Inflation, Profits, and Pricing
Written by CMG News Contributor, Doug Carleton
Inflation is running at levels not seen for a long time. And even though the experts predict that it will be slowing down toward the end of the third quarter, it will still be around at higher levels than desired, probably into early 2022.
Costs of all sorts of things are increasing, some dramatically. A few examples:
Levi Strauss and Harley-Davidson are raising prices to offset supply-line disruptions.
A manufacturer who designs its products in Chicago and has them manufactured in China has had to raise prices 30% to cover the increases in his freight costs.
Apparel and footwear makers are suffering dramatic cost increases because of the long delays in shipping containers to their destinations. Every day a full container sits on the dock or on a ship that can’t dock because of lack of space increases the ultimate cost to the customer. And not only that, but some containers containing certain items – like summer clothing, for example, have arrived so late that they either have to be stored until the next season or sold possibly at a loss, a double whammy.
A manufacturer of shirts, underwear, bags, and hats for several major brands has been paying $24,000 to ship containers from Asia that cost $2,000 before the pandemic.
Costs of ingredients, packaging, and transport are all going up for companies like Nestle, Anheuser-Busch, and Danone, who are already raising prices. Nestlé’s ice cream products have been raised by an average of 3.5%.
Unilever, maker of Hellman’s mayonnaise and Ben & Jerry’s ice cream, saw sales increase 5% in the three months through June, but operating margins were basically flat because of commensurate increases in costs.
Widespread cost increases for so many products and forms of transportation are having a major negative impact on operating margins in many cases. For small businesses, it might not take much in the way of cost increases, no matter how short in duration, to put a serious hurt on your profit margins. So any small business that sells products, what might become far more important in the future than it has been, is pricing. What are your pricing strategies? Cost-plus? Demand pricing? Competitive pricing? Do you have a definite strategy? How fast can you react to unexpected cost
increases? If pricing has always been fairly simple with no wide swings in costs, it might have worked fine. But that may not be the case now, and carefully watching costs in the market regularly could become as important as cash flow over the near term, and if there are several links in your supply chain, you should know what is happening in each one of them. Cost increases in one may have a domino effect in another, and you may be the last domino.
And keep in mind – if you think applying for a loan in the future may be in your plans, your cash flows will be critical to a bank. So if your prices aren’t keeping pace with your operating margins and cash flows are lower, a loan may be out of reach.