Price Increases to the Rescue

Over the past month we’ve talked to a number of companies regarding their “sales projections” for 2008. Surprisingly, a number of manufacturers talked about sales increases in the high single digits / low double digits. Given that this didn’t compute with industry experts and distributor projections, we asked, “why and how?”

All effectively answered “about 3-4% in price increases, some from new product introductions which we expect to take share, and some from targeting specific customer segments”.

Well, the price increases are coming.

A couple of ElectricalTrends readers have sent us manufacturer price increase notices. While most don’t provide much detail regarding the rationale, the obvious reasons of raw materials and fuel costs can be inferred, and understood.

One manufacturer, after explaining the material and fuel costs went on to elaborate and said “Packaging costs have been on the rise. These include corrugated containers, plastic wrapping, materials, and shipping pallets. XYZ, like most U.S. manufacturers, faces increasing costs in the area of wages and benefits (especially medical). The average increase in health insurance premiums for 2007 was over 6% with no letup expected in 2008.” (seems like too much information – isn’t this assumed annually, and don’t distributors have this annual increase also?)

We also understand that some of these manufacturers are passing on their product acquisition costs from their Chinese manufacturers. Shipping from China has increased, the Chinese VAT refund for electrical products has decreased, and Chinese labor costs are rising. If manufacturing / contract manufacturers increase their costs, the increase will be passed through the channel. (Click here for more on the VAT.)

With the VAT being reduced, and according to some, this could be a major component of a contract manufacturer’s profit, companies may look for alternative sourcing venues, seek to automate operations (if they control their manufacturing in China), or, in the words of one manufacturer, relook at Mexico and/or low-cost U.S. manufacturing areas.

From a distributor viewpoint:

• Presuming the price increases hold, it helps add a little to your profit (a % on a higher number is a higher GP) presuming your salespeople don’t give it away.
• It will be important to make sure that your into-stock pricing is kept up-to-date
• There may be some buying opportunities prior to price increases, but stocking too much without understanding your customers’ needs could leave you with excess inventory (even with low interest rates).
• Unfortunately distributors don’t have the luxury of increasing their pricing (for their service – called “margin”) to recoup operational expenses, hence the need to piggy-back upon manufacturer price increases.

As a sidebar, did you know that China has now displaced the United States as the second largest exporter of electrical and mechanical goods (the category includes household electrical appliances and light industrial products).

So, in a year of slow growth, will price increases provide distributors with their topline growth and a vehicle to capture some incremental operational expenses?

What are you seeing? Will manufacturers realize the full increase? How can distributors benefit?