INVESTING EXPLAINED: What you need to know about Excuseflation – a corporate ploy to raise prices, also known as greed
In this series, we break the jargon and explain a popular investing term or topic. Here it is Excuseflation.
What is this?
Some companies use all kinds of economic, geopolitical and other excuses to raise prices – in some cases by more than the rate of inflation – and to keep them high.
This term, which was designed to describe this practice, appeared in American media and is now heard here. Excuseflation is also known as greed.
However, Bank of England Governor Andrew Bailey is now warning businesses to refrain from further price hikes. He says if they don’t, interest rates will continue to rise.
What kind of excuses are used?
The list of excuses given over the past two years includes bird flu, blockages in the Suez Canal, Covid, higher transport overheads, supply chain issues and the war in Ukraine. These may be entirely legitimate reasons to raise prices, but companies that engage in excuseflation are seen as exploiting the situation.
On the rise: Some companies use all types of economic, geopolitical and other excuses to raise prices – in some cases by more than the rate of inflation – and to keep them high
How do companies do it?
They start raising prices little by little, watching if customers smile and support it, or if they go for cheaper rival brands. Some products, especially food, have a dedicated fan-base that will save up in other areas to afford their favorite indulgence.
Sales can be sacrificed in favor of the larger profit margins that can be produced by the strategy. The business may also wish to attract a clientele that is more affluent and less concerned with making ends meet.
Another term for practice?
Some businesses will argue that they choose POV (price over volume), preferring to sell fewer higher margin items, rather than maximizing sales with a lower margin. But only companies that think they have pricing power are likely to go that route.
What companies do this?
The most prominent name is PepsiCo Inc, the name behind Alvalle Gazpacho, Doritos and, of course, Pepsi.
Chairman and boss Ramon Laguarta seems happy to admit he took the opportunity to implement strong price increases, saying: “So we will continue with this focus, trying to create brands that can represent higher value for consumers and consumers are willing to pay more for our brands.’
Pepsico seems to have proven that customers consider Pepsi to be preferable to any other cola. But last month the company said it would suspend price increases.
Wingstop, the American chicken restaurant with 1,500 outlets worldwide, is another group cited by American commentators.
The chain, famous for its spicy Korean wings, has 29 stores in the UK. There have been a lot of comments about UK companies whose prices have been steadily rising, meaning the accusations of excuseflation could soon begin.