Corporations Raise Prices as Consumers Spend ‘With a Vengeance’
Doughnut sellers, milkshake purveyors, tire manufacturers and rental car agencies are all discovering that something is different about America’s pandemic-weathered economy: People are willing to pay more for the goods and services they want to buy.
Companies are taking advantage of a moment of hot and seemingly unshakable demand — one in which consumers are spending “with a vengeance,” to borrow the words of one executive — to cover rising costs and to expand their profit margins to prepandemic or even record levels. Corporate executives have spent recent earnings calls bragging about their newfound power to raise prices, often predicting that it will last.
If it pans out, that trend that could have big economic implications.
Planned corporate price adjustments could continue to boost inflation, which is running at its fastest pace in 40 years. The Federal Reserve is trying to assess whether businesses and households are changing their expectations in a way that might make rapid price gains a more permanent feature of the economic landscape.
A selection of comments from recent earnings calls show just how companies are thinking about this moment..
Rental Car Costs
Everything related to automobiles seems to be increasing in cost, and rental cars are the vanguard of that trend. Company leaders are trying to make the profitable moment last.
“The overall rent-a-car industry still has more demand than supply,” Joe Ferraro, the president and chief executive officer at Avis Budget Group, the rental car company, said on a Feb. 15 earnings call. “Given the current trends, we are cautiously optimistic about what a rebound in demand could mean once Covid is behind us,” he added.
The year “2021 showed us what’s possible,” he said, noting also that he expects the first quarter of 2022 to be the most profitable in the country’s history.
Understand Inflation in the U.S.
- Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.
- Your Questions, Answered: We asked readers to send questions about inflation. Top experts and economists weighed in.
- What’s to Blame: Did the stimulus cause prices to rise? Or did pandemic lockdowns and shortages lead to inflation? A debate is heating up in Washington.
- Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.
The company has realized, “especially given what we’ve been through in the last two years,” that targeting the most possible rentals — effectively competing by offering lower prices — is “not how you maximize profit,” Brian Choi, its chief financial officer, said on the call.
“We choose instead to compete based on the quality of our product and our service,” he said.
Tire Demand
Demand for cars has also bolstered the market for tires.
“It’s a really very, very good constructive pricing environment that we’ve seen right now, probably the best in recent memory,” Richard J. Kramer, the chief executive at Goodyear, said on a Feb. 11 earnings call.
The company does look to its competitors as it makes its price increases — but they, too, are charging more.
“There are nine competitors that we tend to track, and seven out of the nine have announced price increases in the first quarter, and one of the ones who hadn’t raised prices right at the end of last year,” Darren Wells, its chief financial officer, said on the call. Goodyear saw profit margins expand last year, driven in part by price increases.
Sizing Up Beef Costs
The restaurant family that includes Outback Steakhouse, Bloomin’ Brands, is planning to raise prices about 5 percent across its brands to cover rising labor and food costs — and, by pairing that with efficiency improvements, it is managing to increase its profits.
“It became clear that the 3 percent pricing we previously discussed was not be enough to offset the increased inflationary pressures our industry is facing,” said Christopher Meyer, the chief financial officer at Bloomin’ Brands, speaking of the last quarter. “Given that we had not taken a material menu price increase since 2019, we are confident that 5 percent is appropriate.”
Mr. Meyer noted that operating inflation was 4.9 percent and labor inflation was 8.9 percent in the final quarter of 2021, but that the company had managed to increase its profits through improving efficiency by simplifying its menu and by cutting food waste.
In 2022, he said, the company expects beef inflation “in the mid-to-high teens” and wage inflation “in the high single-digit range.”
Recovering Profits in Food
As beef and other food costs have increased, so have Shake Shack’s menu prices. But officials think consumers will be able to spend through the burger and ice cream inflation as virus risks fade and foot traffic picks up in the cities where its stores are located.
Inflation F.A.Q.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Where is inflation headed? Officials say they do not yet see evidence that rapid inflation is turning into a permanent feature of the economic landscape, even as prices rise very quickly. There are plenty of reasons to believe that the inflationary burst will fade, but some concerning signs suggest it may last.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
“We are encouraged by the results of our October price increase and believe our brand has pricing power,” Katherine Fogertey, the chief financial officer of Shake Shack, said during a Feb. 17 earnings call. “The extent of inflation this year remains uncertain and we may take additional price later this year to help build back margins.”
Shake Shack is already planning another price increase in March, which would push up prices by 6 to 7 percent over about six months, Randy Garutti, the chief executive, said, as the company tries to keep pace with rapid cost inflation.
“This company has a history of a roughly 2 percent price take every year,” he said. “For us to be at 7 percent is indicative of the time we’re living in. And I think we’re more, probably, on the conservative end of that if you look at us against the industry — us against at-home cost of food.”
Pricier Hotel Rooms
Wynn Resorts, whose occupancy in Las Vegas took a hit during the winter surge in coronavirus infections, has seen advance bookings rebound sharply — and it believes it has the power to charge vacationers higher prices.
“We believe we have strong pricing power on rooms, food and beverage, and nightlife during 2022,” Craig Billings, the chief executive, said on a Feb. 15 earnings call.
That comes after a strong quarter for the company’s Las Vegas locations, one driven by rapid consumer demand.
“To us, the quarter’s results are a further indication of the fact that our unrelenting focus on service and great product are resonating with premium customers who, after being cooped up for 2020 and the first part of 2021, are traveling and spending again with a vengeance,” Mr. Billings said.
Sweet Treats, Sweet Profits
Another product claiming pricing power? Doughnuts.
The end of 2021 showed that “fresh premium sweet treat business like ourselves — we can manage that inflationary environment that you referenced with price increases,” Josh Charlesworth, the chief operating officer at Krispy Kreme, said in a Feb. 22 earnings call. “We effectively ended the year with double-digit price increase for the year in the U.S., high single-digit on average across the world,” he added.
Mr. Charlesworth said the company expected to expand profits in 2022.
“The guidance we’ve given here today does assume that we’re able to manage, both from that price increase — and if we so choose, if needed, further price increases — to still grow our margins in 2022,” he said, noting that labor cost inflation was expected to hover in the “high single-digit” range and that the company had already locked in key ingredients like sugar and oil for the year.
