BrainTrust Query: How Will Retailers Manage the Impact of Rising Commodity Costs?
Commentary by Bill Bittner, president, BWH Consulting
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.
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
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?