News: Analysis & Commentary: The Economy
The Return of Pricing Power
At long last, companies find they can charge more for lots of things, from beef to PCs
Continental Airlines Inc. took the first big step in February, when it tacked on a $20-per-trip surcharge, blaming higher fuel costs. Most of the industry followed fast. Then, in March, Northwest Airlines Corp. hiked fares some $20 to $40 round-trip. Again, rivals are following suit. "Our planes are full, so our prices are not too high," Continental chief Gordon M. Bethune argues drily. Over at rival AMR Corp., Chief Financial Officer Thomas W. Horton adds: "There's more pricing power clearly in industry right now."
By that, he means far more than just the airlines. Throughout Corporate America, the ability to hike prices is on the upswing. After years of swift retribution when they tried nudging prices up even the tiniest bit, companies are finding customers are willing to give them a little breathing room again. Thanks to a booming economy that has produced strong consumer confidence, plentiful jobs, and bulging wallets, paying a little more doesn't seem so bad after all. "When people's incomes are growing rapidly, they don't tend to shop as sharply," says William C. Dunkelberg, chief economist for the National Federation of Independent Business.
The roaring economy means producers of everything from beef and paper goods to houses and medicines can raise prices and still keep sales brisk. Even home personal computers, long an icon of high-tech disinflation, are sporting higher tickets. "Prices are being sucked up by strong demand," says Robert Dederick, an economic consultant at Northern Trust Co. in Chicago.
Moreover, the pricing party may just be starting. With labor markets still persistently tight and wage increases almost certain to begin threatening profit margins, lots of companies will be pushing the price envelope this year. The National Association for Business Economics, in a survey released on Apr. 13, found that the share of companies reporting a rise in their prices is the highest in four years. Some 29% of the NABE member outfits surveyed said they wanted to boost prices, and of those, some 94% did so in the opening quarter. "That's a dramatic shift," says NABE President Diane C. Swonk, who is also chief economist at Bank One Corp."INFLATION CAT." Of course, good news for Corporate America may not be good for the economy as a whole. The widespread ability to raise prices is worrying some inflation-watchers, who are already nervous that consumer prices climbed at a brisk 3.7% rate for the year ended in March. Warns Allen Sinai, chief economist at Primark Decision Economics Inc.: "The inflation cat is out of the bag." That could spur more interest-rate hikes by the Federal Reserve.
For now, though, few in the executive suite are complaining. In many sectors, price hikes are helping fuel surprisingly strong profits. For instance, price gains helped boost income at Smurfit-Stone Container Corp., a big maker of corrugated boxes, to $40 million in the first quarter compared with a $92 million loss in the same period a year ago.
The most dramatic changes, of course, have come in the energy sector, where higher oil prices have sent earnings soaring at Exxon Mobil, Conoco, and Texaco even as they've led to price hikes far and wide. Along with the airlines, truckers, overnight mail companies, and manufacturers of many stripes also are passing along the higher costs.
Rising prices of several other commodities, too, are adding to costs that manufacturers are determined to recoup. Pulp prices have tripled in the last year, for example. But outfits as diverse as Procter & Gamble Co. and Smurfit-Stone are succeeding in passing some increases on. Strong demand worldwide for linerboard, particularly in the resurgent Asian economies, has allowed Smurfit-Stone to raise its prices $50 a ton, to $475. Yet even as he imposes such hikes, Smurfit-Stone Chief Executive Ray Curran frets that his industrial customers may balk. "We don't want to run up prices to levels that will cause people to seek substitutions," he says.
Reluctance about raising prices is understandable--especially since price leaders often get knocked back for the move. Malden Mills Industries Inc., the Lawrence (Mass.) maker of the Polartec synthetic fabric used widely in fleece apparel, tried to bump up prices by 3% at the beginning of the year. In the highly competitive apparel markets, the hike didn't stick. Now, Malden is trying to command higher prices by adding new qualities, such as wind resistance, to its fabrics. "When we are able to bring something new to the marketplace, people are willing to pay," says strategic planning director Jeff Bowman.
But in many areas of the economy, emboldened executives find they can command more for even fairly common goods. Surging demand for the kind of steel used in cars, for instance, is driving up long-dormant prices. After dropping to as little as $340 a ton in early 1998, cold-rolled sheet steel has rebounded to as much as $450 a ton.
Maybe the most surprising area where price hikes are sticking is in personal computers. Lately, prices for home PCs and for such components as monitors and some kinds of drives have risen--reversing a long-established downward trend. Driven by strong demand from the Internet, such computer makers as Compaq Computer Corp. and Hewlett-Packard have been able to pass on hikes, driving the average price of home PCs to about $923, up from as little as $828 last September.PORK 'N' POLYESTER. To be sure, the rise in prices is not yet universal. Manufacturers of apparel and packaged food--two big components in the much watched consumer price index--are hard-pressed to pass on the higher tab that they are now paying for such diverse raw materials as high-end polyester and pork. The problem: stiff competition in retailing and the grocery business.
Meanwhile, a glut of supply and raging incentive battles are keeping most stickers fairly flat for auto makers. General Motors Corp. Chief Financial Officer J. Michael Losh says prices fell 0.7% in the opening quarter, and he expects the decline to continue all year. The only exception: a few hot new models like the BMW X5 sport utility and Chrysler's PT Cruiser.
And even where pricing power is strong, it's far from clear just how long it will last. The Federal Reserve is expected to keep ratcheting up interest rates to cool the economy. If demand should start to slow, the ability to raise prices will be among the first things to go. Competition certainly hasn't gotten any easier either. But for now, the pricing party rumbles on--and companies are rushing to get in on the fun while it lasts.By Joseph Weber, with Michael Arndt in Chicago, Wendy Zellner in Dallas, and Bureau ReportsReturn to top