Raising Prices Easier Said Than Done
Walt Disney hiked single-day admission prices at its theme parks by up to 9.6 percent last week—its fifth increase since 2009. But other companies might want to think twice before following suit.
Just ask Kohl's.
The department store chain raised prices two years ago, only to see shoppers take their business elsewhere. It has been struggling ever since to make up the lost ground and recently said it would ramp up advertising to entice customers back.
Growth has quickened slightly this year, but most people are still pinching pennies, aggregate consumer spending is up less than 5 percent from pre-recession levels, and companies that try to raise prices risk making their customers angry. If the spotty sales performance of major retailer such as Wal-Mart and Nordstrom is any guide, regaining a measure of pricing power is a distant dream for most companies.
"One of the early behaviors that we saw in the downturn was consumers trading down from higher- to lower-priced products. You saw it in everything from soap to beer," said David Axson, a managing director at global consulting firm Accenture. "Consumer behavior, once it changes, takes a long time to change again."
Even now, four years since the recession ended, the economy is far from healed. Massive job losses have ceased, but the jobless rate is 7.6 percent—and that doesn't include many who have left the workforce because they couldn't find a job. And those with jobs earn fractionally less now on average than in late 2008, according to the Bureau of Labor Statistics.
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"Typically, at this point we'd be much farther along, but recovering from a financial-led recession takes anywhere from seven to 10 years, and we're still a ways away," said Sam Bullard, senior economist at Wells Fargo.
In fact, fallout from the 2007-09 recession—the deepest since the Great Depression—has left companies nearly as shell-shocked as consumers, said Georg Tacke, co-CEO of Simon-Kucher & Partners, a global consulting firm based in Bonn, Germany.
Under pressure to maintain profit margins, companies have focused on cutting costs to the bone and hoarding cash rather than using it to hire workers or invest. But there's a limit to how lean companies can get.
"At some point, they have to act on prices, and many have forgotten how to do it, and more importantly, have not educated their customers to expect it," Tacke said, adding that such resistance could hurt bottom lines once growth and inflation begin to rise.
For now, things look set to get worse before they get better. Most expect the economy, facing government belt-tightening and higher taxes, to slow from the 2.4 percent growth logged in the first quarter.
That's helped keep price pressures in check. Consumer prices rose just 1.1 percent in the year to April. When stripped of food and energy costs, they were up 1.7 percent, the smallest rise in nearly two years.
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Against such a backdrop, "only companies that offer differentiation—whether it's the product or a service—have any pricing power," said Joel Bines, managing director of consulting firm AlixPartners.
Disney could hike prices by much more than the inflation rate because of its unique offering—an experience that's difficult for customers to match.
Others have relied on innovative product development to maintain profits. While Apple has not raised prices, it has managed to get customers to keep buying its relatively expensive iPads and iPhones by rolling out frequent upgrades.
But companies that cater to middle-income consumers or offer goods and services that are largely interchangeable with those sold elsewhere are more constrained.
"If you're talking about the Wal-Marts of the world, the supermarkets and big-box stores, it's fair to say they have relatively little pricing power," Axson said.
The most recent season of corporate earnings proved how cautious consumers are across the board. Wal-Mart's U.S. same-store sales fell in the first quarter, and department store group Nordstrom lowered its sales forecast.
Purveyors of luxury goods, or high-end hotels, whose wealthy customers weathered the recession well, are better positioned to raise prices. A rising stock market and recovering home prices have been a big help.
Tiffany implemented price increases in early 2013, in part to reflect higher diamond prices, but that did not prevent it from selling more high-end jewelry.
(Read More: Consumers Keep Retailers Humming)
But even high-end chains have limited pricing power. Department store chain Saks, which has been trying to wean customers off promotions since the financial crisis eased, offered bigger discounts at a sale in April than it had a year earlier.
More Years to Go
There are still industries where demand exceeds supply, and that has helped some companies regain pricing power.
Consolidation in the airline industry has put an end to the days of fierce price wars, with average fares up about 8 percent between 2008 and 2012, according to the Bureau of Transportation Statistics.
U.S. automakers helped themselves by slowing production in recent years after building too many cars between 2000 and 2009, said Eric Lyman, vice president at ALG, an auto industry consultant. Average transaction prices for vehicles have since climbed to more than $31,000, from $28,050 in 2008, according to Edmunds.com.
Other industries will need to see faster overall growth before things improve. Some economists expect the economy to gain momentum in the second half and next year.
But it will take time for hiring to catch up and even longer for the type of wage gains seen in the boom years of the late 1990s. In 1997, average weekly earnings were rising by as much as 3.7 percent year-on-year; in April, the equivalent was 0.9 percent.
"People have adapted to a different way of buying things and different types of products," said Axson. "It's going to be very interesting these next two or three years to see if companies can convince consumers to open their wallets a little wider."