0:05

Last week, a company called Tapestry

0:08

had an earnings call. It owns fashion

0:10

brands like Coach and Kate Spade. Good

0:12

day, and welcome to this Tapestry

0:14

conference call.

0:17

Our colleague Suzanne Kappener was listening, and

0:20

she noticed something unusual. The

0:22

company's CEO was talking openly

0:24

about raising prices.

0:26

In the past, companies, when they would

0:28

raise prices, they would sort of do it very quietly.

0:31

A lot of companies tend to be secretive about their

0:33

strategy and their pricing, and

0:35

they don't want to share with competitors what

0:37

they're doing, and they certainly don't want consumers

0:39

to feel like they're being ripped off.

0:41

But on the Tapestry earnings call?

0:44

You almost got the sense they were sort of bragging about

0:46

how their brands are so hot

0:49

and so in demand that they can continue to

0:51

raise prices. We continue

0:53

to see pricing power

0:54

across our portfolio. We delivered

0:56

gross margin increases across

0:58

the portfolio, and we expect that

1:01

to continue. The

1:03

average price that consumers are paying

1:05

for Coach items are up 30% over

1:07

the past three years.

1:10

Now that far outpaces the pace

1:12

of inflation.

1:17

It's not just fashion brands that are raising prices

1:19

like this. It's also coffee chains,

1:21

fast food restaurants, and streaming services.

1:24

And right now, it seems like a lot of consumers

1:27

are willing to pay up. But

1:29

why? And how long will

1:31

it last?

1:36

Welcome to The Journal, our show about

1:38

money, business, and power. I'm

1:40

Ryan Knudsen. It's Friday, May 19th.

1:48

Coming up on the show, why some companies

1:51

are getting away with higher prices.

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2:39

A lot of companies first started raising prices

2:41

during the pandemic. And the reason

2:43

was basic economics 101. Demand

2:46

was outpacing supply. When

2:49

everyone was stuck at home, they started buying

2:51

more stuff and companies

2:53

couldn't keep up. So

2:57

the cost of labor was going up. The cost

2:59

of raw materials was going up. Shipping

3:02

costs were skyrocketing. And a lot

3:04

of this was brought on by kind of the supply

3:07

chain disruptions that happened during the

3:09

pandemic where, you know, things

3:11

got very out of whack and that put a lot

3:13

of pressure on shipping

3:15

containers, shipping things from China

3:17

to the U.S. across the ocean got

3:20

very expensive. And so a lot

3:22

of companies started passing through those higher

3:24

costs to their customers.

3:26

As a result of all this, inflation

3:28

spiked. It peaked around 9% last year.

3:32

But since then, some of the things that kicked off

3:34

inflation have largely been resolved. Like

3:37

supply chain backlogs have cleared up and

3:39

fuel costs have come down.

3:42

But a lot of companies are still raising prices.

3:45

What's surprising is that even

3:47

as inflation has started moderating,

3:50

there are some companies that are continuing to raise

3:53

prices and they're sort of bragging

3:55

about it to investors. And

3:57

that seems to be a departure. You

3:59

know, the CEO of. Kroger spoke to us

4:01

and he doesn't remember ever seeing companies

4:04

kind of talking up their price increases

4:06

to investors the way they are doing today.

4:09

They're basically saying, we

4:11

can raise prices and consumers are

4:13

willing to pay. Right.

4:17

That's exactly what Tapestry's been doing,

4:19

that company Suzanne was talking about earlier.

4:22

On Tapestry's earnings call, the CEO,

4:25

Joanne Kravoisierat, talked about one of its

4:27

top-selling products, a handbag

4:29

made by Kate Spade, one of the brands

4:31

Tapestry owns.

4:32

They call it the show dog. It looks almost like a

4:34

sheep dog with shaggy hair and it

4:37

sells for almost $500. And

4:39

in contrast, back in 2020,

4:42

they had another similar, they

4:44

call it a novelty bag. It was in the shape of a pineapple.

4:47

That one sold for almost $400. So

4:50

they've been able to raise the price. It's

4:52

not quite apples to apples comparison, but-

4:54

Pineapples to sheep dogs, right? They've

4:58

been able to raise the price by almost $100 for

5:01

this kind of novelty bag. This is not anything

5:03

essential that somebody needs in their wardrobe.

5:06

It's pure fun. Well,

5:08

I don't know. This

5:10

is a really interesting purse. Do

5:13

you have a favorite among the pineapple or the

5:15

sheep dog?

5:16

Oh, I have to go for the dog. Absolutely.

5:19

Yeah. We're dog people here on the

5:21

Journal podcast. Yes,

5:24

I might. The company said it's been raising prices since even before

5:26

the pandemic. And the reason the company

5:29

says it can is because people love

5:31

the Kate Spade brand. In other

5:33

words- Your brand is so hot. It's

5:35

so strong. When you're selling things

5:37

like not like consumables like milk that somebody

5:39

has to buy, but a handbag, which is discretionary,

5:43

if you can raise your prices

5:45

and consumers are still willing to pay for it,

5:47

it kind of shows that your brand is very hot.

5:51

Another company that appears to think its brand

5:53

is hot right now is McDonald's.

5:56

Here's their CEO on a recent earnings call.

5:59

and we've seen really

6:02

no deterioration in that. Companies

6:04

like Starbucks and Disney are also capitalizing

6:07

on the moment. Disney recently raised

6:09

the price of its streaming service from $7.99 a month to $10.99. It's

6:14

planning to bump it up again later this year.

6:17

It seems like corporate America is being, like,

6:19

opportunistic right now. Like, they're seeing a moment

6:22

that they can get away with raising prices, and

6:24

we're just doing a level up here in how much things

6:27

cost.

6:27

Well, it's always right what the market will

6:29

bear, and if you feel that your consumers will

6:32

continue to, you know, like, we've

6:34

seen McDonald's and other CEOs say

6:36

there have been no, you know, they have not

6:38

noticed any kind of slowdown in sales

6:40

when they raise prices. That gives them confidence

6:43

that they can continue to raise.

6:45

And for some companies, higher

6:47

prices are translating into bigger

6:50

profits.

6:54

So how long do you think this will last? That

6:57

is the million-dollar question, right? Or $1,100,000

6:59

question with inflation these days. Exactly,

7:03

exactly. What

7:06

we've heard so far from a lot of the other

7:09

consumer products, media

7:11

companies, is that there doesn't seem

7:13

to be any sign that this is coming to an end just yet.

7:17

But why are consumers willing to pay

7:19

more?

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7:56

One of our colleagues has been watching companies raise

7:59

prices over the last few months. months. And he

8:01

has some thoughts about it. Hi,

8:03

I'm Greg Ip. I am the chief economics

8:05

commentator of The Wall Street Journal.

8:09

Why do you think consumers are continuing

8:11

to tolerate higher prices? I

8:13

think it's a couple of reasons. It's a strong economy, a 3.4

8:16

percent unemployment rate. So

8:18

workers are able to ask for higher wages and get

8:20

those higher wages because employers don't have other

8:23

sources of labor to turn to. So

8:25

long as that strong labor market persists

8:27

and incomes are going up, consumers have

8:29

the means to pay those higher prices.

8:32

So that's number one. I think number

8:34

two is that there's a switch

8:36

that goes off in people's minds when they

8:38

go from a world of believing and expecting 2

8:41

percent inflation to a world of believing

8:44

and expecting 5 percent inflation. Psychologically,

8:47

you are less resistant to 5 percent prices

8:50

if you now accept that as normal than

8:52

back when inflation was 2 percent.

8:57

But

8:57

why would consumers expect 5 percent

8:59

inflation to be normal? So

9:01

the reason inflation seems to be entrenched is

9:03

that it seems to be taking on a self-sustaining

9:06

character. What I mean is that now

9:08

that people expect inflation of 5 percent,

9:11

they behave accordingly.

9:13

As in when prices go up, people demand

9:16

higher wages. And when companies pay higher

9:18

wages, they need to raise their prices more.

9:21

You can see where this is going. Does

9:24

anybody benefit from consumers

9:26

getting used to inflation? I suppose

9:28

if you're a CFO or a CEO these days in America,

9:31

you love the fact that you can tell your shareholders, hey,

9:33

we're raising prices 5, 6, 7 percent. We're

9:35

getting no pushback. We have a lot of pricing

9:38

power. And indeed, we

9:40

are seeing signs of companies being rewarded

9:42

by the stock market because they've pushed through these high

9:45

price increases. Just look at the latest

9:47

earnings reports from McDonald's

9:49

or Procter & Gambler, Kimberly Clark. They're all

9:51

talking about pricing power. The

9:54

fancy words elasticity, right?

9:56

Elasticity. Wow. I'm getting callbacks

9:58

to freshman year of college. I'm

10:01

sorry about that. No,

10:05

it was a great year. Who

10:10

doesn't like being a freshman? Do

10:13

companies deserve more blame for inflation? If

10:16

companies are deciding to raise prices in this

10:18

environment because they see an opportunity and they

10:20

see that consumers are willing to pay

10:23

for it, how much responsibility

10:26

do companies share for the continued inflation? I'm

10:29

not going to maximize its

10:31

profits, right? I studied economics. I

10:34

learned that companies are always greedy. They're supposed

10:36

to be greedy. They're always supposed

10:38

to raise prices as much as they can to maximize

10:40

profits. But they're discovering now raising prices does

10:42

not result in fewer sales.

10:47

Normally, the free market would solve

10:49

this problem on its own. There's

10:52

a saying in economics. High prices

10:54

are the solution to high prices. If

10:57

one company raises its prices too much, other

10:59

sellers will spot the opportunity, will

11:02

undercut them, move into the market and prices will come down.

11:05

And that is kind of what happened for the 30 years

11:07

before the pandemic. But Greg says

11:09

that right now, this dynamic isn't happening

11:12

because everybody is raising prices. We

11:15

might call that a collective action problem. If only

11:17

one individual wants to raise their prices, then they can't

11:19

get away with it. But if everybody currently agrees

11:21

to raise their prices, they can all get away with it. And

11:24

when this happens, people can't tell what's

11:26

a legitimate price increase and what's

11:28

just an opportunistic one. It gets

11:30

harder for people to figure out if that 5% wage

11:33

increase or that 5% price increase was

11:35

a reflection of the real value of

11:38

the job they were doing or of the product they were buying

11:40

versus

11:41

just generalized price increases. You

11:43

don't really know the price

11:45

signal, which is this vital part of it. Market society

11:47

becomes really muffled and you don't know

11:49

what it means. But

11:51

if everybody is getting used to 5% inflation, is that really

11:53

so bad? I

11:55

mean, it hung around 2% for decades,

11:57

so why can't it just be 5% now?

11:59

Well, I suppose you could say that if everybody

12:02

is used to 5% and basically adjusts accordingly,

12:05

you might argue that nobody is

12:08

actually

12:08

affected. And in fact,

12:10

there have been times in history when we have got along

12:12

with higher inflation rates and things were

12:14

sort of nominally fine. But

12:17

I suppose one would look

12:19

back at those periods and learn that once

12:21

inflation gets up to a higher level, it becomes very

12:23

unstable. We've also learned that

12:25

when inflation is high, there's a tendency

12:28

for it to keep getting higher.

12:32

For the past year, the Federal Reserve

12:34

has been trying to bring down inflation

12:36

by rapidly raising interest rates and

12:39

making it more expensive for people to take out loans.

12:42

So the Federal Reserve has been trying to combat this

12:45

problem by raising interest rates to

12:47

cool the economy. Is that the only

12:49

tool or is there anything that the Federal Reserve

12:51

or the government could do to try to

12:53

put a cap on companies raising prices

12:55

like they've been doing?

12:57

Ultimately, if you have the situation where people

12:59

are used to higher inflation, then the only way

13:01

really to get it down is to raise interest rates until

13:03

demand falls. People buy less.

13:06

They don't buy as many homes. They don't buy as many cars.

13:09

Their interest payments go up and therefore they have to

13:11

cut spending on everything. The

13:13

employers eventually have to lay people off. People

13:15

without jobs don't have as much income and they spend

13:17

less. That's kind of the old story. It's

13:20

more or less why economists expect a recession

13:22

now. They think the only way inflation

13:24

is going to drop is if the Fed raises interest rates enough

13:27

to cause a recession.

13:29

So even though it's the companies that are

13:31

raising prices and contributing

13:33

to this, it's the

13:35

consumers who might have to suffer the consequences

13:38

during a recession if they get laid off.

13:40

That's correct. As Fed Chair Jerome Powell said,

13:42

I think about a year ago, I wish there were a painless

13:44

way to achieve this, but there isn't.

13:46

There are some signs that consumers

13:48

are starting to resist higher prices, though. Target,

13:52

Home Depot, and Walmart all reported

13:54

earnings this week showing that customers are

13:56

moving away from big ticket purchases.

13:59

So where do you think this is? this all ends, how does the U.S.

14:01

economy get out of this inflation grip

14:03

that it's been in?

14:04

I think there's two possibilities. Possibility

14:08

number one, which is the good outcome, is that the Fed,

14:10

in fact, has actually done quite a lot and that

14:12

we will, in the coming months, see pronounced

14:14

signs of a slowing economy,

14:17

softening the labor market, fewer

14:19

job vacancies, and inflation

14:21

starts to converge back towards, say,

14:23

four, three, and maybe in a few

14:25

years, 2%.

14:26

That's what we call the soft landing

14:29

scenario, and it's one that I and I think most

14:31

people are hoping for. The

14:33

other scenario is the more dark scenario, which

14:35

is that people are so used to 4% to 5% inflation

14:39

that the inflation rate does not start

14:41

to drop of its own accord. The Fed's

14:43

tightening has not done enough to weaken demand,

14:46

and the Fed has to do a lot more.

14:49

It needs to resume raising interest rates. Or I suppose

14:51

there is a third option, which is that 5% inflation

14:54

does, in fact, become the new normal. It's

14:57

possible. It's possible.

14:58

I hope not.

15:00

That's all for

15:01

today, Friday, May 19th. The Journal is a co-production

15:04

of Gimlet and The Wall

15:06

Street Journal. The

15:09

show is made by Jade Abdul-Malik, Annie Baxter,

15:12

Ariana Bowe, Catherine Brewer,

15:12

Maria Bergen, and

15:59

Tanner, Nathan Singapac, and Glutat

16:02

Sessions. Fact-checking by Nicole

16:04

Pasulka.

16:07

Thanks for listening. See you Monday.