The cost of goods for all retailers is increasing. To keep their same profit margins, they have to increase their retail prices. Many retailers are looking to gain additional gross profit by raising their retail prices higher than the increase in their cost of goods. For example, if cost of goods increase by a buck, the retail price would have to be raised a buck and a half to increase their gross margin.
In essence, I am saying that the higher general inflation is likely being used as an excuse to increase their retail prices much higher than their costs are increasing. Sure, operating costs are increasing as well (salaries and hourly wages). So to keep the same their operating margin steady, they have to increase their gross margin a little higher to cover both the costs of merchandise they purchase and their increased salaries.
Companies, such as Costco, Ross and TJ Max, would be smart to raise prices much more slowly. For example, raising retail prices enough to cover their increased costs of goods and wages, plus a small increase to bolster operating profits would make them stand out in front of their competition.
Remember, retail is about habit. Once people develop habits, those habits are hard to change. People who try Costco, Ross and TJ Max and are price aware, find out that their goods are substantially cheaper than other retailers. This gets them to be “sticky” customers!
Ross stores, who reported yesterday, showed an increasing trend in sales, but their gross margin and operating margins have decreased. Granted it’s a tough balancing act to perfectly increase retail prices immediately to compensate for increased cost of goods and wages, but at the same time, they are converting customers to their low cost, value proposition. I would call it a “Short term pain with long term gain!” By the way, ROST is up 7% today.
And, when the economy eventually faces a recession, they will be drawing in even more customers during those difficult times. The profit they give up in the short term will be vastly eclipsed by the volume of sales.
The key is to be a well-run and dynamic company like Costco, Ross and TJ Max are.
Remember, value sells!
Be smart, be well-read, be aware and be successful.
