The Economy

How Will Tariff-Driven Price Hikes Affect Sales?

Some consumer goods companies are increasing prices, but there are signs of renewed price sensitivity among buyers, says Korn Ferry's Craig Rowley.
Craig RowleyAugust 2, 2018
How Will Tariff-Driven Price Hikes Affect Sales?

Leaders of organizations such as Sam Adams and Coca-Cola will be closely scrutinizing sales figures for the rest of the summer barbecue season, looking for signs of the impact of recent price increases.

Citing higher costs from steel, aluminum, and other tariffs, automotive, beverage, and other manufacturers have or are planning to raise prices in the second half of the year, according to The Wall Street Journal.

Boston Beer Co., maker of Samuel Adams beer, said on last week’s second-quarter earnings call that it would raise prices up to 2%. Coca-Cola said its sodas would cost more as well, though executives didn’t specify a precise increase. And, according to the WSJ article, recreational vehicle maker Polaris plans to pass $15 million of its expected $40 million tariff bill on to consumers.

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So far, consumers have been willing to absorb the added costs, but recent data points suggest they might not be willing to for much longer. Companies will have to closely monitor reaction to initial price increases, especially among core customers. A significant drop-off in buying should be taken as a serious message.

While tariffs certainly forced organizations into a costly corner, the reality is that consumer goods companies have wanted to raise prices since the end of the last recession. But they’ve been unable to, because consumers stung by that episode have remained cost conscious.

Instead, companies have focused on improving efficiency and taking out costs to maintain profit margins and sales volumes.

But while organizations were feeling the pressure to raise prices anyway, now they have to. With economic and consumer spending growth both around 4%, coupled with sales and margin pressure from tariffs, the feeling among many leaders is that the timing is finally right to raise prices.

Or is it? Some recent data points to suggest a return to price sensitivity among consumers.

The softening of the housing market is one example; sales and new constructions have slowed dramatically in recent months. As Reuters notes, the worry is that the weakness in housing “could spill over to the broader economy, through a reduction in purchases of household items like appliances and furniture.”

That’s a big cause of concern for organizations in the former category, which are experiencing higher costs because of the tariffs.

Wage growth is still at less than 3%, and in June consumer prices rose 2.9%, the highest rate in more than six years. The Federal Reserve already raised interest rates once this year, and has signaled that future increases are likely.

Taken together, these factors mean organizations that are passing costs onto consumers must tread carefully. Many companies, such as Harley-Davidson, are pursuing options that include moving more production outside of the United States to soften or delay imposing price increases.

People are still feeling good overall, so a little increase shouldn’t stop buying, says Rowley. The challenge comes if they face additional increases because of tariffs. What choice will they make then?

Craig Rowley is a senior client partner and the global practice leader for the consumer sector at Korn Ferry.