Sat. Nov 27th, 2021


Veteran financiers are worried that lessons learned painfully in the last crisis will be lost on the generation that has since come of age. There is a parallel that fewer people worry about: the ranks of corporate executives who have risen since the last British inflation peak a decade ago and have not been disciplined in how to push through large price increases.

It should be easy for customers to swallow a price increase in line with inflation. Except now that the client may have to take a fairly large swallow.

By 4.2 percent last month, consumer price inflation rose fast enough. Yet the cost to manufacturers is rising even faster. In October, about 37 per cent of UK businesses surveyed by the Office for National Statistics reported that the prices of materials, goods and services they had bought in the past month had risen more than normal. Fifteen percent in response set their own prices.

The good news is that “the economy of price increases is almost impossible to go wrong”, according to Mark billig, a pricing specialist and CEO of consulting firm Simon-Kucher & Partners. Margin improvements will almost always outweigh revenue losses.

Yet companies – even large ones – can still be bad at it. Of course, there are consumer-oriented groups with dynamic prices up to a T, those with operations in emerging markets or who have driven the commodity cycle of the past decade and are well practiced in pricing.

But a analysis of consultants McKinsey showed that companies typically implemented about a third of the price increase they originally wanted. Data by Simon-Kucher paints a similar picture.

There are those who have been violated by the experiences of previous price increases. In 2011, Netflix raises prices by 60 percent. The company lost fewer customers than the revenue it eventually earned. But it lost more than 70 percent of its share price in the ensuing months, reversing its reason for the rise – but not the rise itself. It has become a case study on how not to push up prices.

Or take the big British groceries after 2006. Then a rise in oil prices, poor harvests in the northern hemisphere and demand from Asia pushed up input prices. A cycle of price increases has begun. Throw in a promotional binge of consumer goods groups and grocery bosses got drunk from the cocktail of price increases and promotions. That is until the financial crisis started, customers started switching to the discount retailers, and we all know how it ended.

However, the greater risk may be that companies confuse their prices by not setting them up enough.

Under normal circumstances it can be irritating, but not too harmful. Companies can cut costs rather than increase ticket prices. One boss of a large FTSE 100 group said he would always try to offset inflation with productivity savings. Consumer goods groups can pick up another triangle from a Toblerone or take some Quality Street out of the can (and do so as a health driving force to start).

But as inflation rises, it can be more expensive to get price increases wrong. Slow and steady annual increases of 3 or 4 percent across the board may not reduce it any more. As inflation hits harder and faster, it’s hard to follow a one-to-one approach to raising prices. More purposeful action is needed.

Customers, meanwhile, are not necessarily as price sensitive as many companies accept. Retailer Next – always a model of best practices – did some figures in 2011. It compared a basket of equivalent items and concluded that prices had to rise 8 percent to lose it 1.5 percent of sales. In the first half of its next fiscal year, the chain expects to increase prices generally 2.5 percent, and only 1 percent on clothing. Unilever, on the sharp side of cost inflation, pushed through a 4.1 percent price increase last quarter, the 10th highest rise in about 19 years. It lost only 1.5 percent in sales volumes, broadly in line with historical trends.

None of the companies will set prices above inflation to buy themselves long-term growth. But whoever does well to pass on price increases in the coming months will help determine next year’s corporate winners.

cat.rutterpooley@ft.com

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