What: Companies with high pricing power are highly considered by financial analysts in periods when production or sourcing are difficult.

Why it is important: Department Stores might be affected by increased wholesale prices unilaterally applied by their partners and might have to also go a stress test when it comes to increasing their own retail prices as a consequence to maintain margins.

The Economist reports that, recently, major retailers and companies increased their retail prices in order to maintain their margins intact even though the cost of production (raw material, manpower) is increasing. For instance, McDonald’s has increased its retail prices in the US by 6%, and so did PepsiCo, Procter & Gamble, or Hilton. The most important is that this retail price hike was passed on customers without impact on the final demand, nor generated any backslash. This ability to maintain margins is, unsurprisingly, quite appreciated by Wall Street analysts.

The Economist identifies the characteristics of companies which enjoy this possibility to increase prices without being impacted by customer demand: they are usually dominant in their market, significant in terms of company size and market share, and usually in consumer staples, communications services, and IT (and no, for instance, energy, financial and material companies). Interestingly, UBS also identified that, usually, companies with high pricing power generate low ROI in ‘normal times’ but produce high returns in tension moments such as the one we are currently going through.

However, so far, these observations have been made on a limited period of time. No one really knows how the market and situation would evolve in the case the current situation drags on indefinitely.

Pricing power is highly prized on Wall Street