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List of price-setters that can raise price/extraction by 5-10% each year w/o losing customers


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Posted (edited)

Buffett revealed to the Financial Crisis Inquiry Commission in 2011:

Quote

The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.

He has also provided tests for this power:

Quote

‘A couple of fast tests about how good a business is. First question is ‘how long does the management have to think before they decide to raise prices?’ You’re looking at marvelous business when you look in the mirror and say ‘mirror, mirror on the wall, how much should I charge for Coke this fall?’ [And the mirror replies, ‘More’.] That’s a great business. When you say, like we used to in the textile business, when you get down on your knees, call in all the priests, rabbis, and everyone else, [and say] ‘just another half cent a yard’. Then you get up and they say ‘We won’t pay it’. It’s just night and day. The ability to raise prices — the ability to differentiate yourself in a real way, and a real way means you can charge a different price — that makes a great business.’

 

What do folks think are some companies that are not only allowed but also have the power to raise the price/take rate by 5-10% each year for the next 10 years without losing customers? 

Here is a video that talks about the spectrum from price-takers to price-setters: https://www.youtube.com/watch?v=PgDrR2wj_Jc.  

I think we should also include businesses 

  • that have the power to set the price on the suppliers but not on the customers (i.e. monopsony power),
  • that have the power to set their extraction-rate from the economic exchanges flowing through them 
  • that have the power to automatically extract more from the economic-exchanges flowing through them as USD-or-RMB value of economic exchanges increases as money-supply increases

If a business has pricing power today, but might be at risk of losing that power due to incoming competition or regulation, it will be great to call out the specific risks as well. 

Edited by LearningMachine
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  • LearningMachine changed the title to List of price-setters that can raise price/extraction by 5-10% each year w/o losing customers
Posted (edited)

For starters, just name the big guys-- AAPL, MSFT, FB (ads), GOOG (ads), JNJ on some product lines, COST in terms of membership fee (but probably not CPG prices). NFLX for now (remember when they first raised prices ~2010 everyone threw a fit? Then more members joined next year), AMZN in terms of AWS and in terms of squeezing suppliers (although, again not in CPG prices).

Edited by CapriciousCapital
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Posted (edited)

Thanks @CapriciousCapital

What do folks think about the following's ability to raise price by 5-10% each year over next 10 years w/o losing customers:

  • Wireless service providers (scarce spectrum that will go up in demand over 10 years), especially those providers with less price-sensitive customer-base (e.g. VZ), i.e. customer-base for who the wireless-spend is a small percentage of the income
  • Pharma stocks, e.g .MRK, come with regulatory & drug-monopoly-expiration risk
  • Biotech stocks, e.g. XBI, come with regulatory and dotcom-style-bubble risk
  • Tobacco stocks for those who are ok with investing in these - is their customer base shrinking with younger folks?
  • Food brands
    • Brands with their own retail presence, e.g. KR, SBUX
    • Doesn't look like packaged brands have much power over retailers anymore?
  • Other retail brands?
    • SHW: Way over-priced.  It has been already on Morgan Stanley's list of companies with pricing power for years:  https://www.thestreet.com/investing/stocks/morgan-stanley-s-18-stocks-with-big-pricing-power-opportunities-in-low-inflation-html
    • DLTR: This is the one folks would least expect to have pricing power because of their price-sensitive customer base & fixed 1 dollar price-point.  However, they have no competition at $1 price point, which they are saying they have maintained for 35 years with good margin by changing SKU-mix, product-sizes, etc.  They are now introducing higher price-points with Dollar-Tree-Plus, growing store count with Family-Dollar-Dollar-Tree combo stores and successfully raised price-point to 1.25 many years ago in Canada.  However, I still doubt they will be able to raise every year?
  • Railroads (scarce easements) - maybe not 5-10%, but follow inflation
  • Pipelines for products that will not go down in demand over 10 years (scarce easements) with low debt = maybe not 5-10%, but follow inflation
  • Others?
Edited by LearningMachine
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Great topic, especially given the likelihood of inflation in our future with all the money printing. Definitely low capex CO's given rising input and labor costs. High ROIC companies with high Free CF. Shale drillers would be the exact kind of long tail, high cap ex CO's to avoid.

I agree with MSFT above because they will be central to so many businesses life in the cloud now with all the adoption of Office 365, and FB because of coming monetization of products like What's App and Messenger. AAPL may face big push back on 30% commissions for app store and devices are already big price points where others are becoming less expensive.

Payment systems that live off the vig. ( V, MC, AXP to lesser extent, PYPL, SQ maybe)

Drug companies I am not so sure with gov't payment systems expanding and price regulation.

More to come....

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Sports teams, Concerts, Theme parks. 

Guess what happened to Knicks and Rangers ticket prices from 2007-2011? Peak to trough for pretty much everyone else? Yea, they went wayyyy up. Good to have a massive waitlist of largely price insensitive customers. Six Flags prices during that time frame also increased a good bit. 

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Wireless doesn’t have a whole lot lot of pricing power, imo. The product is not differentiated and people care more about the iPhone experience than the wireless carrier. There are indeed efforts to make the network operating underneath completely invisible ( Google Fi or MVNO’s). I am with an MVNO and pay less than $20/ month for wireless on ATT.
 

I think subscription services that offer a good value proposition are a case where price increases will be tolerates, especially if the value proposition from a Customer perspective improves over time. Examples mentioned already are Netflix and Costco.

Many software companies have customer retention rates exceeding 100% which means that customer pay more for typically enhanced or expanded offerings. This may not be a straight price increase, because the customer gets more for the higher price, but the unit economics of this are very favorable, so it’s almost the same thing from a business perspective.

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Posted (edited)
3 hours ago, Spekulatius said:

Wireless doesn’t have a whole lot lot of pricing power, imo. The product is not differentiated and people care more about the iPhone experience than the wireless carrier. There are indeed efforts to make the network operating underneath completely invisible ( Google Fi or MVNO’s). I am with an MVNO and pay less than $20/ month for wireless on ATT.

@Spekulatius, I agree the product differentiation is not that strong.  However, I think once people choose to pay more for something over something else, they develop a feeling of loyalty towards it.  I'm not sure why human neural nets work that way, but maybe to rationalize why they paid more, and they continue doing that in the future.  Hence, my posting of the question to Verizon subscribers in the other VZ thread :-).

Also, the way I think about rights to cash-flowing spectrum is similar to the rights to cash-flowing scarce easements (aka. railroads; pipelines to some extent), similar to rights to exclude others from boundaries drawn on land (aka. real estate), and somewhat similar to rights to oil-wells.

That is an important viewpoint because the total spectrum is limited and only divided among three players, and where one-player has customers who have somehow developed a loyalty to pay more to it than other players.  Imagine:

  • All developable land in the U.S. was owned by three players, who licensed/rented homes to consumers.  On top of that, imagine one of the players was charging more than the other two players and somehow people convinced themselves to pay more to that player, e.g. for "homes with cleanest indoor air."
  • All farmland in the U.S. was owned by three players, where all farms sold directly to consumers.  On top of that, one of the three players charged more and had a clear brand and reasons for charging more, e.g. "most organic food".
  • All oil resources were owned by only three players, where all oil companies sold directly to consumers.  On top of that, one of the three players charged more and had a clear brand for people to attach to and gave reasons to justify why, e.g. "cleanest burning gas."

So, I think you have multiple drivers of pricing power:

  • (1)  the overall resource is scarce, becoming more in demand year-over-year (VZ added 10 million incremental cellular IOT devices over last year, and number of IOT devices is compounding at double-digits year-over-year - long runway to get to AI bots buzzing around)
  • (2) the overall resource is owned by a cartel of three companies that don't lower prices even if resource is not fully utilized, unlike oil.  Sure, sometimes, they may let MVNOs use a part of it (usually accessed at a lower priority than premium customers), but the resource-owner sets the price and can increase in the future. 
  • (3) there is some small amount of perceived differentiation created by one of the players by charging more (based on some actual differentiation in some cases).
  • (4) the percentage of high-end consumers' income used for this is still miniscule

That said, @Spekulatius, please keep your opposite thoughts on this coming. It is really helpful. 

Edited by LearningMachine
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4 hours ago, Gregmal said:

Sports teams, Concerts, Theme parks. 

Guess what happened to Knicks and Rangers ticket prices from 2007-2011? Peak to trough for pretty much everyone else? Yea, they went wayyyy up. Good to have a massive waitlist of largely price insensitive customers. Six Flags prices during that time frame also increased a good bit. 

What about MSGE to take a cut of concerts and benefit in the future from "sphere" tourist attractions?

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The Sphere is your real ? with MSGE, otherwise its a really simple/easy/no brainer investment at the current valuation. But throw in the ambiguity with the Sphere economics(so in brief, I cant give you a good answer relating to your question on splits), massive construction costs being incurred/to be incurred over next 2 years, and Dolan forging ahead with London....and well its much less no brainery but still something I find quite attractive. The Sphere is basically Mars as far as comps go. No one has really done anything like it before, so you cant comp it. But MSGS is your sweet spot if you just want something easy. Discounted sports team and while E takes the rents from S, S ultimately has the more direct benefit of pricing power on tickets. That said, both are kind of high multiple hard asset type investments. Sports teams just dont trade at anything reasonably derived from a P/E or P/S. But inflation protected they are. 

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Look into aggregate business, Vulcan and Martin Marietta.  They set the price but demand is up to the market.  Vulcan increased price for rock, sand, and gravel after the GFC when industry volume fell 40% 

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Paraphrasing the question posed, I would argue that there are two distinct segments of businesses that can increase prices without worrying about customer attrition - i) businesses offering a rare/branded product; ii) businesses so intertwined into the lives/businesses of their customers that the cost of changing the supplier outweighs the increased costs.

For the first part, I would argue LVMH (MC.PA), CTF (1929 - HK), Richemont, Kerring, maybe even Hermes, Titan in India, Swatch Group all would be these types of businesses. I honestly believe that in all these businesses, the consumer is more attracted by the brand than the product, so the pricing power is with the brand and the business can extract additional value. I would also add high end luxury yacht manufacturers, luxury homebuilders and any other luxury product.

For the second part, AWS, MSFT have been mentioned. I would add SAP, Salesforce. There are probably other software names, but I am blanking. The anecdotal example I have is a friend running his entire business on SAP, he tied down because he has spent tons of money building up a team/reorganizing modules to fit his workflow/teaching non-IT employees about the system. I dont see a scenario where he can willingly leave SAP. 

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When I think of pricing power, I think of inelastic demand of customers. (I'm looking at it more from the customer decision-making side than the supplier competition side.) I think customers tend to have inelastic demand when there are no good substitutes, or when the cost is small compared to their income, or when there are other costs to consider, like switching costs.

A lack of substitutes might be caused by monopoly (no good alternative), brand (including the signaling value), or significant perceived quality difference. I'm using the word "monopoly" loosely here in order to include companies that make a product that consumers consider differentiated enough that they feel there are no real substitutes. Under this loose definition...

Monopoly: AAPL, pharma (patents), MCO, SPGI, MSGE, MSGN, FICO, GOOG, EBAY, NTDOY, whatever media company has the must-watch show?

Brand: luxury goods, consumer packaged goods, KO, NKE, MSCI, V, MA

Perceived quality difference: FB, CMG, TSLA, HSY, SBUX

Switching costs: AMZN, MSFT, CRM, cable companies and banks to some degree?

I'm sure others can add to these lists and/or correct me where I'm wrong.

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On 5/30/2021 at 3:55 PM, LearningMachine said:

@Spekulatius, I agree the product differentiation is not that strong.  However, I think once people choose to pay more for something over something else, they develop a feeling of loyalty towards it.  I'm not sure why human neural nets work that way, but maybe to rationalize why they paid more, and they continue doing that in the future.  Hence, my posting of the question to Verizon subscribers in the other VZ thread :-).

Also, the way I think about rights to cash-flowing spectrum is similar to the rights to cash-flowing scarce easements (aka. railroads; pipelines to some extent), similar to rights to exclude others from boundaries drawn on land (aka. real estate), and somewhat similar to rights to oil-wells.

That is an important viewpoint because the total spectrum is limited and only divided among three players, and where one-player has customers who have somehow developed a loyalty to pay more to it than other players.  Imagine:

  • All developable land in the U.S. was owned by three players, who licensed/rented homes to consumers.  On top of that, imagine one of the players was charging more than the other two players and somehow people convinced themselves to pay more to that player, e.g. for "homes with cleanest indoor air."
  • All farmland in the U.S. was owned by three players, where all farms sold directly to consumers.  On top of that, one of the three players charged more and had a clear brand and reasons for charging more, e.g. "most organic food".
  • All oil resources were owned by only three players, where all oil companies sold directly to consumers.  On top of that, one of the three players charged more and had a clear brand for people to attach to and gave reasons to justify why, e.g. "cleanest burning gas."

So, I think you have multiple drivers of pricing power:

  • (1)  the overall resource is scarce, becoming more in demand year-over-year (VZ added 10 million incremental cellular IOT devices over last year, and number of IOT devices is compounding at double-digits year-over-year - long runway to get to AI bots buzzing around)
  • (2) the overall resource is owned by a cartel of three companies that don't lower prices even if resource is not fully utilized, unlike oil.  Sure, sometimes, they may let MVNOs use a part of it (usually accessed at a lower priority than premium customers), but the resource-owner sets the price and can increase in the future. 
  • (3) there is some small amount of perceived differentiation created by one of the players by charging more (based on some actual differentiation in some cases).
  • (4) the percentage of high-end consumers' income used for this is still miniscule

That said, @Spekulatius, please keep your opposite thoughts on this coming. It is really helpful. 

I just "cut the chord" ( really migrated to another) with comcast, and reupped with VZ for FIOS internet only. Youtube tv + NFLX, + D+, HBO, etc. Saved $2700/yr btwn 2 houses and got faster speed.  Would do and have done so in the past with wireless.  Creative and streaming services are much stickier and will have some pricing power me thinks but input costs will rise as well. Advertisers are clamoring for inventory now and prices are rising for same.

In terms of the three players analogy, read up on FNMA and Freddie before they became wards of the state. Even though they had Oligopoly powers, they competed away the G fees down to absurd levels pre 2007-8.

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15 hours ago, IceCreamMan said:

When I think of pricing power, I think of inelastic demand of customers. (I'm looking at it more from the customer decision-making side than the supplier competition side.) I think customers tend to have inelastic demand when there are no good substitutes, or when the cost is small compared to their income, or when there are other costs to consider, like switching costs.

A lack of substitutes might be caused by monopoly (no good alternative), brand (including the signaling value), or significant perceived quality difference. I'm using the word "monopoly" loosely here in order to include companies that make a product that consumers consider differentiated enough that they feel there are no real substitutes. Under this loose definition...

Monopoly: AAPL, pharma (patents), MCO, SPGI, MSGE, MSGN, FICO, GOOG, EBAY, NTDOY, whatever media company has the must-watch show?

Brand: luxury goods, consumer packaged goods, KO, NKE, MSCI, V, MA

Perceived quality difference: FB, CMG, TSLA, HSY, SBUX

Switching costs: AMZN, MSFT, CRM, cable companies and banks to some degree?

I'm sure others can add to these lists and/or correct me where I'm wrong.

Thanks @IceCreamMan.  You listed "FB" under "Perceived quality difference".  I'm curious to learn the reasoning behind that. 

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14 minutes ago, LearningMachine said:

Thanks @IceCreamMan.  You listed "FB" under "Perceived quality difference".  I'm curious to learn the reasoning behind that. 

I'm guessing businesses that advertise on Facebook would consider alternate channels/networks to be significantly inferior (i.e. not suitable substitutes). Maybe users, too, have a similar feeling. But, I have no idea.

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On 5/30/2021 at 5:45 AM, CapriciousCapital said:

For starters, just name the big guys-- AAPL, MSFT, FB (ads), GOOG (ads), JNJ on some product lines, COST in terms of membership fee (but probably not CPG prices). NFLX for now (remember when they first raised prices ~2010 everyone threw a fit? Then more members joined next year), AMZN in terms of AWS and in terms of squeezing suppliers (although, again not in CPG prices).

I wouldn't put Amazon for AWS in there.  Maybe for Prime membership but pricing at AWS has come down rapidly, pressured by Azure, Google and all the other wannabes.

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On a broader note, I'd add any of the large scale enterprise software companies that are almost impossible to move off of even if you hate the supplier.  Salesforce, Oracle, SAP, Workday, even IBM on many products (customers still using green screens because it's too difficult to switch).

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  • 2 weeks later...

Keep having to remind myself to give a larger mental weight to pricing power for protecting downside

 

Interesting that some of these I wouldn't really consider to have that much pricing power as they are more like exchanges capturing a percentage of the value of running through a marketplace (GOOG/FB) where raising the % is probably difficult now so it's more like their revenue floats with a market.  Charging a % of value toll on a bridge is still a great business though

 

The most knowable pricing power co's are heavily weighted toward a pretty small part of final product cost SPGI/MCO, VRSN, V/MA, KO/KDP, UNP/NSC, MSFT, INTC, Booking

 

In addition to the aggregates names other natural monopolies due to transport costs would be cement (EXP/MCEM) or long lead time products (MGPI) or locked into long life designs (aerospace suppliers) or some semblance of customer switching costs (AXTA's refinish business)

 

It's kind of striking how much some aspects of these lists change over time... 20y ago IBM would have been top of mind and would have a lot more consumer packaged brands before online reviews killed a lot of their pricing power by easing new product discovery so much.

 

Any businesses that are understood to have terrible pricing power that are improving secularly now?  Thought airlines until recently.

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Posted (edited)
1 hour ago, pricingpower said:

20y ago IBM would have been top of mind and would have a lot more consumer packaged brands before online reviews killed a lot of their pricing power by easing new product discovery so much.

 

@pricingpower, I've also been thinking about loss in pricing power of consumer packaged brands because of online reviews. Because of this ease in product discovery, brands with pricing power today can quickly lose pricing power in the future.   

 

However, I am thinking for some specific categories, people might happily pay more even with access to reviews.  One such category might be food brands. 

 

However, packaged food brands have lost their pricing power due to another reason, i.e. retailers have consolidated market share and can squeeze these packaged food brands with their monopsony power. 

 

However, what about food brands owned by such retailers, where the food brand stands for quality not for cheap price?  For example, what do folks think about Kroger? 

 

How much can Kroger raise prices before consumers start looking at competition?  Munger was a big fan of Tesco because Tesco had a lot of its own brands with pricing power, but Tesco then lost market share to Aldi & Lidl.  Here, I wonder if Kroger will still eventually lose market share to Trader Joe's & Amazon Fresh on the high-end, and Aldi & Lidl on the low-end, especially if Kroger tried to exercise pricing power, even during inflationary times? 

 

Edited by LearningMachine
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@LearningMachine agree with you on the foods bit, but not so much in terms of the stores. Just personally, I used to shop at Tescos when I lived in London, but that was partially due to it being the closest grocer to me. I think the food products itself may be more valuable. I mean just thinking about the ice cream category - Ben & Jerry's has a tremendous following, if they were to increase their prices by 20c, would it really change peoples buying habits? How often they could increase prices is a question because there will be some demand elasticity, but certainly upmarket brands in the food space should be able to do so.

 

Has anyone considered NFLX in this category? I dont know if they can repeatedly increase prices year on year, but certainly looking at the prices all the other streaming services are now asking for, NFLX is value for money.

 

 

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10 hours ago, ANP301191 said:

@LearningMachine agree with you on the foods bit, but not so much in terms of the stores. Just personally, I used to shop at Tescos when I lived in London, but that was partially due to it being the closest grocer to me. I think the food products itself may be more valuable. I mean just thinking about the ice cream category - Ben & Jerry's has a tremendous following, if they were to increase their prices by 20c, would it really change peoples buying habits? How often they could increase prices is a question because there will be some demand elasticity, but certainly upmarket brands in the food space should be able to do so.

 

Has anyone considered NFLX in this category? I dont know if they can repeatedly increase prices year on year, but certainly looking at the prices all the other streaming services are now asking for, NFLX is value for money.

 

 


I disagree. Anecdotally, I’ve been slowly changing to WalMart Great Value products ever since they were packaged white label. Personally I think they should ditch the Great Value mark on the labels & let the designers do their job.

 

I’m a huge peanut butter lover & changing from Jif Extra Crunchy to Great Value was a big step, but now I’ll never go back unless the private label (PL) product price becomes uncompetitive or the quality goes down against national brand (NB).

 

We’ve all noticed how bare the shelves have been since the pandemic began & I’ve further noticed that nationally branded products seem to be less picked over than many of the store brands (here’s a few I go off brand; chips, soft drinks, peanut butter, condiments, frozen pizzas, canned tuna, coffee creamer, canned veggies) & they’re mostly sold to minimal stock levels. This could mean that the national brands are selling better & WM keeps them stocked to meet demand, but I doubt it.

 

There are some categories that simply don’t measure up in PL. Cheese for one. I’ve tried PL product and it’s crap. I also haven’t found replacements for Sweet Baby Rays BBQ sauce, Bon Mamaan Wild Blueberry Jelly, Bernards & locally produced honeys, Mae Ploy Chili Sauce, Sambal Sauce & Sriracha. I’ll also likely remain loyal to my beer, wine & rum favorites.

 

There’s a plethora of articles from a variety of sources & here’s a few that I thought were interesting from different perspectives.


https://www.supermarketnews.com/private-label/plma-private-brands-uphold-market-share-despite-pandemic

 

https://cadentcg.com/wp-content/uploads/2019-Private-Label-Industry-Study.pdf

 

https://thedieline.com/blog/2021/3/18/pearlfisher-talks-about-their-work-on-private-label-brand-paperbird-and-its-whimsical-identity?


—-

 

I think the pandemic will result in a significant shift to private label.
 

 

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15 hours ago, ANP301191 said:

I mean just thinking about the ice cream category - Ben & Jerry's has a tremendous following, if they were to increase their prices by 20c, would it really change peoples buying habits? How often they could increase prices is a question because there will be some demand elasticity, but certainly upmarket brands in the food space should be able to do so.

 

@ANP301191, the key question is who does that 20c increase go to?  When a grocer has above 30% market share, they can say to Ben & Jerry's, say good-bye to 30% of your sales unless you are going give this to us at 20c cheaper next year.  As grocers have consolidated market share, they have built monopsony power which eats away at the pricing power packaged food brands used to have themselves. 

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@DooDiligence - appreciate the point. Maybe I havent been clear enough in my example. But the reason I prefer the product rather than the marketplace is because I see "luxury" as being more about product and product identity. What I was trying to convey in my example with Ben & Jerry's was the luxury product in market "x" should have the ability to raise prices if its product is truly luxurious and specifically sought after. Perhaps the regular food categories are not the right place for this example, maybe I should have focused more on the Wine/Champagne categories or other niche products.

 

@LearningMachine - I agree, if the grocer has such a large % of your sale under his control, then you are by all means more dependent on him than he is on you and so he can take a huge chunk of any price increase. I just dont think that a brand or a product that is so sought after should ever find itself in such a weak position, but undoubtedly it has probably happened and will probably happen again.

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