Senior Client Partner
Passing Along Price Hikes ‘with Impunity’
The numbers certainly look jarring. Oil prices are up more than 90% in a year. New vehicle prices are more than 10% higher than last year. Even bacon prices are up more than 20%. Overall, US consumer prices jumped higher in October than they had since 1990. And that may be the good news. “The current inflation surge will get worse this winter before it gets better,” Goldman Sachs Global Investment Research warned its clients in its new outlook for the US economy.
Yet, to date, most companies have imposed a curious strategy to combat rising prices—passing it entirely along to customers. That’s a far cry from usually trying to cut costs to deal with inflation, but the strategy appears to be working. Companies in nearly every industry—even price-sensitive retail—have been reporting continued increases in quarterly profits. “Up until now, it appears that retail has been able to raise prices with a level of impunity,” says Craig Rowley, a Korn Ferry senior client partner specializing in retailers.
In past inflationary periods, companies often undertook major restructurings to save money, including closing multiple offices and factories while laying off employees by the thousands. Experts say that isn’t happening now because many companies aren’t sure this inflation will last that long. Yes, it has stuck around longer than some experts predicted, but prices to transport goods, one of the first major measures to rise, has started to fall. Meanwhile, pileups at ports, one of the reasons why goods are in short supply at factories and stores, are starting to clear.
At the same time, the economy is still growing at a steady pace, says Nathan Blain, Korn Ferry’s global lead for optimizing people costs. One of the reasons why companies can’t grow profits faster is that they don’t have enough employees to meet demand. “Executives are thinking that they have to keep their feet on the gas” to satisfy demand for their products and services, Blain says, even if it means hiring more people at higher salaries than before the pandemic. Corporate boards may cut their executives some slack, he adds, since management has no control over a general increase in the price of everything.
Plus, the pandemic taught many companies how to work productively with less real estate and fewer travel expenses. The reduction in those costs can offset much, if not all, of the rising prices. If leaders do want to cut costs more thoroughly, they also have far more tools to do it now than they did decades ago, when widespread closings and layoffs were considered the best options. Digital transformation projects, investments in more sustainable manufacturing, and other initiatives often involve upfront costs but can save companies considerably over the long run, Blain says.
Of course, all might change considerably if, in several months, customers start balking at paying higher prices or the broad economy starts to stumble. Then managers might become more aggressive with cost cutting. The first big test of that might come this spring, when firms often determine their broad cost-of-living wage increases for employees. For years, firms have been able to increase annual pay 2% to 3% without problem. This year, Rowley says, might pose a dilemma, if employees have been dealing with rising costs and the company doesn’t want to increase pay by much.