Price over Volume: How Some Companies Are Thriving in a Rising Inflationary Environment

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3 min
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As the team's Capital Markets Analyst, Jacob conducts market and investment research and assists in the development of business strategy to serve our clients more effectively.
May 16, 2023

The Importance of a Pricing Moat in an Inflationary Environment

Price over volume.

No more burritos were sold, no more burgers were sold, no more makeup was sold, no more cola was sold, it was all a price game.

Some of the finest companies in the world are able to pass on excess costs straight to their consumers without much negative business effect. This is a pricing moat. Consumers love your product, brand, or service so much that they don’t care how much you increase the price year to year.

This is the case for some of the largest fast food chains, consumer product companies, technology companies, etc. Pepsi stated that sales volumes fell by 2%, but prices rose 16%. That meant that, broadly, Lay’s Potato chips were 16% more expensive, Pepsi Cola was 16% more expensive, and Quaker Oats were 16% more expensive, all on only selling 2% less. Sounds like a pretty good deal for corporate America. Proctor and Gamble reported a similar thing. Sales volume fell by 3%, but prices broadly rose by 10%.

The brands and the companies themselves were able to maintain their profit margins and pass on costs directly to consumer, and their stock prices reflected that.

But who can’t pass on costs. Travel companies and commodity producing companies have an extremely hard time. It’s hard to convince people that they should buy your more expensive airline tickets, hotel rooms, and resort vacations when they are already paying 16% more for Pepsi products and paper towels.

It’s also incredibly hard to pass on a cost inside of a commoditized product such as paper. If someone mines gold, they can’t then turn around and sell the gold for above market even when their costs have increase to mine it, same thing goes for paper and other commodities.

The Companies That Can Pull All the Levers Are the Ones to Watch

Tom talked about our QGARP strategy (quality growth at a reasonable price) in the Weekend Reads sent out on Saturday and this plays keenly into that. How do you grow, you sell more and/or you charge more.

The companies that can pull all of the levers are the companies that are worth watching.

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