Bump em because of tariffs, bump em some more to pad the margins because what is an extra 5%, bump em even when they're not affected by tariffs because everyone else is doing so, and delay un-bumping them once tariffs fall again.
People have a hard enough time understanding who pays tariffs. Stores'll be able to muddy the waters this way pretty much at will.
Stores often sell common staples like bananas, generic milk, and other basics at close to cost. They’re the things that get people in the door. They make their profit on things like cereal, deli meats, packaged goods, and other non-staple items that people also buy once they’re inside.
It’s similar to how many gas stations compete on cost of gas to get people there, but hope that you’ll stop inside and get a $6 drink or some $5 packaged snacks.
Then you have to consider all of the other things that go into a store are also tariffed. The parts for the trucks that transport the bananas have tariffs. Many of their cleaning supplies. Parts for the checkout registers. The light bulbs they have to replace. Many of those tariffs could be well over 100%. They have to make up that price in the cost of bananas and everything else.
I’d happily take 2-3% margins of their $11B in revenue (2020 per Wiki).
If tariffs increase the wholesale cost of an item by $1, but you can make consumers think $5 retail is what the increase should be, that’s an extra $4 in your pocket.
Economics education doesn’t stop at 101 for a good reason. “Supply and demand” is like “veins carry deoxygenated blood” - it’s largely true, but further learning reveals complexity.
Supply and demand is impacted by many factors, but it’s still supply and demand.
You can put different labels on different components of the influences, but at the end of the day it’s still supply and demand.
What a pity we accidentally gave Nobel prizes out for things like game theory, then.
Supply and demand isn't the only thing that exists, but basically everything else feeds into and informs it. It isn't the only starting position, but you can reach basically any point from it.
People should remember that it isn’t just the corporations who raise the price that are at fault, it is the people who are unwilling to go without it when the price is overinflated. Yes, then we nit-pick into things like medical necessity and … thus back to the point that it is both supply and demand, and not.
Revenue =/= profit. OpenAI has similar amount of revenue, but is nowhere near profitable.
>I certainly don't doubt they've purchased other investments with the proceeds over time, but they're making plenty.
The point isn't what they did with the profits, it's whether the profits are commensurate with the capital they put in (ie. return on equity).
I’m well aware. The assertion that gets made is “oh they’re low margin!” They are. But they have massive volume. So they make lots of money still.
> The point isn't what they did with the profits, it's whether the profits are commensurate with the capital they put in (ie. return on equity).
Well, they certainly didn’t start as billionaires a hundred years ago. The profits seem fine.
I’d be very happy to be in the business of selling $1 bills for $1.02, if the customer base is big enough.
"Many grocers earn more profit from agreeing to carry a manufacturer's product than they do from actually selling the product to retail consumers."
Of course, I didn't know this, which was very weird when I saw someone those stocking shelves, only to be met with a 'sorry, I don't work here' response when asking them a question.
Yes. But the tariffs are on the import price, not the shelf price.
The shelf price went up as if it were on the shelf price, because consumers won't realize/understand the distinction. (Hell, a good proportion of the population still thinks someone else eats the costs entirely.) We saw the same thing during COVID - "it's because of COVID / supply chain issues" was the magic wand you could wave around to raise prices. Some of those increases were warranted, for sure. But all? Almost certainly not.
The prices before these tariffs were arrived at by some confluence of factors such as cost and competition, it wasn’t some universally agreed “fair pricing” scheme that determined them. So what does it mean for a price to be warranted?
Now businesses have to raise prices because of the aforementioned tariffs, and, you speculate, they will add some extra margin because they think the customer is primed to accept higher prices right now than they’d normally be.
First of all, is that the end of the world? If this is only made possible because the wool has been pulled over the customer’s eyes, then at some point there will be a correction in the other direction - unless you’re saying that there is actual and widespread price-fixing (which is illegal and enforced as such). This particular mechanism on its own won’t cause prices to spiral out of control or anything.
Secondly, even if you think it is bad and don’t want it to happen, how would you prevent it? I can’t come up with a single feasible approach that isn’t basically halfway to socialism (which is fine if that’s your preference, but then that’s a larger conversation).
In this case, I believe many companies raised pricing more than they needed to, because people misattributed the source of those increases. If, say, ice cream doubled in price in normal times, people would cry foul. COVID gave an ironclad excuse.
> unless you’re saying that there is actual and widespread price-fixing (which is illegal and enforced as such)
I see very little evidence of this. We're great at innovating new ways to price fix without attracting (or successfully fighting off) regulatory attention.
Like outsourcing the price decisions to a third party…
https://www.propublica.org/article/senators-introduce-legisl...
https://www.reuters.com/legal/government/data-company-agri-s...
So the one is necessarily influence by the other. I'm not sure where the breakdown in your understanding is. Trying to make a distinction doesn't really make sense. Somebody IN THE UNITED STATES is taking the brunt of this. More often than not, it will be the end-consumer.
"We saw the same thing during COVID" hints that you might understand the larger picture. You're on the right track: This comes down to supply chain costs.
And i know i simplifying things A LOT here.. but that is the mentality behind it..
When crude oil price go up then gas station raise their prices because they know next they they buy it will be more expansive and they will need more money to afford it, so they raise their prices prices immediately..
On the other hand, if crude oil prices drop, it means that next time they buy it will be cheaper, but the gas they currently have was expensive, so they need to keep the prices up to recover what they already paid for it..
If I bought a gallon of water for a dollar and then there was a terrible water shortage I would not let it go for two dollars
Everyone does this. If someone was trying to sell their old car and they saw news of upcoming tariffs on cars, they’d expect to sell their car at a higher price even though the tariffed cars haven’t arrived yet.
A second factor is that volatility and unpredictable policy raises risk, which increases prices. There will be a lot of price increases in excess of base tariff rates simply because everything is changing rapidly on the whims of this administration and businesses need more buffer for unexpected shocks.
If you’re a company who set up manufacturing in China, placed orders 4 months ago, and you’re watching the tariff rate change from 65% to 125% or more in the span of days with threats of more, you have to increase your prices a lot to have more buffer. Those parts you ordered now have an unpredictable price tags attached when they arrive at the port. It’s completely out of control.
In Japan the US Military buys fuel and sets the price at its on base stations according to what they purchase it for. On several occasions when I lived there this resulted in the Base CO having to address everyone and tell them if they don’t buy the fuel (that is now significantly cheaper outside the gate) then the Exchange cannot buy new fuel, and they may have to shut the station down permanently.
It never came to that; everyone just went and paid the higher price for a tank and the issue was resolved.
My point is that trying to price a commodity that moves prices like that by a lagging indicator is a great way to capture business on one side and a great way to go bankrupt on the other.
The price will rise until it gets high enough that the product of sales * price falls.
It has always been that way. Businesses haven’t been selling goods and services out of the goodness of their hearts at an arbitrary price. It’s always supply and demand.
Tariffs are expected to reduced demand because they increase prices. This is why the stock market is down and nearly every economist is calling the tariffs a big problem. Companies won’t have room to raise prices infinitely because they feel like it, because consumers are about to be able to afford fewer things because the things they need are getting more expensive.
In the current circumstances, though, companies do not have a choice to lower prices. The basic cost of taking an item into inventory from these suppliers has risen significantly, in most cases well above 2024 margins.
The net effect is that, despite the market's best effort to correct prices to within an affordable range, costs may rise considerably and availability may still fall regardless. Under severe shock to the system, the usual maxims that account for nominal shifts in day to day trading no longer apply.
Then supply and demand reach equilibrium.
Supply and demand doesn’t mean that either or both supply and demand remain constant. Both supply and demand change depending on the price.
But that's a massive oversimplification. It's like saying programming is "just typing". Technically, sure; accurate, no. There's latency in the real world. Bad actors. Information asymmetries. Regulations. Monopolies. Stuff you can't do without and can't even always decline (ambulance ride for an unconscious person). Fake news about a supply crunch changes demand without changing supply for a while.
One of the primary reasons for combination in low-margin markets is to gain pricing power. And even if there are 2-5 entities in a given market, informal price collusion is far from unheard of.
If OP wants an intro to the determinants of price elasticity, starting here would be a good idea: https://en.m.wikipedia.org/wiki/Price_elasticity_of_demand
It's especially galling because if markets actually worked this way, then central planning would work as well.
"The price went up 10%, that must be the 10% tariffs" is something consumers will inherently understand… but it's not the case. The 10% is not on the on-the-shelf price; it's on the wholesale price the importer's charging. The $20 shirt at Old Navy is probably $4 (with $0.40 in tariffs added) for tariff purposes… but they'll add $2 to it anyways, because consumers will go "oh ok". There's a massive information asymmetry here.
The unpredictable nature of these specific tariffs is fairly unique, too. The rates change randomly, with zero warning, and how they're set isn't sensical. With ships across the ocean taking weeks, that's gonna chill the supply side as well.
1. The average apparel retail store margin is nominally 50%, but half of that margin is given back to the consumer for their ubiquitous sales. So that $20 shirt costs the store $10, but the average selling price is actually $15. So if they directly pass through the 10% tariff, it adds $1 to the average $15 sale on that $20 shirt.
2. Increased prices reduce sales. Non-product costs are fairly fixed, so just passing through the tariffs will have a significant impact on store profitability. Retail stores are going bankrupt left and right in this Amazon age. They don't have the capacity to absorb increased costs, if they don't pass them on they'll just go bankrupt more quickly. So that $1 in tariffs turns into a $1.50 price increase.
"You can see that the money runs out before the month is gone, you can see that people are buying smaller pack sizes at the end of the month," McMillon said.
They do need to eat, but they are eating less - and not by choice. They don't have the money to buy what they want to. No amount of advertising will fix that.
People think they're saving money that way. They often aren't.
Being poor is expensive!
I would humbly suggest that you start engaging with more poor people and help educate them. (And I don't mean shouting advice as you walk by)
Everything after that is preference substitution.
This doesn't invalidate consumer demand. People judge society and ultimately governments based on if they are able to obtain their preferences.
My approach was a little more engineered than most people's would be, but definitely possible if maybe you expanded it to $3/day or $4/day.
There was never any risk of any of those things, and if anything the diet proves out the quality of our understanding of nutrition.
Rice is $20/25 lbs, and 1600 calories/lb for 2000 calories/$
They are 6.5lbs after deboning. Cooked chicken skin on is 950 calories per pound. That is 620 calories/$.
Tortillas themselves are 110 cal, and 4.99 for 100ct, or 2200 cal/$
Normally I'd make a joke about econ 101 but I'm pretty sure you'd lose points for answering with this in an econ 101 class
True, but human psychology is a huge confounding factor. One area where this is evident is gas prices that "go up like a rocket, and come down like a feather" in response to crude oil prices. Simple supply and demand does not explain this.