New Zealand outdoor clothing company Cactus didn’t beat around the bush when it came to telling customers about hiking its prices earlier this year.
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RICKY WILSON/STUFF The retail sector gross profit margin is near historic norms, suggesting costs are being passed on to customers.

“Nobody likes a price increase, but sometimes there is no other option,” the email started.

Rather than blind siding customers Cactus wanted to “call a spade a spade” and outline how it sets its pricing and why an increase was necessary.

The email explained how Cactus re-timed how long it took to manufacturer each product and found its timing was a bit off. On top of that wages, freight costs and the price of raw materials had all increased.

It said it had three options:

1-Keep prices the same, and decrease profit margins.
2-Keep prices the same, but decrease the quality of products, so they are quicker to make
3-Adjust prices “so that everyone gets their fair slice of the pie”, and hope that customers stick around

It went with option three.

Cactus founder Ben Kepes says sometimes people don’t take the time to understand price rises.

Cactus prides itself on being transparent and does not want to put prices up by stealth, he says.

“I’m all for consumer understanding and transparency, so people actually know what makes up pricing.”

People may not realise some businesses are having to put their prices up “to keep the lights on”, he says.

He says it was not possible for Cactus to absorb the costs, otherwise there would be no profit left.

The rising cost of inflation is being felt by businesses and customers across the world, and in New Zealand it is at a 30-year high of 6.9%.

Consumer NZ spokesperson Gemma Rasmussen says its research has found the cost of living is now the top national concern, outstripping other issues like Covid-19 and house prices.

The consumer watchdog believes businesses should offer customers clarity regarding price rises or any changes to pricing patterns, she says.

“We would consider this to be good customer service and a fair business practice.”

It is typical for larger scale companies to announce price rises and justifications, she says.

When customers are locked into a subscription service, whether that’s a gym membership or Netflix subscription, the company has an obligation to inform them about price increases.

“Customers shouldn’t be shy to ask businesses to justify a price rise if they feel it is unreasonable.”

If a customer is uncertain about the amount they are being charged for a product or service, Consumer NZ recommends they do a price comparison, to ascertain whether the price they are paying is similar to what other retailers are charging.

Businesses are free to set their own pricing, and it’s not illegal to increase pricing, but the Fair Trading Act prohibits misleading and deceptive conduct, so false reasoning for price increases would be in breach of the Fair Trading Act, she says.

Sense Partners economist Shamubeel Eaqub says most sectors are passing on cost increases to customers, but some sectors will be feeling the impacts of inflation more than others because of the higher input costs they incur.

Stats NZ data for the December quarter shows that in the retail sector the gross margin (total revenue less the cost of goods sold, divided by total revenue) is near historic norms, suggesting cost increases are being passed on, he says.

“The cost of living crisis is very real. Our price increases are similar to many other parts of the world, but the reasons are different,” Eaqub says.

He says in the United States, where inflation is more than 8%, business profit margins have increased, but that is not happening to the same extent in New Zealand.

“By and large we’re not seeing the big increase in profit margins.”

Stats NZ data shows company profits dipped in the September quarter, but returned to historic norms in the December quarter, albeit on the high side.

“I’d say firms are using the inflationary environment to increase prices and protect profits, but not in an egregious way.”

There may be some instances where New Zealand businesses are trying to fatten their profit margins, but Eaqub does not think it will be widespread, because those that do, risk losing market share.

He says most cost of living increases are the result of “cost-push”.

Cost-push results from increases in production costs such as wages and raw materials.

Eaqub says inflation in the construction sector is particularly high because of the high demand for housing, and a shortage of materials and labour.

He says other sectors, such as hospitality, are feeling the effecs of inflation and labour shortages, but prices are not rising as much because demand is not as strong due to the absence of tourists.

He says customers should remain vigilant and not expect prices to rise, otherwise businesses will take every opportunity to raise prices if competitive pressures are not strong enough.

“We should always question.”

Being a small economy New Zealand suffers to a degree from a lack of competition, he says.

Consumers should be “hyper aware” of what is happening with prices across a range of providers, Eaqub says.

“There’s a cost to that, but you should not accept that just because prices are going up, all prices will be going up, because not every commodity has gone up by the same amount.”

Independent economist Benje Patterson says early on in this inflationary cycle price increases generally had a more auditable trail, predominantly driven by commodity prices, supply chain disruptions and labour shortages.

That means much of New Zealand’s inflation is centred on things like construction, food and transport, he says.

However, recently inflationary pressures have begun to spread into pretty much every industry, including those with less justification for raising prices, he says.

Patterson points to Stats NZ’s latest CPI figures which show the price of inflation for “other miscellaneous services”, which includes professions like lawyers, running at 11% a year.

“It seems to me that many organisations in the professional services sector are beginning to take advantage of a higher inflationary environment and relatively high demand for their services to begin pushing through more aggressive price increases in contractual negotiations.”

Eaqub says the pandemic has been “a real bonanza” for businesses and skilled professionals that service “the knowledge economy” because Covid-19 uncertainty increased demand.

Demand exceeded expectations because usually during periods of economic uncertainty people reduce their discretionary spending, he says.

Patterson says the Reserve Bank’s recent Survey of Expectations also indicates that inflation has moved beyond supply chain challenges.

The survey asked recipients where they expect inflation to be in two years time and the answer was about 3.3%.

He says this means businesses still expect to be lifting their prices above the Reserve Bank’s target inflation band of 1% to 3% a year in two years time.

“This sentiment matters, as it builds inertia into what is currently happening, and means that businesses will factor these types of thoughts into their contractual negotiations with customers.

“The persistence of inflation over the long-term in New Zealand isn’t a fait accompli just yet and the last thing we want is businesses to act like it is.”

Global and supply chain factors that have pushed up prices will eventually ease – or businesses will innovate to lessen the burden, Patterson says.

“So what we don’t want here and now is for businesses to act like a high inflationary environment is going to persist over the longer-term. If they do this, then it is going to be that much harder to rein in inflation.”

Businesses have a role to play, particularly larger businesses, and those with stronger balance sheets, or fatter margins that aren’t being squeezed, he says.

They can be a “responsible corporate” and tell their customers that they are taking some of these pressures on the chin and chose not to engrain rapid price increases in longer-term contracts, Patterson says.

He says it’s not such a far-fetched idea.

“These types of movements can have a snowball effect. An initial trickle of businesses getting on the bandwagon can lead to a torrent.

“Businesses that lead the way can garner favour with customers, and may actually win long-term business out of what they are doing.”

If businesses don’t begin to lower their future expectations of inflation, then the Reserve Bank won’t hesitate to act aggressively with interest rates, Patterson says.

Farmer organisations have called the proposed changes to the code of welfare for dairy cattle as big, complex and overly prescriptive.

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