If you raise the price, they'll still come
NEW YORK—The way Americans are chomping Big Macs, lacing up pricey sneakers and gulping peppermint mochas in this economy, you'd think they're taking advantage of big holiday discounts.
The truth is they're paying more.
McDonald's, Nike, Starbucks and other companies initially worried that customers would run the other way when they started raising prices to offset their higher costs for ingredients, fuel and packaging. But so far, cash-strapped Americans largely have swallowed the price spikes. And they're continuing to do so during this holiday shopping season.
On a recent weekday, five full floors of shoppers in a Nike store in New York didn't seem to mind paying more for their favorite kicks, including the almost $200 sneakers named for NBA star LeBron James. At a McDonald's across town, people munched on Big Macs and fries that cost a dime or two more than last year. Customers also piled into a Starbucks down the street, where cappuccinos and many other specialty drinks now top $5.
Timothy and Katrin Sullivan, a San Diego couple, estimate that together they spend about $100 a month on skinny caramel macchiatos and pumpkin spice lattes at Starbucks, where prices on some drinks have risen in some regions this year. As parents of five children, they worry about the economy and have cut back on travel and ball games, but so far their morning cup of joe has survived the chopping block despite the rising price.
"It's cheaper than therapy," says Katrin Sullivan, 39.
The prices Americans pay for food, travel and other things have steadily risen this year, according to government data. Prices went up 3.5 percent in October compared with the same month a year ago. At the same time, every month for the past year except one, spending grew 2 percent or more compared with the same month a year ago. That's given retailers some cautious optimism as they try to gauge just how much more consumers are willing to pay.
Pete Bensen, McDonald's chief financial officer told analysts during the company's earnings call that the question boils down to this: "Is the consumer in a place that we're comfortable we can continue to add price increases?"
Companies of all stripes have been asking that question a lot. In the past year, they've been paying more for materials like beef, corn and fuel that they use to make, package and transport their goods. A combination of poor crop yields in some parts of the world, unrest in the Middle East and greater demand from countries like Brazil and China have sent those costs up.
Many costs have come down after spiking in the spring. A pound of coffee, for example, is trading at about $2.30, down from $3 in the spring. But that's up from $2 a year ago.
As a result, Starbucks Corp. this year raised the price of the packaged coffee in its stores by 17 percent. The company declines to say whether prices on brewed drinks have risen or fallen overall in the past year, since those price decisions vary by region. But generally, the Seattle chain says the prices of specialty drinks like lattes and macchiatos are more likely to have risen this year than simpler drinks.
The price of a 16-ounce grande cappuccino at Starbucks costs about $4.25, up about 23 percent from $3.45 a year ago, research firm Technomic estimates. Meanwhile, a bagel went up from $1 a year ago to $1.25.
That hasn't stopped Starbucks customers from getting their coffee fix, though. Store traffic rose 6 percent in the most recent fiscal year, which ended in October. Revenue at stores open at least a year -- an indicator of a retailer's health -- rose 8 percent.
"We think we are in a very good spot right now," Jeff Hansberry, who runs Starbucks' consumer products division, said in a call with analysts this month.
At Nike Inc., sales rose almost 18 percent in the three-month period through August, even though it raised prices on certain styles this year. Nike hasn't detailed the price increases, but according to research firm SportsOneSource Group, the suggested price of a pair of this year's version of LeBron James' sneakers is about $170, up from about $160 last year. Nike said it expects to raise prices more broadly in the spring.
"We have not seen any big price resistance at all," Charles Denson, president of the Nike Brand, said in a call with analysts.
Likewise, traffic and sales grew after McDonald's raised prices an average of 1 percent in March and another 1.4 percent in May. In the third quarter, guest count increased 2.6 percent. Revenue at stores open at least a year rose 5 percent. (The revenue figure is a snapshot of money spent on food at both company-owned and franchised restaurants. It does not reflect corporate revenue.)
McDonald's won't give details on which items it raised prices on, but Technomic estimates that a Big Mac costs an average of $3.39, up from $3.19 a year ago. A large order of fries is about $1.89, up from $1.79.
And the company signaled that there may be more increases to come. "We will continue to evaluate additional price increases," said Bensen, McDonald's CFO, during a call last month. "As we look into 2012, we expect commodity cost increases in the U.S. to be similar to this year's."
Even if the costs for some raw materials decline, companies are still expected to continue to raise prices during this holiday shopping season. That's because costs for materials are uncertain, so companies will try to raise prices whenever they think customers will tolerate them. Still, they have to tread lightly or risk losing customers.
To be sure, families have trimmed their budgets as the economy plummets. But Americans continue to spend for myriad reasons, even though prices have risen on everything from Coca-Cola soda to Huggies diapers to Ben & Jerry's ice cream.
Some are stomaching the higher prices only on products they need. Others who've cut back on bigger frills are willing to splurge on brands they trust or things they see as small indulgences. Still others are apathetic to the increases because "everybody's doing it."
The weak economy has forced Kenya Leach, a New York actress, to cut back on eating out and trips to the movies and to reconsider her plans to return to school for an anthropology degree. Still, she keeps buying beauty products from Origins, which sells $35 moisturizer and $25 face wash, even though she's noticed those prices edge up by about a dollar per product, by her calculations.
Estee Lauder, the high-end cosmetics company that owns Origins, did not detail its price increases. But CEO Fabrizio Freda said recently during an analyst call that customers have been "resilient" as the company has raised prices and rolled out more expensive products.
Leach, for one, figures it's OK to spend a little more on Origins products because she is cutting out so many other things. "Treating yourself sends off those happy pheromones," says Leach, 25. "When I get really crabby and upset, I'll buy a new lipstick and I'll feel 10 times better."