BrainTrust Query: How Will Retailers Manage the Impact of Rising Commodity Costs?
The big cry again in last Tuesday's election was "It's the Economy Stupid." But with the word "stimulus" turned into a pejorative, the only tool left to the government is now monetary policy. The Fed announced their $600 billion buy-back plan for treasuries on Wednesday. The goal is to lower the cost of borrowing for businesses and consumers. The unfortunate side effect will be a continued rise in commodity costs. The Wall Street Journal described how a few retailers are responding to the pressure to date. Some are passing on a portion of the increases, some are reducing costs in other areas, and some are just letting the increases go through and taking their lumps.
We have already seen the huge impact the economy has had on consumer behavior. Discount retailers have seen their revenues increase, private label has taken sales away from national brands, and consumers are saving more -- i.e., spending less -- exactly the opposite of what is needed to increase demand in a sluggish economy.
The challenge with the current round of commodity price increases is that it is not driven by an increase in demand, but rather the monetary decline of the dollar. As Asia raises interest rates while the U.S. continues to lower them, commodity prices are going to rise even more while demand remains tepid. I believe this should really take the price increase option off the table. Margins will decline, having a huge impact on various business models and the way successful retailers conduct business.
I believe retailers will increase forward (investment) buying. Self-distributing retailers will have greater advantage over others because of diverting income and lower storage costs. Labor costs will get greater scrutiny with retailers focusing more closely on operating costs. Freestanding retailers will see advantages from their investment in energy savings. Rising fuel prices will be a double-edged sword, leading to increased delivery costs for online retailers but also decreasing consumer trips to the brick and mortar locations. Online retailers may get hit by a double whammy if mandatory sales tax collections go into effect. With real estate prices so low and interest rates declining, maybe more retailers will purchase their properties rather than pay rent.
Discussion Questions: Do you think retailers can afford to pass on the full impact of commodity cost increases? Should retailers hold the ground on prices even if it means putting growth and investment plans on hold? What other changes could a retailer make to survive reduced margins?