What Do You Think About Price Increases?

Tyres & Accessories recently asked its diverse readership – comprising of manufacturers, wholesalers – retailers and everyone in-between, what they thought about the recent spate of price increases. For their part the manufacturers claim rocketing raw material prices have forced them into a corner, with regard to end-product price increases. However wholesalers and distributors are likely to feel that these increases are an attack on their margins, which can only be remedied by passing the cost onto the consumer, therefore making retail more difficult.

T&A asked readers: Are price increases a necessary evil, or just the result of prudent financial planning on the part of the manufacturing business? 60 per cent of those that responded put price increases down to the nature of supply and demand, while the remaining 40 per cent said manufacturers had more ‘business orientated’ motives.

While the 60:40 result would appear to clearly vindicate the position of the manufacturer, readers’ thoughts may not have been as clear-cut as they seem. For example, one reader agreed that price increases were inevitable, but questioned the frequency of recent price hikes: “Most manufacturers have now moved production to less developed countries, thus reducing manufacturing costs significantly. I feel that prices should at least have stabilised and not increased by approx. 17 per cent in last 18 months.”

Other readers were more philosophical: “If you want to maintain your margins, you have to increase prices at this point in time,” said one visitor to www.tyrepress.com. Another reader, “Paolo”, defended the manufacturers, and suggested that oil companies were at the root of the increases. “Instead of accusing the tyre manufacturers, we should accuse the oil companies and their allies, including hedge funds and speculators. Sorry for the [consumers] they have to pay,” Paolo wrote.

However, regardless of how the majority of T&A readers voted, the relatively impartial analysts at Deutsche Bank appear to have sided with those that said the manufacturer were over-estimating the effects of increased raw material costs. Of course, stockbrokers have a different take again. While distributors, retailers and consumers may tend to see the negative side of this equation (they all have to pay more), market analysts tend to give the thumbs up to anything that will increase the margins of any company they may consider investing in.

“While much of the price hikes in 2005 went towards offsetting increased raw material costs, tyre industry purchasing execs are beginning to see some relief on raw materials (oil derivatives, steel, carbon black),” said Deutsche Bank analysts in a recent report. In this instance the analysts were referring to Continental, Yokohama and Michelin’s US price increases, however they also believe that European repercussions are inevitable. According reports, the fact that raw materials are traded in dollars has generally made it less important to raise prices in Europe. However, now that US dollar has strengthened against the euro, analysts expect pan-European price increases too.

Despite this, as T&A went to press, Michelin representatives in France announced that they would not increase prices in Europe even though the manufacturer has in North America and Japan.