Most investors love companies with pricing power. Me? Not so much. Consider the life of a wealthy expat who asked a broker to show him the most expensive apartments in Rome. The first, at €20,000 a month, was a dump. So was the second, at €18,000. Yet the third apartment, at €16,000, was well-maintained, with gorgeous views of the Italian capital. Sensing confusion, the broker explained that the first two apartments had sat empty for months—and the owners kept raising prices to make up for the lost rent.
Sound familiar? The U.S. Postal Service has seen first-class mail volume drop from a peak of 103.7 billion letters in 2001 to 61.2 billion last year. It raised rates from 34 cents to 49 cents to make up the difference. Movie tickets sold in the U.S. peaked at nearly 1.6 billion in 2002. Last year only 1.3 billion were sold. Meantime, average ticket prices jumped from $5.81 to $8.65.
The more prices rise, the more customers bolt. It’s like running up a down escalator and never getting to the top. With the stock market hitting highs just about every day, investors need to be wary of companies that raise prices to make their numbers. These stocks make for spectacular sell-offs on even the slightest earnings miss. Case in point:Starbucks , the $4.65 macchiato maker, slid nearly 10% on Friday.
Disney ’s stock has been stuck around $100 for the past few years as investors bite their nails over cord-cutters. ESPN and cable networks were over half of Disney profits in 2012. Figuring the party would rage on, ESPN signed multibillion-dollar TV deals with the National Football League and the National Basketball Association. The Oakland Raiders’ Derek Carr makes $25 million a year? Thanks, ESPN.
Yet the sports channel’s subscribers have dropped from 100 million in 2011 to 89 million today. So ESPN raised prices, from $4.69 per sub a month to $7.21 today, a fee five times as high as any other channel. This newspaper reported earlier this month that Disney is in talks with cable operator Altice USA to raise prices again by perhaps 6% a year and institute “minimum penetration guarantees” to make up the difference. We’ve seen this movie before: ESPN may be a few price increases away from losing another 11 million subscribers.
There’s a long list of price bumpers. Walk down any supermarket aisle. Kellogg’s prices constantly snap, crackle and mostly pop. Procter & Gamble toothpaste sizes shrink faster than my cavity count, always less for the same price. Now private-equity firms are circling P&G. Same for Nestlé . Expect rising beer and liquor prices soon.
Empires are lost on rising prices. Until recently, rather than innovate in mobile or cloud computing, Microsoft kept raising the price of its Windows operating system to computer manufacturers. Tablets and phones ate their lunch. Fees rose at eBay until Amazon took its growth away. Booksellers raised effective prices on digital books to offset the decline of physical copies. I never understood that one.
The Durbin amendment to 2010 Dodd-Frank Act cut the fees banks could charge on debit-card transactions. Banks simply cut back on free checking, adding annoying low-balance and overcharge fees, making up the difference elsewhere. Not sure how this affected personal-safe sales.
Increasing prices attracts others to attack your market. Amazon’s Jeff Bezos warns: “Your margin is my opportunity.” We’ll see devastation from rising prices in lots of places: ObamaCare premiums, personal tax rates in Illinois, cap-and-trade costs in California, wages in China.
Competition solves much of this problem. Investors love protected businesses, but eventually relentless price increases kill them all. Consumers are the kangaroo at the bar in the old cartoon: The bartender says, “Say, we don’t get a lot of kangaroos in here.” The kangaroo replies, “No, and with these prices, I can see why!” Call me a kangaroo, but I prefer to invest in companies that lower prices and offer more.