Chipotle and Netflix announced that they would soon be raising the prices of their goods and services.
Most consumers probably won’t even notice because the price hikes will only amount to a few dollars and cents.
But they should care.
Corporate Profit Margins Have Never Been Fatter
Fattening profit margins have enabled corporate America to deliver record earnings amid modest revenue growth.
However, much of these profit margin gains have come from companies cutting costs (e.g. laying off workers) and improving efficiencies (e.g. making workers produce more stuff with little or no pay raise).
Obviously, this is not sustainable because eventually those workers will no longer be able to afford stuff. In other words, the customers will stop shopping.
For now, corporate America is doing what it can to maintain or further boost its profit margins in order to 1) blunt the impact of inflation; 2) maintain earnings growth; and 3) please its investors.
Unfortunately, companies can only do so much cost-cutting and business-optimization before they’re forced to raise prices.
Passing Costs To The Consumer
We recently got two examples of price hikes that anyone in America should notice:
- Chipotle Mexican Grill‘s CFO announced it would raise prices by mid-single digits (~5%) by the end of the quarter. This comes as the burrito chain faces rising food costs. “A 5% increase would raise the cost of Chipotle’s chicken burrito from $US7.81 to about $US8.20 in New York,” reported BI’s Hayley Peterson.
- Netflix is raising the prices of new subscriptions by $US1 to $US2 per month. That would represent a 12% to 25% increase over a $US7.99 subscription. “The company justified the price increase by saying it has greatly expanded its streaming video library,” reported BI’s Steve Kovach. “It will use the new revenue to acquire even more content.”
So what does all this mean?
On the surface, it is literally just a few dollars and cents. And in the long-run, some of these price hikes will be offset for the consumer elsewhere. For example, a more efficient car will help save on gas.
But experts agree that in aggregate, prices will rise.
We Need A Raise
Unfortunately wage growth has largely been stagnant, which means something will eventually have to give.
“Consumer spending is around all-time highs as a share of U.S. GDP, while labour income is at multidecade lows,” said Gerard Minack of Minack Advisors. “This has been wonderful for corporates: consumer spending boosts revenue, while labour costs are the corporate sector’s largest single cost. Rising consumer spending and falling wage share of GDP is great for profit margins.”
“Now, however, further wage weakness threatens to suffocate the U.S. consumer,” he added.
It might take regulatory changes. It might take tax hikes. It might take a massive destabilizing protest. But eventually, something will have to get corporations to channel some of that money back to consumers or else they risk feeling pain on their top lines.
The good news is that expectations for wage growth are actually rising. We’ll just have to see if that actually materialises.