Inflation Has Become a Perception Problem for Companies

On average, Americans paid 8.3% more for everyday goods and services in April compared to the same time in 2021, according to the Bureau of Labor Statistics. This rate of inflation—one of the highest shoppers have seen in four decades—has left some consumers wondering: If companies are raising prices to offset higher costs, why are their profits continuing to grow? https://www.tiktok.com/@theaccountingprof/video/7081041879491710254 Others are outright accusing corporations of unethical behavior. In recent months, for example, watchdog group Accountable.US has released several reports reprimanding retailers, manufacturers and energy companies for raising prices while generating higher net incomes. "Home Depot and Lowe’s are the latest to join the long list of corporations exploiting the pandemic to ruthlessly upcharge working families struggling to make ends meet," Kyle Herrig, president of Accountable.US, said in a statement. "Companies making [profits] hand over fist during the economic recovery have a choice, and major retailers continue to choose padding their bottom lines rather than keeping prices stable for everyday families." Recent research from professional services firm Deloitte shows the majority of U.S. adults believe companies are hiking prices more than necessary to counterbalance their costs. And this suspicion could end up hurting a brand more than merely tarnishing its reputation. Additional data reveals shoppers who feel companies are taking advantage of the moment are less likely to spend in the near future compared to those who don't. "While consumers might be more accepting of higher prices when they’re driven by pandemics and wars, their patience around corporate greed looks to be thin," according to the Deloitte report. In America, for instance, 60% of adults think corporations are increasing prices more than needed. That's slightly higher than the global average, as 54% of consumers around the world agree with that outlook. This matters because the perception of unfair pricing—whether it's happening or not—correlates with an intention to spend less in the month ahead, especially on discretionary items. "Everybody wants to feel like they're getting a fair price, if not a great price," said Stephen Rogers, co-author of the report and managing director of Deloitte's Consumer Industry Center, who noted it's "harder to do now." To illustrate the point, U.S. consumers who feel companies are charging too much plan to spend 28% less on personal care, 19% less on clothing and 17% less on recreation and entertainment compared to those who don't believe companies are acting inappropriately. The former group also intends to tighten their budgets when it comes to restaurants, leisure travel and home furnishings. The results of Deloitte's spending survey, conducted in two waves during March and April, come as consumers in general are pulling back on purchases. Figures from market research firm The NPD Group show consumers bought 6% fewer retail items in the first quarter of 2022 than they did in the first quarter of 2021. On TikTok and Twitter alone, conversations about inflation have increased 1,062% between April 2021 and April 2022, according to consumer intelligence platform Talkwalker. A complicated situation Although the perception of corporations partaking in predatory pricing may be increasing, it's not necessarily accurate. Procter & Gamble and the Clorox Company, for instance, reported higher profits in their latest quarters, but both saw their gross margins shrink due to higher commodity and manufacturing costs, among other factors. "I would not say firms are raising prices more than costs," said Erin Lash, director of consumer equity research at investment research firm Morningstar. Lash noted costs are going up across the board, from labor and packaging to transportation and raw materials. Meanwhile, Russia's invasion of Ukraine is only exacerbating the problem. Instead of solely passing the hiked prices onto consumers, however, companies are also working to drive down costs by reducing overhead and sourcing alternative materials while increasing manufacturing and marketing productivity. "Firms have historically not used pricing to offset the entirety of the higher costs they're facing, and this time doesn't appear to be any different," she added. Indeed, some retailers are experiencing clear-cut declines. Earlier this month, Walmart reported that while year-over-year sales increased during the quarter ending April 30, its net income fell nearly 25%. Target, meanwhile, revealed profits declined more than 50% during the same period. What companies can do In this climate, Deloitte and other experts outline a handful of things companies can do to ameliorate negative feelings and win back trust. One is to improve transparency around decision-making. If shoppers don't know the why behind the what, they will go looking for it. And companies might not be pleased with what consumers conclude. Another option is to expand the number of products available in a portfolio, giving consumers a choice between different price points. As Rogers put it: "Are you offering them an alternative before they reach for the other guy's stuff?" Product innovations, such as new sizes, flavors or features, can also justify higher prices. Lash pointed to Tide Pods as an example. Although the item costs more, it has won over college students and dollar store customers alike for its convenience. "It's a lot easier to bring a pod or two with you to the laundromat than a big jug of liquid laundry detergent, so consumers were willing to pay up," she said. In times like these, companies also have an opportunity to strengthen rapport with consumers by reminding them that corporations are made up of individuals dealing with similar struggles as everyone else. "Empathy is a hard conversation to have between a brand and a consumer, but being able to show that in communications or the products you are producing is a good thing to do to show you understand," said Elspeth Ross, a global consulting partner at Ogilvy Consulting. Old Navy’s Answer to Inflation: A Price Lock on Kids’ Clothes