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Companies with Pricing Power


handycap5
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I want to start a thread of companies which have emerging or temporarily depressed pricing power.  Concerning the definition of pricing power, Buffett's example of not having to hold a prayer meeting before asking your customers for a price increase will do.  Please exclude cyclical pricing power (i.e. a farmer who today gets more for his corn). 

 

My best example is Federal Express and United Parcel Service.  DHL has exited the US domestic parcel business.  The United States Post Office is loosing money and will be forced to raise prices at some point soon.  A duopoly is emerging in US domestic freight and Federal Express and UPS both say the right things in terms of "yield management" being "the number one priority" and returns on capital needing to improve. 

 

A thoughtful response will be greatly appreciated.  I look forward to the discussion! 

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Girlfriends anyone?  Wives?

 

Not 100% sure, but I would look to luxury goods.  TIF, COH, LVMO, company I work for but won't say, DECK maybe.

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this is going to cause some posts ... i submit a company has some pricing power

 

TPX

 

bought it when it was from 6 to 12

 

How do they keep pricing power when every other mattress company out there has some sort of memory foam bed - Sealy, Serta, Simmons, Spring Air, and SCSS?  I'll grant that they are pricier, but I just figured that they took the high-end luxury part of the market like like what Callaway does in golf clubs or Lacoste in shirts.

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you should read what tpx has been doing, they pretty much raise their price on a yearly bases, a mattress that cost $3000 one year its $3100 the next year doesn't deter many buyers. tpx has the brand name. Its pretty much tpx and everyone else considering what they sell.  the other 3 S's pretty much get lump together, they are all pretty much the same to me, brand wise.

 

i wouldn't buy it at current price (I am not the best when it comes to market timing). there are actually a bunch of company that i believe have some pricing power that are too rich for my blood currently, for exmaple:

 

nflx, aapl, tpx

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I'm not convinced.  They may raise the price of their top of the line products every year, but in order to compete with others they have introduced mid-priced mattresses so they can continue to differentiate the market.  Creating pricing tiers and maintaining/raising prices in the luxury tier, while creating lower priced tiers to fight off competitors doesn't strike me as pricing power.

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roger what is your definition of pricing power? my definition is, if the company can raise their price without affecting their sales much is pricing power.

 

people who have decided on TPX is not going to buy another brand because TPX raise their price by 50 or $100 compare to last yr. There is already a huge price difference btw TPX mattress and others.

 

 

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biaggio - I was thinking that too, but they do lose customers with the higher prices. 

 

Maybe a niche - cigars? 

 

Spirits and Wine? 

 

Still think you are looking at "luxury", high end goods.  Like caviar and Flyers tickets (which only a true epicurean can appreciate)

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roger what is your definition of pricing power? my definition is, if the company can raise their price without affecting their sales much is pricing power.

 

Well WEB uses the See's Candy example.  Every year he jacks up the price by xx cents and the sales keep chugging.  See's doesn't introduce a See's Lite brand at a lower price point to fight off Russell Stover and others.  They just offer one price level.

 

Notwithstanding our disagreement on pricing power, congrats on your TPX buy.  They are a much lower cost mattress company compared to their peers and their spend in marketing allows them to maintain a powerful brand.

 

With regard to pricing though, when was the last time you shopped for mattresses?  There are Serta, Sealy, and Simmons memory foam mattresses which are fairly close in price (couple hundred $) to TPX products and top of the line 3S foam mattresses overlap the TPX mid-line mattresses.

 

I was thinking that ARM Holdings has some fairly strong pricing power with their royalty rate.  But it's not absolute.  They have been raising their royalty rate but if they jacked it up too high then chipmakers would probably balk.  But since their operating margins are robust, most of that royalty rate drops to the bottom.

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I would rather buy companies with well established pricing power.  I have a problem investing in what I see as "fad" type companies.  Coh, Tif, and Deck can go in and out of fashion.  I may get berated for this, but what happens if Apple has a flop?  I have a problem investing with the company with a business model of producing the next greatest thing or keeping up with the latest fad.  What companies provide goods and services that we cannot live without, or would not mind paying a little bit of a premium for?  Who switched from Coke to Sam's Choice durring the recession?  Buffett likes Coke, Kraft, Railroads ect...  

 

Two companies with pricing power that come to mind quickly (not necessarily good investments!) are Microsoft and Southwest Airlines.  Are companies going to continue to pay for the new versions of Windows? You bet.  Southwest can control prices for much of domestic air travel.  

 

I need some time to come up with some more names.  I do agree with Starbucks though, because they are often the only place to get a decent cup of coffee in many communities.  Though I would never buy the stock, NFLX does have pricing power; I'm now paying $9.99 a month up from $7.99 and I'm not sure I was notified of the change!  Am I going to cancel?  No way. Bronco, I apologize in advance for my AAPL comments!

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roger,

 

i don't think see's only sells one product at one price last time i check.

 

also i don't see how often you buy something have to do with pricing power.

 

also don't get me wrong, i never said or think tpx was the best pricing power or it'll last forever.

 

all it comes down to this is very simple. If tpx raises price will it affect their sales much, base on my analysis i don't think so.

 

hy

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I like to follow luxury goods companies. I would say coach is close to the bottom. one of their leather bags costs about $350CDN (not the cloth crap). Ferragamo or a Prada bag will cost over $1000. In terms of price, I think Hermes is a good one, their Berkin bags seem to appeal to the rich and these bags can cost the same as a car. However, I've noticed that Coach's ROE is much higher than Hermes. This is probably because all of Coach's stuff is made in China. It's funny how people will buy those bags with that fabric C all over it. Some of their leather bags are nice though. The women in my life have taught me a lot about these goods.

 

The Buckle seems to have some success selling teen clothing without having to discount too much. They seem to be very service oriented. Fossil's got to be doing something right too.

 

I think that these types of companies are in niches. As long as they don't grow too big, they can be cash cows for years.

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Keep in mind that pricing power is only temporary, those who have it can only lose it. Today it may be Google, but 2 yrs out that will be very diminished unless they can stay ahead of their competitors.

 

The Coy has to offer something unique, but it doesn't have to be the major, or only, seller. The honest guy selling into a corrupt market does well - as his is the only one that is seen to be not ripping off its customers. Nothing to do with price.

 

You need a material & significant barrier to entry, & you need the coy to pay a dividend - as todays price leader is the cash cow that you're reinvesting in tommorrows leader.

 

Cdn charterted banks & rail companies.

 

SD

 

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I like to follow luxury goods companies. I would say coach is close to the bottom. one of their leather bags costs about $350CDN (not the cloth crap). Ferragamo or a Prada bag will cost over $1000. In terms of price, I think Hermes is a good one, their Berkin bags seem to appeal to the rich and these bags can cost the same as a car. However, I've noticed that Coach's ROE is much higher than Hermes. This is probably because all of Coach's stuff is made in China. It's funny how people will buy those bags with that fabric C all over it. Some of their leather bags are nice though. The women in my life have taught me a lot about these goods.

 

The Buckle seems to have some success selling teen clothing without having to discount too much. They seem to be very service oriented. Fossil's got to be doing something right too.

 

I think that these types of companies are in niches. As long as they don't grow too big, they can be cash cows for years.

 

You can't be sure that all luxury brands are made where they say they are...

 

http://www.nytimes.com/2007/11/23/opinion/23thomas.html

 

http://online.wsj.com/article/SB120673913731872739.html

 

http://marketplace.publicradio.org/display/web/2009/02/02/pm_made_in_china/

 

http://online.wsj.com/article/SB10001424052748704240004575085502462249586.html

 

 

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Thanks. Those links were good reads. I'm pretty sure that Hermes also makes stuff in China, or they're planning on moving some of their production over. I'm sure that some of the people that buy these luxury goods only want it to show it off. Some many not even care where it was made.

 

I wouldn't be surprised if all the denim and clothing sold at the Buckle were all made in China, but their merchandise isn't the high end stuff.

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Not sure I agree coach doesn't have pricing power.  There is, after all, a difference between high priced products and pricing power.

 

 

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Very interested in RSG and WM.  Landfills and waste transfer stations are very difficult to permit and build.  Prices have been flat for years because of recession.  One day, these prices are going to skyrocket without a corresponding increase in underlying costs.  Problem for me has always been contingent environmental issues. Thoughts?

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WM has listed environmental liabilities of $1.4 billion as of the the most recent 10-K. The company has produced $1 billion in free cash flow for the last five years. I don't think they will be that hard to swallow down the road. If you factor in inflation the costs go up. With their pricing power I'm sure they'll be able to keep up.

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Thank you for the posts and thoughts.  I must say, however, that I am disappointed that there are not more creative or counterintuitive suggestions.  I am hoping for something like the US railroads in 2004, when pricing power was emerging but not self-evident. 

 

So far we have:

 

The obvious: tobacco companies, cigar, spirits, KO/PEP/DPS, US RR’s.

The debatable: FDX/UPS, THI/SBUX, ARM, RSG/WM, Canadian chartered banks.

The wrong (in my view): MSFT, LUV.

The luxury consumer (I don’t know): TIF, COH, LVMO, DECK, TPX.

 

One more, which I categorize as “debatable,” but I mention because the CEO states explicitly in the annual letter that he believes the company has pricing power, is STRA. 

 

Please add additions. For my purposes, the “debatable” additions are more useful than the “obvious.”

 

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There are a number of businesses that are part of significant market share duopolies here in NA.

 

Construction equipment auction - Ritchie Brothers (RBA) vs Iron Planet (private)

 

Salvage yard auto parts - Copart (CPRT) vs private competitor

 

Organic foods distribution - United Natural Foods (UNFI) vs Natures Best (private)

 

A number of businesses have natural moats similar to landfills, for example, gravel, sand, limestone quarries - MLM and VMC

The pricing power of MLM and VMC may be debatable given a much lower demand level, but overall they have still retained pricing power in certain markets (North Carolina, Los Angeles, Texas).

 

 

 

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