Private Equity, Part 3: Bad for Consumers
In a previous discussions about the private equity industry, I’ve spoken mostly about their lack of contribution to growing the economy – since the function of a private equity deal is to provide a sky high ROI to the firm and “partners,” they have no interest in really producing anything, innovating, or creating jobs.
I further believe not only to a lot of private equity deals not help grow the economy, in fact, they help suppress it; companies saddled with huge amounts of debt (no matter what you call it on the balance sheet) have started to sell by the “flinch method” rather than on a basis of materials cost + assembly and distribution cost + reasonable return.
What’s the “flinch method of selling?”
Basically, the strategy goes like this: “oh, they (the public) are willing to pay $XX.XX? Then surely they won’t object to paying $XX.XX more.”
Or so it seems to me, and especially in the food industries, at both the manufacturer and retail level.
This week, I looked at three different outlets of the same (private equity held) grocery chain in three adjacent zip codes. Two of the zip codes could be categorized as “upper lower to middle class” and the third zip code could be described as one of the highest per capita zip codes in the country.
The same products, the same day, the same chain, varied widely in price across the zip codes.
This really doesn’t make sense to me. I queried the chain about this and their less than illuminating reply was “pricing takes many different factors into account.” Hogwash.
From where I sit, it seems like grocery prices go up every week, and I spend a lot of time in grocery stores. There are lots of excuses for this, but the biggest one you’ll hear is regarding the cost of feed for cattle, hogs, and chickens.
Another common “excuse” is massive thinning of herds caused by drought conditions in different parts of the U.S.
2014 is seeing record levels of corn and wheat production; cattle production is only down 1% over last year. For some reason, this enables meat companies to believe they can double the price on cut beef and pork.
Average price of choice beef over the last 12 months was $5.29 per pound, according to the National Cattlemen’s Beef Association. Unless there is a new math, average would be the middle price, which should mean there is beef out there somewhere that’s less than $2.00 a pound.
Damned if I can find it. Around me, it’s difficult to find ground beef for less than around $5.00 a pound, and a “good” steak or roast is going to set you back between $12 – $25. Even former “junk cuts” like “cubed steak,” are ridiculously high.
According to the USDA’s monthly survey of 20,000 + grocery stores, beef prices this month are thus:
Ground Round $4.54 ( year ago $3.34)
London Broil $4.94 ( year ago $3.90)
Eye of the Round $4.83 ( year ago $4.24)
Filet 15.16 ( year ago $7.34)
Holy crap, I was right, as the USDA table also shows prices by week and they ARE going up weekly. No wonder I feel bruised at the cash register.
But even if you look at the annual numbers, increases in the range of 25 % – 100 %? Why?
Greed. Debt. Because they can.
What annoys me the most is that if there is, in the future, a substantial reduction of production costs, retail prices won’t drop proportionately.
Any number of smaller producers, closely-held companies have publicly stated they won’t raise prices if they can possibly avoid it, but we never see this approach from the titans of industry, and I think we should.
I don’t believe the US has turned the ‘economic corner’ yet and a lot of people are hurting. I’d like to see at least one major food company step up to the plate and acknowledge that, and say they are going to try and do their part to help, by holding or rolling back prices.
As a PR move, brand building loyalty move, if nothing else.
A little less profit in the short term ain’t a bad thing. Sometimes industry leaders, who are actual operators interested in truly building businesses, need to take the long view.