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Companies pull hard in pricing tug-of-war

Fretful central bankers and hard-pressed consumers hoping companies will swallow rising input costs look set to be disappointed as evidence grows that prices will increase in coming months.
/ Source: Reuters

Fretful central bankers and hard-pressed consumers hoping companies will swallow rising input costs look set to be disappointed as evidence grows that prices will increase in coming months.

From a superjumbo jet plane to the ubiquitous Big Mac, manufacturers around the globe are plotting price rises to offset higher costs and claw back ground lost in the recession.

Take McDonald's Corp, the world's biggest restaurant chain, which this week said it would charge more for some menus to help offset expected rises in the 10 commodities that make up around 75 percent of the cost of preparing its food.

Any price rises come against the backdrop of a mixed global inflation outlook. According to the University of Michigan consumer survey, the one-year expectation is for inflation of 3.3 percent. That's the highest level registered by the survey since the third quarter of 2008.

McDonald's reckons its costs are forecast to rise 2 to 2.5 percent in the United States and 3.5 to 4.5 percent in Europe, but hasn't yet put a figure on how much it will raise prices by.

Meanwhile, European planemaker Airbus said earlier this month it was lifting its list prices by an average 4.4 percent and the cost of a A380 superjumbo by an extra 4 percent.

That may not cause so much pain to a growing airline in India, where inflation is around 8 percent and the rupee has appreciated against the euro and dollar. But such increases will hurt a European airline struggling with higher fuel costs and limited ability to raise its own ticket prices.

Some prices have already been marked up in response to rising commodity prices and will be factored into the inflation figures which are giving central banks such a headache.

McDonald's, for instance, raised prices in China last year to offset a spike in commodity costs and in Britain this year to cover a value-added tax hike.

Companies pushing through increases are pointing a finger at raw material costs. A rise in rubber prices drove Italy's Pirelli to announce last week higher tire prices in all European, Middle East, African and Asia-Pacific markets.

The March price rises are 3 percent for car and SUV tires and 7 percent for both heavy and light industrial tires.

Swiss chocolate group Lindt is raising its prices by about 1 percent next month and is not discounting a further rise as problems in Ivory Coast drive the price of cocoa higher.

"Naturally we cannot completely rule out a price increase on our products if the cost of cocoa beans rises significantly," a Lindt representative said this week.

Other sectors look set to follow suit. Goldman Sachs said in a recent research note that U.S. retailers could also begin raising prices as early as next month, and sector analysts expect to see an effect on gross margins by the second half of 2011.


Manufacturing companies have other means of dealing with higher costs for raw materials from grains, cotton, rubber, cocoa and metals to energy. Many responded to the 2009 downturn by turning the screws on their suppliers, forcing them to take the pain.

That looks likely to continue as the likes of McDonald's use size and reach to exert their relative pricing power.

Food retailers and restaurants can also resort to shrinking portion sizes. That way they can hold headline prices by giving customers less, but for the same price as before.

But squeezing suppliers and other tricks will never be enough.

Barclays Capital argues raising prices is one of the ways that European corporates should be able to continue improving their profit margins this year. They will also depend on strong developing market growth, high asset turnover thanks to restructuring, greater productivity and restrained labor costs.

It's not all one-way traffic on pricing. Not all companies are in position to force through rises. Some of Europe's budget clothing retailers are likely to take a hit to profit margins rather than hike prices and risk seeing thrifty customers head for the exits.

For chains like Sweden's Hennes & Mauritz and Britain's Primark, which have gained market share from more expensive rivals during the economic downturn, that is likely to mean short-term pain.


In the luxury sector, consumers seem able and willing to pay whatever it takes to sport the latest styles. Asian appetite is strong and players are rushing new stores to meet demand.

Companies such as Swiss watchmaker Swatch Group are not shy about passing on the extra costs of gold, other precious metals and jewels.

Swatch, which also owns higher-end brands such as Breguet, Blancpain and Omega, says it will increase prices and improve its manufacturing processes to combat a strong Swiss franc and higher gold prices.

The same goes for jewelers and watchmakers Cartier, Montblanc and Audemars Piguet which have also signaled they are preparing for price increases this year.

"We will certainly adapt prices for certain brands. We have to do it," Swatch CEO Nick Hayek said, adding it was easier to raise prices for watches at the top end.