloomberg said.
With the US consumer price data for April, economists surveyed by Bloomberg expect inflation to remain unchanged at 5%. Before that, the inflation slowed down for nine months in a row. “ Inflation will prove to be far more persistent, pronounced and problematic for the US Federal Reserve in the summer than expected ”, says economist Samuel Rines, Managing Director at Corbu.
In the US automotive sector, new car prices are not far from their record values. The average monthly rate was $ 754 in March, almost one sixth of the average net income of US households. The surge in prices is likely to worsen as automobile manufacturers want to switch their fleets to more expensive electric models.
Inflation: pandemic aftermath
Already in the Corona pandemic, Ford and its competitors recognized that the serious chip bottlenecks also meant that you could make more profit with less produced cars.
For airlines, it is the lack of trained pilots and the backlog of new aircraft and spare parts that hinders sales. Southwest could have offered up to 8% more flight capacity in March if it had enough staff.
The capacity bottlenecks combined with the strong demand enable the industry to charge high prices, especially for transatlantic flights. The average price for a return flight to Europe is $ 1,032. This makes them 35% more expensive than last year and 24% more expensive than before the pandemic, as data from the Hopper rice search engine show. The figures suggest that international airfares will reach their highest level in five years this summer.
Companies support their profitability with price increases
The hotel industry has also adapted to the current consumer environment. According to market observer STR, US overnight prices rose by more than 10% in the first quarter, while occupancy only increased by around 6.
One reason for this is the changed demand mix: Leisure travelers have returned faster than customers than business travelers, which focuses demand on weekends. However, the owners have gotten used to operating hotels with lower occupancy but also lower cleaning costs.
“ The pandemic has lost a lot of staff, but has also gained a lot of pricing power ”, says Jan Freitag, director of the hotel analysis area at CoStar.
The producers of consumer bulk goods also put margin on sales: the Kimberly-Clark Corp. from Dallas, Texas, which produces Kleenex towels and toilet paper, increased prices in all categories by 10% in the last quarter. In view of this, sales decreased by 5. However, the gross margin rose to 33% from around 30% a year ago.
“ Therefore, when the price of toilet paper rises, you generally do not go to the toilet less often, do you? ” CEO Michael Hsu said at last month's press conference.
Rines notes with investors the expectation that companies will support their profitability with price increases. “ Companies do it everywhere, that's clear to see ”, he says. “ And if companies can't do it, they will be put under pressure. ” On the other hand, there is a risk of being attacked by consumers or politics.
Diana Gomes of Bloomberg Intelligence still sees the gross margin of the consumer goods companies she observes below the 2019 level. This suggests that the price increases so far only offset the increases in raw material and supply chain costs.
With a view to the fight against inflation, prices for travel and hotel accommodation for the Fed represent the biggest problem.