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Prices up, profits down

February 16, 2012 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

A recent Washington Post/Bloomberg Business article stated that Hormel Foods' fourth quarter 2011 profit slipped 3 percent. Price increases were blamed for lower sales volumes. Tyson Foods experienced a similar fate with its fourth quarter results.

Does this news fly in the face of my January 24, 2012 post, "Do higher prices drive customers away?," in which I cited business owners whose price increases resulted in growth in their customer bases?

I don't think it does. Price is an easy scapegoat. Here are some other possible explanations:

These companies could have:

• Accelerated sales into a previous quarter through discounts.
• Cut back on their marketing during that time period.
• Experienced a new entrant to the market.
• Failed to pass along all their cost increases in their pricing.
• Disappointed distributors in an earlier quarter and experienced the backlash in the fourth quarter.
• Experienced a typical seasonal downturn.
• Invested heavily in marketing for the benefit of future quarters.
• Experienced unfavorable currency translation charges.
• Had a lapse in quality in the products.

Any and all of these are possible explanations for the declining profits in the face of rising prices.

My reason for pointing this out is that these headlines affirm a myth that raising prices results in lost customers. That simply isn't true. Don't take my word for it, look at the success Panera Bread, Starbucks and Chipotle experienced while raising prices throughout the worst economy in seven decades.

Price increases are an easy scapegoat for declining profits. Don't fall into that trap. Use the list above to explore the real reasons why you're experience declining profits despite rising prices.

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