In this installment of "The Pulse," TLG Research looks at the economic trends influencing third quarter pricing changes for various parts and service categories. Below are TLG’s thoughts on the matter.
Raw material pricing has begun climbing again following a bit of a break this summer. Manufacturers report the combination of raw material costs, pressure for increased staffing costs, as well as more mean significant pressure on margins and, as a result, pricing. The one factor mitigating this issue has been price increase reluctance by customers, especially large programs. Their issues include competing with a group of second lines, which is growing, along with imported products from low-cost markets.
In prior issues, we have discussed the issue of inflation pressures. Here are the factors involved:
· Continuing high unemployment (published rate forecasted to be 7.5 percent through 2013), and feared to be higher given possible impact of the ACA health insurance program
· Price pressure by distributors and consumers alike
· New and expanded low-price entrants to market
· Moderating oil cost and raw material pricing related due to reduced demand
· Any upward growth in the economy
· Given outcome of debt discussions, possibility of higher interest rates to attract investors
· Pressure from retirement plans, money markets, seniors relying on interest-sensitive investments, etc.
· Growing housing prices and mortgage rates
As a result, the real question is: Which set of factors wins out in the year ahead, or is it a draw? According to economists’ best estimates, averaged, 2013 ends up with a 1.7 percent GDP growth overall. Most are calling for 2014 to range from 2 percent to 2.7 percent. Estimates have been off in recent years, though … trending lower than thought.
So, why is this discussion so important? It means a few things for manufacturers, repair service facilities and distributors alike:
1. This is not the time to relax the push to increase prices. This will avoid much larger increases later. Sell value, not price.
2. Watch market share carefully. As is shown when we assist a client in trade-off analysis and more, there is an optimum price at which consumer acceptance, capacity and share all converge. It is mission critical to know where this happens.
3. Assist repair service facilities in creating service packages where any one part is not the subject of scrutiny, and the package is perceived not for price but value.
4. Watch the value lines. On one hand, there appears to be demand where a line doesn’t exist. However, it may cannibalize margins for all in the chain.
In the our Q4 article, we’ll focus on a 2013 wrap-up and look ahead to 2014 with our annual forecast of pricing by major product area.
1. Based on reported pricing of parts to service repair centers
2. Represents change of current quarter over the prior quarter
1. Represents total job repair order price to prior quarter
NOTES ABOUT PRICING CALCULATIONS:
The pricing is based on changes in the current quarter relative to the prior quarter. The data is collected from service repair centers with additional service repair center level pricing information provided by a number of sources. The "Parts Categories" includes only the parts. The "Service Categories" include both parts and labor and is based on the average reported. Pricing is collected in percent change, and is averaged across the U.S. Where needed the data is weighted in order to represent the entire market.
©2013 TLG Research, Inc. All rights reserved