Around 20 years ago, a buyer with a leading grocery chain explained consumer packaged goods (CPG) company pricing to me. "What goes up (prices), never comes back down." He then pointed to a number of companies who took prices up over a period of years, usually citing higher commodity costs as the justification. He then asked me, rhetorically, why if prices went up with commodities did they never go back down even when retreating to pre-increase levels.
To be fair, many CPG manufacturers often hold pricing while increased costs cut into their bottom line. When they do raise prices to distributors and consumers, they are often trying to recoup some of the dollars already lost.
All of this leads to the most recent reports of retailers pushing back against increases. In the past, some merchants have flat out refused to purchase products at higher prices. Typically, these are the biggest retailers such as Costco, Dollar General, Kroger, Walmart, etc. But most retailers and wholesalers simply don't have the wherewithal to stop doing business with all but the smallest brands in any given category.
A recent Reuters report concludes that Walmart is putting pressure on suppliers to hold the line on pricing.
"We want to work with vendors on that to see if we can take a price lower and leave it there permanently," Charles Holley, chief financial officer of Walmart, told reporters, according to Reuters. "The price image for a customer is very important."
Walmart's stance could be good news for other retailers as vendors may be forced to maintain current pricing rather than get on bad terms with their largest account.
On the possible downside, brands that decide they can't take prices up often choose to either downsize packaging or reduce promotional spending at retail. In a business, particularly among hi-lo operators, that is so driven by deals, this could have a negative effect.
"I think we reached the wall in terms of raising price. Consumers can't take any more," Edward Jones analyst Jack Russo told Reuters.
"A lot of these companies are going to have to get back to basics and not raise prices much, and if they want to grow sales they're going to have to do it through innovation, or being razor-sharp on pricing," Mr. Russo added.
Many manufacturers may have gotten at least a brief respite from price pressures. According to the Bureau of Labor Statistics' Producer Price Index, prices for consumer foods decreased 0.9 percent in December and then 0.3 percent in January. Energy prices were down for the fourth month in a row in January, declining 0.5 percent although fuel prices have begun to increase of late.