ChainMail | Inflation’s Pressure

How manufacturers protect the bottom line

ChainMail | Inflation’s Pressure

There can be two dozen components in a bra. From lace to dye to elastic trim, inflation has increased the cost of each piece, forcing lingerie makers to — sorry! — push up wholesale prices.

The Natalia Underwire Bra, which sold for $68, now retails for $98. Some stores thought the price hike was too much and stopped carrying it. But Journelle, the manufacturer, said it had little choice — some costs have doubled since 2019.

Guido Campello of Journelle told The Wall Street Journal he anticipates shoppers will stay loyal, but these are tricky times for pricing decisions up and down the supply chain. If your prices are too low, you risk losing money. If your prices are too high, you could alienate customers.

An entire generation of executives and owners came of age without worrying about how to defend their businesses from inflation. The average U.S. inflation rate from 2000 to 2019 was a calm, cool 2.10%. Then came COVID, and its disruptions to the supply chain, followed by Russia’s invasion of Ukraine, which caused energy prices to spike. The annualized inflation rate in April was 8.3%. How do you manage that kind of attack on the bottom line?

Consumer goods companies such as Unilever, Nestle, and Procter & Gamble are raising prices to protect themselves. And they’re looking for ways to control escalating costs, including on the distribution side. Coca-Cola increased prices, and shifted to affordable and refillable glass bottles in some markets. In India, Coke is selling drinks by the cupful. The company has more than held its own, reporting sales and profit increases that beat expectations. “Coca-Cola delivered a masterclass in pricing power,” one analyst gushed.

Critics see something nefarious in these strong performances, accusing companies of using inflation as an excuse to gouge customers. But that’s a short-sighted criticism. With every price increase, businesses risk driving away customers. Unilever, maker of Dove soap and Ben & Jerry’s ice cream, saw sales volumes dip 1%. There are cheaper ice creams out there, and Unilever knows it.

The bad news for consumers is that prices for finished products typically don’t drop once they’ve been raised (as opposed to market-traded commodities like oil that fluctuate continuously). “We think many of these price increases are here to stay,” Campello said.

The solutions are more long-term: Competition, technological advances, and efficiency gains bring new buying options for customers, and should compel companies to hold the line on future price increases. “When shifting demand and supply fundamentals drive up a price, markets eventually fix the problem,” Wall Street Journal columnist Greg Ip noted. In the 1970s, and again in the 2000s, the United States responded to higher oil prices by expanding production.

This time around inflation should moderate as the Federal Reserve raises interest rates, which will slow the economy. Wages also are rising. For now businesses need to get their pricing right, or face the consequences.

Read the complete Issue 10 of ChainMail here.

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