Thoughts on companies/CEO's that jack up prices to customers

[LongHaul]

Every so often I find a company where it seems like management has jacked up prices to customers.  When I say increase prices, I really mean above and beyond any raw material inflation so that the Gross profit per unit goes up faster than inflation. 

A current example is Ametek where Gross Profit Margins have increased and organic growth has stalled.  What seems to happen is organic growth slows because competitors come in and take market share.  I think it shows that management is short term oriented and ruining the business.  I have previously made the mistake of thinking this was sustainable when often it is not.

 

Anyone else have experience with this and any general thoughts?

 

It is great competing with a competitor who keeps prices high.

[Liberty]

Honest question: In the specific case of Ametek, are you sure you aren't looking at operational leverage boosting the GMs? Or maybe them making acquisitions in higher margin areas?

 

I'm not super familiar with Ametek, but I've looked at similar types of conglomerates that had rising margins and that's what was happening.

[ItsAValueTrap]

Companies that can raise prices without losing customers are arguably some of the best investments around.  They're raising their earnings without investing any capital.

[gjangal]

I was reading the 10-K of QCOR quite a while ago. The company seemed cheap and was trading at 12 PE with decent cash flow.  They had one major product Acthar , the company benefited by raising the price of the drug from 50$ a vial to around $28k per vial.  There were only a few patients in the US that needed it for a rare condition, i forget what it was. They own the patent for it. They were also hiring a lot of sales people to market the drug for other uses

 

I decided to skip the company, I wasn't very comfortable with it.

[premfan]

This depends on if the product or service is a commodity or if it is a brand service /product. Raising prices on a brand product is acceptable and should not mess up its market share. A commodity product cant raise its prices without losing market share. Most business's are commodities so they should focus on operating expenses compared to its competitors.

 

Keeping operating expenses lower than competitors in a commodity business creates a competitive advantage making the business the lowest cost operator

 

High prices are relative to value proposition. The best surgeon in town can charge any price and will not lose market share. He has created a brand or a moat. When thinking about high prices i suggest first coming to the conclusion if the company is clearly a brand company if so they can raise prices ( if not regulated like banks etc).  99 percent of companies are commodity based though.

[Guest longinvestor]

Understanding businesses with cost/unit advantages over the long term and charging fair prices is a lot, lot easier than those that are built trying to take money off customers' pockets. Especially if you are catering to a market primarily made up of the middle/lower middle class, given the long term squeeze on disposable income. Walmart in the grocery business, for example, is eating the lunch of grocery chains. It has been unfolding in my neighborhood over the past 5 years. Other grocery stores are closing shop. The only ones that are surviving are the ones with much better service but not at much higher prices. Netflix(<$10) putting the hurt on cable subscriptions($50-100) is another example of this. Anyone remember AT&T and long distance home phone business? My bills, with international calling, used to range $200 to $400+ in the early 90's.  With Vonage, MagicJack etc. in, ATT is out of the long distance business. I pay $35+tax for the all-you-can-eat home phone. Granted ATT has moved into the mobile business and is collecting $100-200 per family but for how much longer? Everyone is looking for bargains in everything. (I do!) We experiment with store brands all the time, sometimes go back to brands but for the most part, have stuck with store brands. High prices and the economic times we are living in don't mix very well at all.  Sinegal, Walton, Bezos all built their winning businesses on not overcharging their customers and patient investors have done well with them. There may be niche businesses out there that may thrive charging high prices, but those belong in my "too hard" pile.

[bookie71]

Understanding businesses with cost/unit advantages over the long term and charging fair prices is a lot, lot easier than those that are built trying to take money off customers' pockets. Especially if you are catering to a market primarily made up of the middle/lower middle class, given the long term squeeze on disposable income. Walmart in the grocery business, for example, is eating the lunch of grocery chains. It has been unfolding in my neighborhood over the past 5 years. Other grocery stores are closing shop. The only ones that are surviving are the ones with much better service but not at much higher prices. Netflix(<$10) putting the hurt on cable subscriptions($50-100) is another example of this. Anyone remember AT&T and long distance home phone business? My bills, with international calling, used to range $200 to $400+ in the early 90's.  With Vonage, MagicJack etc. in, ATT is out of the long distance business. I pay $35+tax for the all-you-can-eat home phone. Granted ATT has moved into the mobile business and is collecting $100-200 per family but for how much longer? Everyone is looking for bargains in everything. (I do!) We experiment with store brands all the time, sometimes go back to brands but for the most part, have stuck with store brands. High prices and the economic times we are living in don't mix very well at all.  Sinegal, Walton, Bezos all built their winning businesses on not overcharging their customers and patient investors have done well with them. There may be niche businesses out there that may thrive charging high prices, but those belong in my "too hard" pile.

When we were in college in the 1960's we would call home "person to person" to ourselves to let our folks know we were back safely.  My mother and mother in law kept an egg timer by the phone so nobody would talk too long.

Yes competition does terrible things  ;D

[LongHaul]

I am not actually 100% sure that Ametek hasn't had margin expansion due to mix changes.  I don't think it is leverage that I see.

 

My thesis right now on Ametek is that they have pushed up prices too much.  I could be wrong about this but it smells like it.

 

[rkbabang]

If you raise your prices and not see a decrease in sales, that only means that you were irresponsibly charging too little for your product or service.  You have a fiduciary duty (to either your shareholders, family, employees, your employees' families, and/or yourself) to charge what the market will bear.  My question to the CEO that "jacks up"*  his prices and sees no loss of business is "How long ago could you have done this? And why didn't you?".

 

*(you seem to suggest a negative connotation to raising prices just by your language "jack up prices", rather than "increases prices to market levels").

 

[jb85]

You shopped for a box of see's candy lately?  Buffett's main criteria for investing in see's was because he could raise the prices and still get the same amt of sale volume.  he rationale was something a long the lines of "men aren't going to tell their wife on valentines day, 'honey i got you the cheapest box of chocolates i could find"