Pricing power: who actually has it?

Zooming in on who can pass on higher prices.

Emilie Stevens
May 20, 2022

So far in 2022, if stock markets have taught us anything, it's to question what the experts tell us a bit more. 

With US and UK inflation reaching 40-year highs this week, things are looking far from transitory despite what certain people expected. Yes, J-Pow, we mean you.

That has put firms who tell us they have pricing power centre stage. Being able to hold onto consumers and even pass on price rises to them in times of inflation is an enviable asset

And, with a host of different consumer stocks reporting recently, we’ve been able to start differentiating between those who have pricing power and those that just say they do.

What pricing power actually looks like

Simply put, pricing power means you can raise prices in the good times and the bad, without losing customers. 

This is particularly important at the moment with input costs at record highs, as it means companies can pass on higher costs. 

The end result is that companies can protect profit margins and continue to grow profits over time and aren’t derailed when it looks like people are going to spend less. 

Pricing power is often attributed to strong brands. If we know and love something we are generally stickier customers and it takes more for us to switch to a competitor. 

And while you’ll find many companies telling you they have this in abundance, their numbers often tell a different story. 

A lot of these firms haven’t had to showcase their ability to tackle inflation over the past decade because there just hasn’t been much inflation. Now that there is we can see just who has it and who was a bit too big for their boots.

Prices up, sales hmm…  

Unilever is home to more brands than we can all probably name. From Dove to Domestos to Hellman’s, 3.4bn consumers in 190 countries use their brands every day. 

After the financial crisis, Unilever gained a lot of support from would-be bond investors who suddenly saw interest rates nailed to the floor.

The thinking was that this was a business with a wide range of steadily growing product lines, a bit of yield and the feeling that, even if there were a recession tomorrow, you’d probably still wash your face or clean the toilet.

And while we may all be loyal to our favourite soap and mayo in easier times, Unilever’s latest results suggest higher prices aren’t quite being accepted across the board. 

Q1 headline sales grew by 7.3%, driven by a combination of an 8.3% rise in price but a 1% fall in volume. Not a huge drop off, but one that was mirrored across each product category. 

You can see from the operating margin chart that this is perhaps not a new theme for Unilever. 

While profit margins have remained steady over the last decade, has profitability improved notably? Not really.  And that’s the part that would suggest an ability to keep raising prices.

Source: Unilever Charts 2010-22 and Annual Report 2021.

That’s not to say Unilever’s dead in the water but its investors might sit up and take note of Walmart’s statement this week. The US shopping giant said it had seen a trend of inflation-conscious consumers switching from branded goods to cheaper own-brands.

That’s not what Unilever needs and it’s a key area for investors to keep an eye on now. If it has to reduce prices to keep consumers around, that’ll eat into margins and erode its reputation as a solid source of inflation protection.

Prices up, sales up 

Rémy Cointreau is France’s answer to Diageo and boasts a whole host of spirit brands in its international portfolio. 

In the cabinet you can choose from straight up Rémy Martin or LOUIS XIII Cognac for the grown ups, Cointreau (for your Margaritas) or maybe Mount Gay (for your Dark and Stormy).

Friday night drinks aside, the group recently announced revenue for the year to April 2022 was up 27.3%, driven by a 9.2% price increase and 18.2% boost in volumes. Profit margins are also expected to grow beyond previous the year’s level of 23.4%. 

Not too shabby, particularly given growth has more than surpassed pre-Covid levels too. 

For Rémy, being able to continually raise prices and still attract a growing clientele isn’t necessarily a new theme either. It’s a strategy that’s enabled the company to keep up a regular track record when it comes to gradually raising dividends too.

Note we’ve excluded special dividends to show a view of more standard dividend trajectory. Source: Annual Report, 2020/2021

Now, we note this isn’t necessarily an apples to apples comparison, Rémy, unlike Unilever, is home to luxury brands. There’s nothing wrong with Ben and Jerry’s but, while we might try Tesco’s own ice cream in a pinch, the cognac crowd might have enough in the bank to not need to trade down.

And maybe that’s part of it this time round. With wages stagnating and prices rising, it’s maybe the luxury sector that can withstand inflationary pressures a bit better. That’s something we looked at here.

But, even if it’s not a perfect comparison, we think it provides one of the better examples at the moment about what pricing power in a consumer-facing market can look like.

In short, just because a firm thought it always had pricing power doesn’t mean it actually did, or still does. As investors, we need to question that premise constantly and look for any signs that it has changed.

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