Bad Economy - Why Sticky Prices are Oh So Ooey, Gooey!
You may never have heard about sticky prices in a bad economy, but they certainly have been on the news a lot lately. Don’t know what they are? In some areas of marketing, prices that ‘stay’ even after other prices have fallen, are said to be ‘sticky’.
You pick them up and they ooze on your pocketbook! Their prices stick at current levels because retailers don't want to lose their profits. But those aren't the only reasons prices get stuck.
Which products will you buy in a bad economy? It's like a game of Russian Roulette. Or how bout a nice game of 'Eeny, meany, minie mo, Catch a price tag by the toe, If it's too high, let it go, Eeny meanie, minie mo!'
Why a Bad Economy Produces Sticky Prices
Your local grocery store is just one place where you can expect prices to either RISE or remain the same, even though the price of oil used for transportation continues to drop. Retailers and manufacturers want to recover some of the losses they took when gas prices were high.
They responded to higher gas prices by slowly raising prices on the foods you consume and the other products you buy. These same retailers can make a lot more money (even in a bad economy) and have higher profit margins when they do not lower prices as quickly as they raised them. Surprised?
Another concern for retailers in a bad economy is that the price of gas at the pump is so unpredictable. It takes a lot of planning and man-hours to raise and lower prices across the board at local markets. If companies lower prices and gas goes back up in price, they are setting themselves up for more losses. Even though crude oil has plunged more than 53% from its record high of $147.27, retailers also like to see that the lower price of gas will ‘stick’ before they lower their prices again. Why does this happen in a bad economy?
Meat companies like Tyson Foods Inc., for example, have taken losses this year as ingredient costs crept higher. Executives were fearful that consumers would abandon their products if prices jumped too fast. Because they didn't raise their prices, Tyson's profit plunged 92 percent in the third quarter and the company said it didn't expect any rebound soon.
Once a price hike is in place, it may never go back down, especially in a bad economy. Many businesses, in fear of even higher prices, locked into prices before the price of gas dropped. That means they are still paying more for their ingredients, products, and services. When they are locked in, so are all of us. Looks like the price of milk is going to stay around $4 for quite some time!
The one factor than can drive prices back down in a bad economy is a drastic drop in demand, but most people are not going to live without much. We will continue to pay for the products we need the most. That's exactly what retailers are banking on. For example, most retailers ordered their current merchandise months ago. With their costs locked in, they will keep most prices as high as they can to recover as much profit as possible from slower consumer traffic and purchases.
Companies will hold out as long as they can. They of course, like making more money. Higher prices are likely to start falling once one company decides to take the opportunity to sell more for less. It’s like a game of chicken. They will wait to see who will be the first to drop them and how long they can hold out if they keep prices the same. (You do it! No, you do it! Well, you go first! No you first!)
Companies also tend to price their products based on what their competitors are charging and not necessarily on what it costs to make them. For example, Pepsi is more interested in what Coca Cola is charging for a liter of cola, than the price they pay for the ingredients to make it. However, if even one company were to start cutting prices to lure customers away from competitors, it could start a price war. That would be very good news for the consumer!
Nobody wants to be first though! It happened once before in 1996 and took several years for the companies to recover their losses.
1996 was the last time cereal makers broadly reduced prices. Post cereal was the first company to lower their prices by 20 percent. When competitors were forced to join in, it hurt profitability across the board and reduced sales. Kellogg responded to Post's price reductions by slashing their prices 19 percent, and the company's profits tumbled 8% to $502 million in 1998, and another 33 percent to $338 million in 1999. Kellogg decided to launch a new specialty line of higher-end cereals to try and create a niche market. They hiked domestic cereal prices nearly 3 percent in 1998 and later returned to growth.
Of course, you and I know they’ve been limiting the amount of ounces per box of cereal for several years. And it’s not just cereal. Many companies are lowering the amount of food (per ounce) they box, bag, or bottle, for the same price they might have charged a year ago. You may think that you’re getting the same deal because packaging is cleverly deceptive, but upon further inspection, consumer’s are slowly realizing that their ice cream quarts are far below quart size. That may explain why a quart of ice cream won’t last you as long anymore. (And you thought you were just eating more!)
Are consumer's getting ripped off? Most economists don't see it that way. In a bad economy, consumer's spend less so retailers don't make as much profits. If almost like an even exchange. They hold their prices so we limit the amount we spend. As long as prices hold, consumer's will have to scrimp to get by in a bad economy. Hold onto your hats! You may have to sell them!
Until price wars start, there is one ray of hope for the consumer. Retailers are sure to offer huge discounts during holiday shopping seasons trying to entice consumers to get on the spend your money band-wagon. The more discounts there are, the more likely consumer’s are going to open their wallets or pocketbooks.
The motivation to cut prices was reinforced when the U.S. Commerce Department recently reported retail sales dropped 1.2 percent across the board. This was about twice as much as analysts expected. The decline helped heighten fears that the bad economy was headed into a deeper recession than economists had predicted.
Retailers are expecting one of the worst holiday seasons in years. To make matters worse, OPEC is threatening to cut back on oil production to spike the price of oil. Heck, they don't care. They're all rich! They liked it better when a barrel of oil was $140 a barrel! If they cut back supply, that may drive the price of gas back up again.
Unfortunately, big promotions do not mean a drop in consumer goods and services that we use day to day. Retailers never cut prices back if they can avoid it. They like higher profitability and for now, it seems that we are 'stuck' with sticky prices where they currently are in this bad economy, for quite some time.
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