There's understandably a lot of concern about inflation — and consumers want to know who to blame for it. U.S. companies are showing that they've got pricing power and know how to use it in this environment. That makes them an easy target for consumers — and politicians' — ire. But for the most part they're merely raising prices to keep up with their own higher costs. If consumers are going to get relief from inflation, it has to start with companies getting relief of their own.
The companies in industries where prices and profit margins have gone up the most — which some say is due to "corporate greed" — are the industries that haven't been able to maintain production because of supply-chain problems, such as homebuilders and automakers. Companies in both industries are planning to increase production by double digits in 2022 — if supply chains can handle it.
For most companies, the higher prices they've been passing on (and will continue to pass on) to consumers are the result of their own material costs rising. They're just striving to maintain the same profit margins they had before the pandemic, which is important information when thinking about the future path of inflation.
The epitome of this dynamic is Chipotle Mexican Grill Inc., which has been aggressively raising prices over the past year. If corporate greed rather than inflationary pressures explained the restaurant chain's actions, then that would be visible in its financial results. In the fourth quarter of 2021, Chipotle's gross profit margin — essentially, what it earns after expenses like food, labor and occupancy costs — was 20.2%. In the four pre-pandemic quarters of 2019, Chipotle's gross profit margins were 21.0%, 20.9%, 20.8%, and 19.2% — very much in line with the 2021 fourth quarter even after price increases.
Clorox Co. is on the other end of the spectrum. Prior to the pandemic, its gross profit margin fluctuated in a range from 42% to 46%, varying a bit as the cost of key commodities and freight changed. In the fourth quarter of 2021, its gross profit margin plunged to 33% as it was overwhelmed by higher costs. Getting back to pre-pandemic profit margins overnight would require a price increase of 15% or so. (If you're one to stock up on bleach, now wouldn't be the worst time.)
Somewhere in the middle is Cheesecake Factory Inc., which reported earnings Wednesday and discussed in its investor call how it's thinking about price increases for this year. To regain its 2019 profit margin — which is its goal — it would have to raise prices by an additional 2% on top of increases it's already taken. But "given the volatility in the commodities market and the potential for some degree of reset," it's choosing not to do so yet.
While these three companies may be in different positions in 2022 when it comes to profit margins and near-term pricing strategies, they're all essentially pursuing the same outcome. They believe that pre-pandemic profit margins are a reasonable goal. Chipotle's managed to keep pace in a tumultuous 2021. Clorox is far behind where it wants to be, and you should expect bleach prices to continue to rise until they've made up the ground they've lost. Cheesecake Factory is in a wait-and-see mode; if its own costs fall this year, it might not have to raise prices again.
It's fair to argue that companies shouldn't be passing on price increases to maintain profit at a time when consumers are feeling pinched, but these are for-profit companies, not charities, and exerting pricing power when they have it is part of what companies do, and what investors expect. The good news is that companies for the most part really aren't trying to reap windfalls on the backs of struggling consumers.
To prevent higher prices of burritos, bleach and cheesecake, what we need is for the commodities, freight and labor markets to normalize. If freight and commodity prices fall significantly in the coming months, companies would see their profit rise above the 2019 levels they've been targeting. As a result, consumers might see years of more stable prices as companies allow profit margins to normalize from a more gradual rise in costs.
The key is getting corporate America's input costs under control. Once we make that happen, consumer price inflation will get back to normal, too.
Bloomberg News provided this article. For more articles like this please visit
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