Will Consumers Take A Hike?Amey Stone
Frank A. Olson knows how tough it is to push through price hikes in a low-inflation economy. The Hertz Corp. chairman has just boosted his company's car-rental prices by $5 a day, and he's hoping against hope that the increases stick. "This is our sixth try in 20 months," Olson laments.
A price hike, he figures, will have to hold--one of these days. And Olson isn't the only CEO trying to make that day today. In the past few weeks, companies as diverse as Hertz, Anheuser-Busch, General Mills, and Hearst Magazines have announced increases. Stickers have also risen on everything from airline tickets and paper towels to wallboard and dynamic random-access memory chips (DRAMs). "Most of these increases are really delayed reactions to cost pressures [that companies] started feeling three to six months ago," says Donald Ratajczak, director of the Economic Forecasting Center at Georgia State University. "They simply couldn't pass them on then. They feel they might be able to do it now."
"Might" is the operative word. With the economy growing at only 0.5% in the second quarter and with inflation steady at about 3%, many hikes are being made on a wing and a prayer--often in the face of rising materials costs. Car-rental companies, for instance, say fleet costs have more than doubled in the past three years, while rates have remained nearly flat. Hearst cites a 37% increase in paper costs in the past year, plus a 12% hike in postal costs since January. At Ralcorp Holdings Inc., maker of Chex, Cookie Crisp, and Ralston Muesli cereals, it's higher grain and packaging costs. Anheuser-Busch cites more expensive materials for its average hike of 15 cents per six-pack, scheduled for some markets this fall.
COMING TO A HEAD. Success at raising prices, however, may depend more on the dynamics of specific industries than on the strength of the overall economy. Publishing, for instance, is finally coming out of its long slump. "Any time you have an uptick in demand, which is certainly the case in magazines, you are going to try for a price increase," says Steven N. Barlow, an analyst at Smith Barney Inc.
In the beer industry, the popularity of premium-priced brews and the even higher-priced microbrews has raised many consumers' price threshold--giving Anheuser-Busch Cos. a license to hike prices. Thanks to strong demand, net cement prices are up 8% in a year, to $59.81 per ton, for the quarter ended June 30, says Arthur R. Zunker Jr., CFO of Centex Construction Products Inc. Even the beleaguered airline industry is getting a break this year--in spite of an August fare war.
Another reason companies are moving now: Many have done all the cost-cutting they can. "I'd rather get a dollar of efficiency than a dollar in price," says Hertz's Olson, but there's no more room to cut. For now, the major rental companies have followed Hertz's move with some hikes. But if one big rival pulls back, the others may follow.
Some companies are trying stealth hikes. Rather than pass on the 59.6% increase in pulp costs, Scott Paper Co. revamped its Scott Clean paper-towel brand, reducing the number of sheets in its smallest roll from 96 to 60, then repricing the roll at just 10 cents less. Scott says it also improved the quality of the towels.
WARY SHOPPERS. Still, in most industries, this is hardly the time for aggressive pricing. In fact, fewer companies expect to raise prices during the third quarter than was the case during the second quarter, according to Douglas P. Handler, director of research at A.C. Nielsen Co. A comparison of the inflation rate with Nielsen's "optimism index" (percentage of companies that expect to raise prices minus the percentage that expect to decrease) shows many hikes aren't sticking.
A major reason: Shoppers are reluctant to pay full price, says Shawne C. Mastronardi, director of retail marketing services at Kurt Salmon Associates. In a recent survey, 91% of consumers said they wondered if they were paying too much when they paid full price. "Consumers in general are exceptionally resistant to increases in prices, and no maker of consumer goods has been able to get away with large increases," says Handler. Not exactly words Frank Olson and his colleagues want to hear.
WONDERING IF THE INCREASES CAN HOLD
ANHEUSER-BUSCH (St. Louis) It will raise beer prices an average 3.5% in some markets in October because of rising materials costs.
AMERICAN, DELTA, UNITED, ET AL. In the past year, airlines have lifted fares an average of 7% as cut-rate competition has abated.
CENTEX CONSTRUCTION (Dallas) Its cement prices are up 8% from last year, to $59.81 a ton. U.S. capacity is constrained.
HERTZ (Park Ridge, N.J.) On June 25, it raised rental rates by $5 a day,
to about $50 for a typical midsize car, to offset higher purchase prices.