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Price Increases for Consumers Seem Inevitable, Licensing Execs Say image

Price Increases for Consumers Seem Inevitable, Licensing Execs Say

A sharp rise in costs in nearly every link in the supply chain from factory floor to retail store will drive inflation across many global markets, potentially setting the stage for consumer price increases by fall, according to licensing industry executives.

The magnitude of the consumer price increases isn’t clear yet, although some licensing executives have put it in the 5-10% range. Manufacturing, distribution and shipping costs – the latter having tripled from a year ago to the $5,000-$10,000 range for a 40-foot container – have risen sharply. And those costs, coupled with continued tariffs and a weaker dollar, are making price increases appear likely.

‘The supply chain is being hit on all sides’
“I don’t think there’s any doubt that inflation is inevitable given the economic climate we’re in,” says Concept One Accessories CEO Sam Hafif.  “Consumer products in particular are going to be under increased costing pressure, as the supply chain is being hit on all sides.  Retailers have been struggling to maintain the same retail price points in apparel and accessories that have been in place for over 10 years without erosion to their gross margins. The result is suppliers have been eating the brunt of the cost increases.”

While many suppliers have absorbed cost increases at various points in the supply chain in the past, that option isn’t as readily available given the across-the-board nature of recent jumps. Some housewares and bedding suppliers have already increased wholesale prices, which retailers typically pass on consumers as they try to preserve margins.

Toy vendors will likely increase wholesale prices 5-10% starting this year, which will result in consumer prices rising by the same amount, says Basic Fun CEO Jay Foreman.  Yet on the apparel side, wholesale prices have so far been holding despite the increased cost for the materials such as cotton, says Milin Shah, Senior Vice President and General Counsel at Isaac Morris.

Carrying through to consumers?
Whether price increases will carry through to consumers, to some extent, may vary by retailer. For example,  while Walmart saw “signs of inflation” in “commodity price changes” earlier this year, the retailer is confident it “will work through this to make sure we are offering the best value we can for customers,” John Furner, President-CEO of Walmart U.S., said in March.

But Canadian dollar store chain Dollarama is weighing moving some of its prices into the $4.50-$5 range to offset “steep inflation on the supply side,” CFO Michael Ross told analysts earlier this month. It made a similar shift to $3.50-$4 in August 2016 to offset inflationary pressure, Ross said.

“The attitudes [at retail] are still ‘I need it at this price and you can’t raise it on me,’” says Keith Block, Western Regional President at freight forwarder Transmodal, which handles shipments from China.  “At that point,  who absorbs the increase?  Is it the importer or do they just walk away?  There are going to be discussions very soon where prices are going to have to rise.  Something has to give.”

The U.S. is seen as having a much higher risk for inflation than Europe since the federal government has pumped more cash into the economy than has the eurozone. The U.S. economy, given a rising vaccination rate, is seen as recovering faster than Europe, which slipped into recession earlier this year amid a still-raging pandemic and slow vaccination rate. The U.S. Federal Reserve has said it will tolerate inflation climbing to 2.5% without hiking interest rates.

Looking at the Value of a License
Given the rising costs, licensees are “looking closer” at their gross margins and the relative royalty rates in determining which properties to push more aggressively, says Hafif. Of course, such calculations need to take into account the relative consumer popularity of the properties. In essence, it comes down to whether a property can justify a higher royalty.

Despite the potential for higher prices, sales of licensed branded products will likely be less affected than non-branded items, given the brand equity that’s been established with consumers, say industry executives. But Foreman countered that inflation will likely have little affect on sales of licensed or non-licensed items, provided the products have “value.”

“If the property has value, it will carry any increase and still be in demand from the consumer,” says Foreman. “Kids still want what they know and these are licensed products to a large degree. The fact is that to put a non-licensed toy on TV takes about as much cost as a license adds to the product, so it’s really a wash. For non-branded commodity goods, it’s just factory costs that will go up and need to be passed along.”

But there’s little sign of any relenting in the higher costs. And at this point,  suppliers are paying the higher prices because “right now it is all about allocation, allocation, allocation” in securing placement on container ships, says Block.  And it might be 2-3 years before shipping costs return to pre-pandemic levels, says Block.

“The input costs are at record highs and that, along with all the other increases, is resulting in higher prices,” Robert Kay, CEO at kitchen and dinnerware supplier Lifetime Brands, said last month. Lifetime has licenses for Farberware, KitchenAid and Scott Living. “There is cost inflation that we have been working for a while and we will continue to try to mitigate that through various channels, but that is the reality. Ultimately this will result in higher prices to consumers over time.”

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