Source: Whale Business (ID: bizwhale) | Authors: Wang Xiaoxuan, Da Erwen In 2022, no one can remain unaffected by the wave of price hikes. As the year-end approaches and preparations for New Year goods begin, a surge of price increases is sweeping through the market. Last month, consumers saw dairy giants Mengniu and Yili raise prices, sparking concerns about the affordability of milk. Recently, brands like Xiang Piao Piao, Sexy Tea, and Wahaha have also announced price increases. The brands raising prices almost unanimously stated: "Driven by the need to stabilize company profitability and development, and citing continuous increases in costs of raw materials, labor, and transportation, we have decided to raise prices." In fact, looking at a longer timeline, in 2021, not only daily consumer goods like food and oil saw price hikes. Home furnishing and appliance companies such as IKEA and Midea also increased prices. And it's not just domestic—price increases abroad have been even more aggressive. Who is raising prices, and how steep are the increases? Over the past year, news of fruit price increases has often caught consumers' attention the most, followed by food and beverages. Before Sexy Tea raised prices, there was already a large-scale trend of price increases in the beverage sector. For example, categories like soft drinks and beer, as well as dairy drinks from giants Mengniu and Yili, had already embarked on price hikes around August 2021. The main reasons for the price increases are rising costs of packaging materials and energy. For dairy brands like Mengniu and Yili, fresh milk (raw milk) saw significant increases in 2021. According to data from the Ministry of Agriculture and Rural Affairs for the second week of December, the average price of fresh milk in 10 major producing provinces, including Inner Mongolia and Hebei, was 4.32 yuan per kilogram, up 0.2% from the previous week and 5.6% year-on-year. Similar to dairy, the beverage industry also faced rising costs. Packaging materials like tinplate (the main material for cans) and PET plastics saw upward trends in 2021. As raw material prices rose, profits for beverage companies like Coca-Cola and Zuming declined, with the most significant and prolonged impact on gross margins. In the food sector, companies like Qiaqia Food and Orion began raising prices in September 2021, with increases ranging from 6% to 18%. The main factors driving these increases were the costs of major raw materials such as flour, white sugar, peanuts, and peanut oil. Condiments, which are "partners" to food, also use raw materials like soybeans, white sugar, and peanut oil. Therefore, in the highly competitive condiment market, brands already prone to price wars are now facing price increases. Production costs for glass bottles and plastic bottles are also rising, squeezing brand profitability. Beyond food and beverages, major home appliance brands are also raising prices. For the home appliance industry, key raw materials like copper, steel, aluminum, and plastics account for nearly 85% of operating costs. The remaining operating costs consist of manufacturing expenses (energy) and labor wages. With rising prices of copper, aluminum, steel, and thermal coal, brands like Midea, Gree, and Hisense increased prices by 5% to 15% in 2021. It's not just daily necessities that are rising; "spiritual consumer goods" like trendy toys are also increasing in price. New consumer brand Pop Mart, amid slowing performance growth, began raising prices in April 2021. The brand first increased the price of its original blind boxes from 59 yuan to 69 yuan, then raised the price of the Doll Dress-Up series released in May to 79 yuan per box, and the Magic Kaka series released in October to 89 yuan per box. Pop Mart explained, "Due to rising prices of supply chain raw materials and increased labor costs, we have adopted a price increase strategy to cope with cost increases." Trendy toys involve intricate designs and complex craftsmanship, which also contribute to higher costs. However, the price increases have sparked dissatisfaction among some consumers, with some student players expressing difficulty in accepting the new prices. Nevertheless, the trend of rising raw material prices across industries is unlikely to subside starting in 2022. Large consumer goods companies still need to use multiple means to reduce costs and increase efficiency to hopefully restore stable growth. But then again, why raw materials continue to rise is a question more worthy of attention for both brands and consumers. Raw materials are not the only factor behind price increases The rise in raw material prices is also a manifestation of market regulation. Looking back to 2020, the United States began printing money frantically, leading to severe inflation. In simple terms, money became less valuable. This phenomenon has repeatedly affected China's raw material markets over the past two years, with price increases reaching tens of percent or even 100%. During the 2021 Spring Festival, specialty paper, plastics, textile raw materials, copper, and industrial raw materials all saw price increases, driving up factory prices. This has made it difficult for brands to maintain stable terminal pricing, hindered growth plans, and caused PPI data to fall short of expectations. In addition to the impact of raw materials, in 2021, factors such as continuous investment in R&D expenses, rising labor costs, escalating marketing expenses, increased logistics costs, exchange losses, power rationing, and pandemic-related production restrictions have reduced profits across the small and medium-sized manufacturing sector. Specifically for brands, their perception is even more acute. Sexy Tea recently announced that it will raise prices on some milk tea products starting January 7, 2022. Most products will increase by 1 yuan, with Zhixiao rising by 2 yuan, while Youzai Youzai, Fusheng Banri, and Zhengzheng Zhiyuan will not see price changes. The last time Sexy Tea raised prices was five years ago. Such infrequent price increases are a result of brand dividends that drive spontaneous consumer purchases, saving the company many marketing costs. In fact, Sexy Tea is not the only one raising prices; most leading milk tea brands have increased prices on their products to varying degrees over the past two years. A frequent milk tea drinker, Ms. Gao, once told Securities Daily that she noticed many Heytea items had increased by 2 yuan compared to 2019. "The Doudou Bobo Tea was 25 yuan in 2019 and is now 27 yuan, and the Zhizhi Meimei also rose from 30 yuan to 32 yuan." Ms. Gao also noticed that some milk tea products from Chabaidao, COCO, and Yidiandian had increased by 1 to 2 yuan. However, these price increases often draw complaints from consumers. More notably, the milk tea brands that have raised prices are all well-known brands that have established consumer mindshare. It's clear that besides these leading companies, mid-tier and lower-tier milk tea brands are under dual pressure from rising raw material costs and shrinking demand. For offline milk tea shops, which are high-margin, require no distributors or channel entry, and have costs limited to raw materials, labor, packaging, equipment, and decoration, price adjustments have become necessary for survival. For snack brands that need to build their own distribution networks and enter convenience channels, they face challenges such as declining consumer demand, reduced foot traffic in supermarkets, and increased inventory risks as raw material costs rise. Moreover, these snack brands, facing distributors who thrive on volume, need price stability to ensure mutual benefits. Now, with multiple cost increases, it's like adding frost to snow. The ability to withstand price increases During the pandemic, global inflation accelerated. In the US, for example, in the first 11 months of 2021, fuel prices rose nearly 60%, meat, poultry, and fish prices increased over 10%, and overall clothing prices rose 5%, with trends continuing into 2022. In contrast, China's macro-control measures have been much more effective in combating inflation. According to data from the National Bureau of Statistics, China's CPI rose 2.3% year-on-year in November 2021. Even so, for ordinary people, the pressure of fighting inflation is not insignificant. Facing the wave of consumer goods price hikes, this trend will become more evident in 2022. To ensure the quality of life doesn't decline, increasing income faster than inflation is the most direct way. On the other hand, we must also believe in the government's ability to regulate prices of daily necessities; life will not regress. From a business perspective, facing a new wave of price increases, if you can hold off on raising prices, doesn't that mean there's an opportunity to increase your product's market share? As Warren Buffett said, "Be fearful when others are greedy, and greedy when others are fearful." "Price wars" have become a common "killer move" in the internet and e-commerce sectors, and many new consumer brands aim to "catch up from behind" through low-price competitiveness. However, in the current context of global price hikes, a sluggish capital market, and rising operating costs (rent, traffic, labor), persisting with low-price strategies often leads to the trap of "diseconomies of scale," ending in a mess. Of course, some might say, aren't there special cases? Look at bottled water at 1-2 yuan per bottle—it hasn't increased in years. Similarly, Mixue Ice City, which sells milk tea, hasn't raised prices much. Indeed, it's undeniable that "low-price strategies" have given brands like Nongfu Spring and Mixue Ice City a highly competitive market advantage. But let's break down why they can withstand not raising prices: First, these brands left ample gross profit margins when pricing their products early on, allowing them to outpace currency depreciation; Second, these categories have their own particularities and are highly controllable. Even if Nongfu Spring's water isn't profitable, not raising prices allows them to penetrate sales networks with a single hit product, increase market share and brand awareness, and then use other beverage products to generate premium profits; Finally, and most crucially, brands that can stick to a "low-price" strategy must have strong self-control in their supply chain. Mixue Ice City has control over the entire chain, from product development and manufacturing to distribution, enabling it to "surround the city from the countryside" and open over 20,000 stores. But for other categories, most are like "an arm trying to twist a thigh." Rising upstream raw material costs directly lead to higher production costs, which then transmit to higher consumer prices. Take Fuling Zhacai, which raised prices recently. Its financial report shows that in the first three quarters of 2021, revenue increased by 5.61% year-on-year, but net profit fell by 73.75%. Despite increased revenue and no significant increase in fixed market expenses, profits declined noticeably. Even the "first pickled vegetable stock" couldn't withstand the pressure. Moreover, in recent years, the state has intensified efforts to crack down on illegal activities like tax evasion, indirectly increasing compliance costs for enterprises. When "even the landlord has no surplus grain," ultimately, price increases at the consumer end achieve "wool from the pig's back." Reality once again tells us that most brands will follow the trend of price increases, and new consumer brands must be especially careful with pricing, as it can be seen as the "lifeline" of the enterprise. Are you "watching" me?