Wednesday, January 19, 2022
There is no better adversary to inflation than a strong brand. Branding power allows a company, typically consumer-facing, to INCREASE their prices or "pass-along" underlying inflationary costs for their raw materials on to the end user. But this cost transfer is a little misleading. And something we as financial farmers should pay closer attention to.
Consider the lowly pound of coffee. Typically sourced from arabica beans in a mostly equatorial geography, a pound of coffee "arrives" here in the United States via a circuitous path from grower to harvester to roaster to grinder to your morning cup of Joe. Now the headline inflation number we might see for a pound of coffee might be 10% for example. Consumers just assume by constant media barrages that they will be paying headline rate increases. And they're right, kinda.
That 10% increase on a pound of coffee might translate to a whole price increase of $0.30 cents on the pound for a large, vertically integrated coffee company. That company can "cut" a pound of coffee into approximately 30 cups and sell each for a retail price of $5. But with "inflationary pressure" the NEW price is $5.50...a "10% increase."
Quick math here reveals something quite different. That $0.30 increase at the wholesale level is a boon at the retail level, allowing the coffee retailer to rake in another $15 per pound. Assuming the brand is strong enough, and product good enough, an investment of $0.30 yields a an amazing 50X return for the retailer!
We used coffee as an example, which is one of the most lucrative businesses in the world, but the same concept applies to nearly every other consumer-facing brand. Wholesale price increases "give permission" to the company to increase prices on the consumer. One could even argue that inflation to retail-facing companies is a flywheel which ignites further, compounded profits. Consumers are hard-pressed to find FALLING prices once an inflationary spiker recedes. Higher prices are sticky...and honey to the owners of these brands!