Raising Prices
RECENT THOUGHTS
The front cover of the WSJ had an article discussing the current sugar shortage (“Food Firms Warn of Sugar Shortage”). It stated that large food companies such as Kraft and General Mills are petitioning the Agriculture Department to ease import restrictions (the government imposes restrictions on how much tariff-free sugar they can import). The food companies warned that the alternative would be consumers paying higher prices. Notice, they didn’t warn that their own profit margins would be crimped. This is because they know they have pricing power. The majority of “goods” they offer have more inelastic demand – they make necessities, and their goods are branded. Thus, by not easing import restrictions, the increase in prices of sugar get passed onto the consumer through higher prices in the end product, and essentially become an indirect tax to the consumer. This brings up a point we have been making in many of our investment letters – the importance of owning businesses with non-durable, necessary, branded products who have the ability to raise prices, particularly during times of inflationary pressure. We may not see the inflation for quite some time, but when that day comes, these businesses will be prepared for it and they will continue to be profitable.