Nike's Brand Strength: A Round Of Prices Increases

Not many things test a brand’s strength more than a price increase. Nike (NYSE: NKE) said it will increase what it charges for most products by 5.2% because of rising costs for materials including cotton and rubber. Nike’s decision is easy to defend in the name of profit margins and shareholder returns. Its  shares have risen over 80% in the last two years, significantly outperforming the DJIA. Management does not want to see those gains fall away.

Many Nike customers will not notice the increase. How many consumers can tell that a pair of sneakers that cost $40 yesterday now cost $42? Nike can also gamble that its customers are not value shoppers like the people who buy cheap shoes at Wal-Mart (NYSE: WMT). Still, it would be a mistake to believe that all consumers shop without regard for price. Nike will have to hold some customers through the strength of the brand’s appeal to consumers that goes beyond price.

Nike has the same problem that hundreds of other companies do. The cost of commodities used in its products have risen. The price of oil used for transportation is up sharply. Nike will have a drop in margins if it does nothing. Its new decision carries the alternative risk of a fall in revenue if consumers turn away from the brand. Nike is caught between two courses each of which has the chance of being wrong.

Nike is one of a relatively small number of brands that could weather the current cycle of inflation without much harm. Nike is the top company in its field for a reason. Consumers believe that the firm makes better shoes. Moreover, Nike has been a magician as a marketer. It has enlisted famous athletes which stretch from Michael Jordan to Tiger Woods. The shoe firm is about to find out whether the “brand equity” it has bought in the marketplace has value.

Starbucks (NASDAQ: SBUX) raised some prices recently. The cost of cocoa and sugar have gone up. Starbucks wants to protect its margins asNike does. There are no reports from analysts who cover Starbucks that the increases in prices have  hurt sales.

A number of companies will need to raise prices over the coming months. They are likely to include McDonald’s (NYSE: MCD), Apple (NASDAQ: AAPL), and Exxon Mobil (NYSE: XOM). Most consumers and businesses have to buy gas, so Exxon may have some protection as long as its dealers do not use the rise in oil prices to push pump prices above those at stations run by less well-known oil companies. McDonald’s and Apple have to overcome a harder problem. People can prepare food at home. Consumer electronics buyers can hold their current handsets, PCs, or multimedia players a few months longer in most cases.

Corporations which own well-known brands had to count on brand equity through the recession as a way to retain customers. They hoped for some relief as the recovery set in. That may have happened but its positive benefits will be eroded by inflation. The power of big brands will be tested again this year, and so will the theory that the best products, marketed best keep customers loyal.

Douglas A. McIntyre