• Amazon.com (AMZN): “we’re seeing lower average selling prices, or ASPs, right now because customers continue to trade down on price when they can.
• Yum Brands (YUM): “The impacts from the Middle East conflict, in addition to a more cost-conscious consumer, have presented headwinds to same-store sales…ensuring we provide consumer’s affordable options has been an area of greater focus for us since last year with all of our brands having offered disruptive deals and introduced or reintroduced the track of everyday value with examples in the US such as KFC’s Taste of KFC deals, Pizza Hut’s $7 Deal Lovers, and Taco Bell’s Cravings Value Menu.”

These are of course just two companies, but their management are telling a familiar and consistent story: consumers are pushing back on price increases. They have had enough. We can no longer blame consumers for inflation.

Unwillingness to Pay

The flip side of this narrative on changing spending habits suggests that consumers played a large role in perpetuating inflationary pressures. If not for their higher willingness to pay – sometimes supported by being flush with stimulus money, sometimes supported by signalling from over-burdened supply chains (aka “seller’s inflation“) – companies would not have had the freedom to do what they do best…charge as much as the market will bear.

The Beige Book from last month is even more telling about the consumers reduced willingness to participate in the inflation game. AP pointed out the following quote under the “Prices” section in the summary:

“While consumer spending was generally reported as showing little to no change almost every District mentioned retailers discounting items or price-sensitive consumers only purchasing essentials, trading down in quality, buying fewer items, or shopping around for the best deals.”

AP also quoted from a speech by Tom Barkin, president of the Federal Reserve Bank of Richmond. Barkin made the observation and strong claim that “while inflation is down, prices are still high, and I think consumers have gotten to the point where they’re just not accepting it…And that’s what you want: The solution to high prices is high prices.” Consumers were too willing to pay and now they are unwilling to pay. Note that Barkin reassured the audience that consumers in his district still exhibit strong demand “at the right price.”

(On the other hand, the Fed also noted important lingering pricing pressures on the producer side: “Most Districts noted that input costs were beginning to stabilize; however, Atlanta specifically noted products like copper and electrical supplies have seen a notable increase over this period.” Later in the Beige Book, the Cleveland Fed reported on the soaring cost of health insurance: “Contact reports of increasing health insurance costs remained pronounced, and one banker said their premium level increased by 15 percent this year compared to an average of 1.6 percent annually over the past 10 years even after they “aggressively” shopped for healthcare plans.”)

Soft Landing?

A potential soft landing is part of the implication of this narrative of consumers’ unwillingness to pay. Consumers are trimming the excesses of spending without cutting down so much that they lead to recessionary pressures. According to the AP, economists estimate that consumers are simply slipping back into pre-pandemic norms of spending habits that will make it much more difficult for companies to raise prices. In other words, the demand “volume” (in terms of units) remains strong, but the spending capacity is not strong. Folks in the financial markets may observe these effects as a “growth recession” given the impact it will have on top-line growth.

Be careful out there!

The post Consumers No Longer Accept the Blame for Inflation appeared first on Inflation Watch.

Oil’s relative share of consumer expenditures is another factor to consider. Amazingly, energy’s overall share of consumption has declined as gas prices have soared in recent months.

For more detail and data see “Oil prices and the U.S. economy“

The post Relative, not absolute, oil prices impact the economy appeared first on Inflation Watch.

“…we did have higher material and oil-related cost which came in at approximately $450 million and that significantly impacted our results last year…we still see this year 2012 estimated raw material inflation to be a headwind, and we’re forecasting those increases to be between $300 million and $350 million, but we expect to more than offset these costs with our other normal strong productivity activities.

All previously announced price increases are fully implemented, including the most recent 6% to 7% price increase effective January 1, 2012. As you know, these increases are necessary to mitigate higher material costs. As a result of a cost base price increases, our margins have substantially improved both sequentially and year-over-year. And we are well-positioned to expand margins in 2012…

…We are focused on executing the margin expansion actions already in place. We expect to benefit from: one, our previously announced price increases in every region of the world…

…we’re planning for a flat to a slight improvement in demand. We will have raw material inflation in the range we talked about, but we expect to fully mitigate those increases through our productivity.” (Seeking Alpha transcripts)

These actions both remind us of the real inflationary pressures facing industrial/durable goods companies, AND the pricing power that some of these companies have, particularly in the U.S. Whirlpool’s price increases contributed much more to margins in North America than they did in the rest of the world as the company took a “strong stance” on pricing in North America. Prices were increased in Europe in the third quarter of last year.

Management’s discussion about the difference in price elasticities in the U.S. versus the rest of the world was particularly illuminating. Management claimed that “…the [U.S.] consumer who’s in the market ever 10 years doesn’t really have a preconceived notion about what that value feature content is” whereas in consumers in emerging markets are making first-time purchases with definitive affordability thresholds. Thus, although Whirlpool saw the need to raise prices as much in these markets as in North America, the resulting elasticities prevented them from raising prices as much as in North America.

Whirlpool does not discuss future pricing, but I am expecting more price increases if the economy continues to improve, especially in the U.S.

The post Whirlpool fights input costs with price increases and productivity gains appeared first on Inflation Watch.

Note well that I cannot think of a single retailer who consistently charges lower prices than Wal-Mart on anything. So maybe this whole thing is more a marketing gimmick than anything else?

For more details see “Wal-Mart introduces Christmas price guarantee program.”

The post Wal-Mart will push prices down for holiday shopping appeared first on Inflation Watch.

On a day in which commodity prices and stocks took another plunge, DemandTec released the results of a poll of 16,000 leading retail and consumer products users that asked about pricing expectations:

“Nearly 50 percent of respondents agree that shelf prices will rise moderately as both retailers and manufacturers absorb some margin compression in the coming six months.”

Although it is not 100% clear, the poll seemed to focus on shelf prices of food products. A lot of the margin compression will be coming from commodity prices.

The post DemandTec reports that shelf prices for food will rise “moderately” appeared first on Inflation Watch.

“Despite a substantial increase in material and oil-related cost inflation, we are maintaining our full year earnings and cash flow outlook…We have implemented cost-based price increases in many regions around the world, continue to introduce a strong cadence of innovative new products and remain focused on accelerating our cost reduction and productivity improvements to manage higher material cost inflation.”

Disclosure: author owns WHR

The post Whirlpool passes higher costs to customers appeared first on Inflation Watch.

“P&G said list prices for Pampers are up 7 percent on average, Pampers wipes up 3 percent, and Charmin and Bounty products up 5 percent. P&G said Luvs, its lower-priced diaper brand, remains unchanged.”

Disclosure: author is long PG

The post From the baby’s room to the bathroom to the kitchen, Proctor & Gamble raises prices appeared first on Inflation Watch.

“[The] baby and child care and consumer tissue businesses are notifying customers of plans to raise prices in North America during the second and third quarters of 2011…

…Net selling prices in the U.S. and Canada for Huggies baby wipes and diapers, Pull-Ups training pants and GoodNites youth pants will increase on average between 3 and 7 percent, with implementation timing ranging from June 19, 2011 to August 17, 2011. In addition, net selling prices in the U.S. for Cottonelle and Scott 1000 bathroom tissue will increase approximately 7 percent, effective June 19, 2011. The price changes vary by brand and pack size.”

KMB blamed, you guessed it, the rising costs of commodities and raw materials. In today’s earnings release, KMB increased its inflation expectations:

“Inflation in key cost inputs of $450 to $550 million compared to the previous assumption of $200 to $250 million. This reflects estimated average market pricing for benchmark northern softwood pulp of $1,000 to $1,020 per metric ton and average oil prices of $100 to $105 per barrel for the year. The increased inflation assumption is primarily due to higher costs for virgin pulp, polymer resin and most other oil-based materials. “

From the earnings conference call (following quotes from Seeking Alpha transcripts):

“Clearly, the environment is much more challenging since we talked to you last at the beginning of this year. Market pulp costs did not fall in the first quarter like we and most others had assumed. Instead, costs rose in March, and over the next few months, are likely to hit or potentially even exceed the peak levels that occurred last summer.

In addition, as we all know, oil prices have risen rapidly to over $100 a barrel, this is well above what we planned for and it’s caused prices for many of our oil-based cost inputs to increase considerably. For example, polymer costs are up about 20% both year-over-year and sequentially from the fourth quarter of 2010. Similarly, superabsorbent costs are up 15%, and costs for both of these key materials are expected to increase further in the near term.”

During the earnings conference call, KMB made it clear that they are taking a multi-faceted approach to addressing their inflation problem:

“We’re responding to the significant pickup in cost inflation in three primary ways: First, we’re raising selling prices across a number of our businesses; second, we’re accelerating or implementing additional FORCE cost savings programs; and third, we’re focused on managing our overhead spending aggressively.”

In addition to March’s announced price hikes, KMB will be taking pricing actions worldwide:

“We’re also in the process of raising prices in many areas of K-C International, particularly in Latin America.

And our B2B businesses are also taking pricing action, including a North American K-C Professional price increase that we announced last week. So as a result, we now anticipate that price and mix improvements will deliver 1 to 2 points of revenue growth in 2011. That’s up from our original assumption of about 1%.”

It seems there more and more upward pricing pressures are surfacing for the Federal Reserve to dismiss. Investors did not dismiss the bad news, sending KMB down 2.7% on the day.

The post Kimberly-Clark Keeps Hiking Prices appeared first on Inflation Watch.

The article includes a video in which Simon notes that inflation is “starting to creep into the business.” He started seeing inflation pressures late last year in items like dairy and is now seeing it in transportation-related goods like paper. (I assume he meant goods that carry heavy transportation costs). The article also features some cautionary commentary from a retail analyst.

Key quote from Simon in the article:

“…Inflation is ‘going to be serious…We’re seeing cost increases starting to come through at a pretty rapid rate.'”

NPR blog is hosting an informal poll on inflation expectations here: “Wal-Mart CEO Sees Inflation Ahead; Do You?”

The post Wal-Marts CEO warns consumers on inflation appeared first on Inflation Watch.

We have printed similar stories of companies using shrunken packages as a method for passing on stealth price increases (see category “Disguised Inflation“):

1. November 28, 2009: “Food packages are shrinking, but prices remain the same“
2. January 25, 2010: “Stealth inflation“
3. November 11, 2010: “Inflation hidden in higher unit costs“

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