Is the price right?
Not for a lot of companies squeezed by suppliers and workers on one side, and by customers on the other. But there are some things you can do.
By William Hoffman
Two decades ago, businesses cringed at the idea of passing double-digit annual price increases along to their customers. Today, with inflation flat and intense pressure to keep prices nearly so, it may be hard for some companies to decide which is worse: bumping up prices-or failing to do so.
"Businesses have been having problems passing along price increases for the last two or three years," according to John R. Kerr, Bruning professor of entrepreneurial management and director of the Small Business Institute at Florida State University. Cost pressures from suppliers, wage demands from workers and global competition made local by the Internet and other communications tools squeeze profits at a growing number of companies. How they cope with the situation depends in part on what sector of the economy they occupy, and how they position themselves in the markets they serve.
"What's happening now is the start of that kind of [profit] squeeze, because labor costs are rising, and labor is a big factor in retail," says Rosalind Wells, chief economist for the National Retail Federation, representing 45,000 stores. So far, the squeeze hasn't shown up in higher prices, she says, in part because sectors such as apparel have benefited from a strong U.S. dollar and favorable exchange rates against foreign currencies, and because technology sellers may be making up in volume what they lose in price. "They seem to be coping," says Wells. "Of course, there are others who will find it more difficult."
Dave Huether, economist at the National Association of Manufacturers, says his group's latest survey (3,000 companies in March) found small and medium-sized manufacturers slightly more optimistic about the economic future than their large counterparts, though all were very hopeful. The Asian crisis has hit larger companies that export finished products harder than smaller businesses whose components of these finished items comprise "invisible exports."
Huether says, "One way companies are tackling [cost pressure] is to invest in the type of capital equipment that will let employees become more productive, so they can still turn out products at a competitive price." Wage pressures have so far been negligible, he adds.
By contrast, Ron Schreibman, vice president at the National Association of Wholesaler-Distributors, says his 40,000 constituent firms are content with the current environment. Low inflation rules, he agrees, "but neither do we see significant cost pressures in the labor-cost pipeline at this time." Productivity increases, better inventory controls, the macroeconomic shift from goods to services and "ingenious" management of the money supply by Alan Greenspan's Federal Reserve have made a low- or no-inflation economy sustainable over the long term, Schreibman says. "It is not inevitable that if inflation is low that wage expectations must be high." Barring war, an oil disruption or the like, "There's no end in sight" to the current stable price market, he says.
For those companies that cannot resist the cost-push and believe they must raise prices, Kerr says, distinctiveness is key. "The small businesses today are trying to figure out what gives them some kind of distinctive competence in the marketplace." He adds, "That competence can be either real or imagined." A "real" distinction is a product or service that distinguishes your business from its competitors. An "imagined" competence can be a customer service that places you far ahead of competitors.
Economists are usually loathe to guess how long any economic phenomenon will last. "I think we're in kind of an unusual economic period right now, and I don't know how long this is going to last," Kerr says. Huether notes that NAM forecasts a .1 percent increase in the producer price index in 1998 (from a minus 1.2 percent decline in 1997). Wells, at the National Retail Federation, says that low inflation "is not a particularly new phenomenon," and that since consumer price inflation "is much tougher to estimate ... we don't do it." Schreibman, for the wholesalers, says simply, "There is no end in sight."