Inflation Is Coming to Theater Near You as U.S. Companies Flex Pricing Power
(Bloomberg) -- From the big screen to the snack aisle, American companies plan to hike prices as their input costs creep higher.
It’s a sign that businesses have faith consumers will keep shopping even as products become more expensive. And that belief in pricing power, showcased on earnings calls and presentations during the week of Aug. 6-10, could signal a turning point. Businesses have spent much of the economic expansion saying customers will abandon them if they charge more, and it’s become an often-blamed reason for low overall inflation.
Still, perceived pricing power isn’t uniform, as the comments show. For the most part, businesses raising prices are doing so in response to higher non-labor input costs, while the predominant strategy for tackling wage inflation still seems to be productivity enhancements instead of higher prices.
All remarks are from transcripts available on the Bloomberg Terminal at NH BT.
Coming soon to theaters: higher prices. Movie theater operator Cinemark Holdings Inc. plans to pass costs along to customers, partly due to seating upgrades.
“Our average ticket price also increased 3.7 percent to $8.08, largely as a result of inflation, incremental pricing opportunities associated with recliner conversions, and favorable adult-versus-child ticket type mix,” said Chief Financial Officer Sean Gamble. “As we’ve continued to roll out recliners, our general tactic has been to go forward with limited pricing upfront and then when we see the demand opportunity increase there, and I’d say there’s still -- we still believe there is further opportunity as we look to the back half of this year and forward in that regard.”
To be fair, movie ticket prices have been marching steadily higher in recent years. But theaters aren’t the only ones planning to pass on costs.
The maker of Twinkies and Ding Dongs wants to charge more for its sugary snacks.
“We will implement a retail price increase and incremental retailer programs to help offset the inflationary headwinds we and others in the industry are experiencing,” Hostess Brands Inc. Chief Executive Officer Andrew Callahan said on a call, explaining that the company is researching how to do so without choking off growth. The majority of the change will come in 2019, he said.
Sealed Air Corp., the maker of Bubble Wrap and other packaging materials, is trying “to do everything we can operationally to keep our freight costs low,” Chief Financial Officer William Stiehl said in apresentation. “Where I’ve been very happy with the company’s success is our ability to pass along price increases to our customers for our relevant input cost.”
Tariffs are hitting home at Otter Tail Corp.’s metal fabrication unit BTD, but leadership doesn’t sound especially concerned. Thank pricing power.
“We do not anticipate higher steel prices from tariffs having a significant impact on BTD’s margins as steel costs are largely passed through to customers,” Chief Executive Officer Charles MacFarlane said on acall. “BTD is working to enhance productivity in a period of increased volume and tight labor markets.”
The trade impact pass-through is equally real at semiconductor device maker Diodes Inc.
“Products that we import into the U.S. from China, all of those products are going to be ultimately affected by the tariffs,” Chief Financial Officer Richard White said on a call. Between U.S. levies that began July 6 and additional rounds planned to follow, “it’s about $3.6 million per quarter, but we plan to pass these tariff charges on to our customers.”
Housing developer LGI Homes Inc. is “consistently” seeing sales price increases as costs bump higher -- a sign that pricing power exists even in big-ticket markets like housing.
“We’re able to and need to raise our prices to keep our gross margins consistent,” Chairman Eric Lipar said on a call. “In the market that we’re in, which I’d characterize as a good, solid, strong demand market with a tight supply of houses and the labor challenges, the material challenges that we all face, we see at least for the next couple quarters, that trend continuing. Prices are going to have to increase on a same-store basis if you will in order to offset increased costs.”
He said higher interest rates could be a hurdle that proves surmountable.
“We’re dealing with a higher monthly payment for the buyer now because of the rising interest rates from nine months ago. Demand seems to be there,” he said, adding that the company may need to examine ways to address the situation. “Rather than reducing the price, we may have to look at smaller square footages. The buyer may have to choose.”
Not everyone is finding opportunities to pass along costs: Civitas Solutions Inc., a health and human services provider that caters to those with disabilities and youth with behavioral or medical challenges, is seeing slimmer margins.
“The number of people that are exiting the company are still a concern to us and I think it’s driven largely by the full, robust economy,” Chairman Bruce Nardella said on a call, citing workers seeing opportunities to leave to get higher wages. “Over the last two years, our margins have eroded because of that labor pressure.”
As if a leadership feud and sales slump weren’t problematic enough, pizza chain Papa John’s International Inc. also has to deal with wage pressures and rising costs. It’s responding by attempting to eke out efficiency gains, rather than by raising prices, to defend its margins.
“We have employed third party efficiency experts to review the potential for improvements within our restaurants,” Chief Executive Officer Steve Ritchie said on a call. “They are also conducting time and motion studies. Their work will directly supplement the work we are doing within our restaurant design of the future.”