By Dominique Jacquet

After 30 years of absence, inflation is back in North America and Western Europe. Many managers never experienced a double-digit price increase and believed that interest rates (the cost of money!) couldn’t move away from zero. Hard reality to understand that the Working Capital Requirement increases nominally under the effect of inflation and consumes part of the profit without constituting an investment, that the volatility of the exchange rates will be amplified if the theory of the Parity of Purchasing Power (PPP) is still working and the cost of capital will be pushed up by the return to positive real interest rates (that, on the other hand, is better for future retirees…).

My opinion is that the major challenge faced by companies is to transfer to their customers the inflation observed in production costs (materials, services and wages) by increasing sales prices. Suppliers in the automotive sector remember with bitterness the difficulty of convincing their customers to agree to bear at least part of the increase in the cost of certain sensitive raw materials observed on the London Metal Exchange…

In fact, there is not one, but several inflation rates: the increase in your rent, the evolution of your food basket, the adjustment of your salary. How do you persuade your boss that a pay rise is inevitable to cover the rising cost of your consumption? By showing him that you are unique and indispensable! Same reasoning for the sale of products and services.

The strength of a brand is to make itself indispensable to customers. I am willing to pay more and sacrifice some of my purchasing power because this product cannot disappear from my universe.

Some companies have been particularly effective in raising selling prices in order to maintain what they call their “growth momentum”.

Publishing its financial results for the first half of 2022, Unilever (presentation of this prestigious firm in the educational films of January and February 2022) announces sales growth of 9% for the second quarter which is the result of an increase in the sales prices of 11% combined with a drop in volumes of 2%, knowing that the gross margin was ultimately reduced by 2%. At the same time, Nestlé announced organic sales growth of… 8%, a drop in its operating margin of 0.5%, an increase in both prices of 6.5% and volumes of 1.7%. Contrasting evolution of these two groups whose commercial performance has given rise to comments. We have all learned that price-volume sensitivity is negative for consumer goods. This is confirmed by Unilever, which announces that it is continuing its “growth” strategy which consists of selling less…? But more expensive…!

This reminds me of the exact opposite example of “Marlboro Friday”. In 1993, the firm noted that by selling at a too high price to its customers in times of crisis, it saw its market share gradually melt away to the detriment of “low cost” producers. So, on April 2 of this year, it significantly reduced its selling prices in order to win back its customer base, which will happen. Wall Street will, initially, bring down the stock market price of Philip Morris by 26%, to bring it back to the same level 18 months later. This is the time it takes for some financial professionals to realize that a firm’s client portfolio contributes more to its value than the next quarter’s profit.

It is clear that a company must remunerate its shareholders in the long term. But, in somewhat exceptional circumstances (and, hopefully, not too long-lasting…), it is necessary to invest in the lasting relationship with the stakeholders, whether they are customers, suppliers and employees, and this for the greater good of its shareholders. In the case of sales prices, while consumers are worried, among other things, about the evolution of their own purchasing power, capturing the resources of some and excluding others is neither ethical behavior nor good commercial and financial policy.