NEW YORK, Nov 16: Falling prices may be a boon for consumers, but for companies in a sluggish economy and facing stiff competition, price declines are a major hurdle to achieving earnings targets.
Unless the US economy shows significant improvement, falling prices, or deflation, could spread and wreak even more havoc, financial analysts say.
In response to the slump, companies are cutting prices, introducing lower-priced products or are struggling to hold fast against price-cutting competition to meet profit goals.
On the one hand, businesses are still wary of increasing investment — a reluctance that is affecting everything from the prices of telecommunications equipment to office furniture. On the other, consumers concerned about job losses are bargain seekers, even for cigarettes.
Price cuts are widespread in manufacturing and retail, said Allen Sinai, president of Decision Economics Inc. To move product, prices have to be cut, and American consumers’ resistance to prices will get more intense.
Reduced pricing power is hurting some of the most powerful and prestigious companies in the United States.
International Business Machines Corp, saying it was pursuing a “flexible pricing” strategy, plans to introduce lower-priced software to attract smaller corporate customers.
Philip Morris Cos. Inc. said it might not achieve its targets for earnings growth next year because of an influx of cheap imported cigarettes and counterfeit cigarettes. The news sent the shares of the world’s largest tobacco company and other tobacco shares sharply lower.
Intense competition has kept companies from raising prices. In the era of globalization, multinational corporations can quickly relocate a plant from Mexico to China or a customer service center from the United States to India to exploit the cheapest labour.
There is lower inflation so consumers are less willing to accept price increases especially where there is a high level of competition, said Patrick Schumann, a consumer analyst at Edward Jones.
The fast-food industry has yielded to pricing pressure in the form of “dollar menus.” Some stock analysts have questioned the strategy, which has been embraced by McDonald’s Corp. and Burger King. Brokerage Edward Jones downgraded McDonald’s, in part for the move to the 99-cent menu, which Schumann said would put a bite into profit margins.
Excess capacity — whether it’s too many fiber-optic networks or too many autos — contributes to companies’ difficulty in making higher prices stick.
During more prosperous times many companies overbuilt capacity and went deeply into debt to do so. Without the ability to hike their prices and bring more cash in, they are finding it increasingly hard to service their debt. —Reuters