Minnesota companies have raised prices, but key margins remain below pre-pandemic times

As the election has drawn closer, the blame game over inflation has gotten louder with some criticizing the role of corporations.

Those critics, mainly left-leaning economists and politicians, say businesses are lifting prices on customers even higher and faster than their costs are rising, padding their profits and adding to the spiral of inflation.

"The biggest price gouging goes on in the very industries where there are the biggest players," Rep. Katie Porter, a California Democrat who has criticized pricing moves for months, said last week on MSNBC.

Corporate profits are higher this year, especially set against 2020 and early 2021 when the pandemic depressed consumption and production. And many CEOs openly discussed price hikes as publicly traded companies in recent weeks announced results for the July-September quarter. Investors and analysts focused on whether those increases were enough to offset higher costs.

A look by the Star Tribune at 12 large, Minnesota-based nonfinancial companies that just disclosed results showed that, by one important measure, price gouging does not appear to be happening. Indeed, the companies are still trying to recover from the pandemic downturn.

None of the companies have seen their gross profit margins — which is the cost of goods as a percentage of revenue — exceed what they were before the pandemic. A higher gross profit margin would be one signal that a company had been able to raise prices faster than its costs had gone up.

"My general sense is that most companies are just trying to make it through," said Mark Bergen, a pricing expert and marketing professor at the University of Minnesota's Carlson School of Management.

To be sure, some Minnesota-based companies are now very close to the gross profit margin levels they had three years ago.

Polaris Inc., the maker of powersports vehicles, had a gross profit margin this summer and early fall that was just 3% below where it was in the same period in 2019. It has been able to raise prices sharply on ATVs, snowmobiles and motorcycles, but its boat segment has not been able to keep up with the higher costs of production.

At 3M, Sleep Number, Graco and Pentair, the most recent gross profit margins were also down low- to mid-single digits from the third quarter of 2019.

Minnesota-based food companies General Mills and Hormel — which have made price hikes that are highly visible to consumers — earlier this year reported gross profit margins that are down by double-digit percentages against comparable quarters in 2019. (Both will report next in December.)

For part of this year, economists cited government stimulus in 2020 and 2021 as a factor in inflation, which has been above the 2% level since April 2021 and above 6% since last November. But as the 2022 political season wore on and monthly inflation data remained elevated, corporate price actions came under greater scrutiny.

The Economic Policy Institute, a left-leaning think tank in Washington, in April called for an temporary tax on excess corporate profits. Porter, the California congresswoman, often cites an analysis by the institute that says 54 cents of every $1 in price increases is due to profit padding rather than higher labor or other input costs.

Last week, a prominent voice on Wall Street echoed the argument. Writing in the Financial Times, Paul Donovan, chief economist at UBS Global Wealth Management, wrote that the broadening of inflation beyond commodity price moves "is more profit margin expansion than wage cost pressures."

That's because consumer spending stayed strong for longer than economists expected, Donovan wrote. Americans lowered their debt during the pandemic, allowing them to tap into savings and increase borrowing to offset the fact that wages have not kept up with inflation this year. "The resulting resilience in demand has given companies the confidence to raise prices faster than costs," Donovan wrote.

"This unconventional inflation means higher unemployment and lower wages are not the only possible cure for it," he added, referring to the outcome from interest rate hikes that are generally thought of as the way to halt inflation.

It's unclear whether voices advocating for government action against corporate price increases will gain momentum, or whether market forces, such as a drop in consumer spending, will dictate what comes next.

Minneapolis-based Graco usually makes price hikes once a year. But this year, the maker of fluid-handling equipment for industrial and contractor markets added a second price hike.

"We did see some commodity prices beginning to ease during the quarter. However, they were not enough to offset broad-based inflationary cost increases," Kathryn Schoenrock, Graco's corporate controller, told investors last month. "Interim price increases were implemented throughout the third quarter, and we will begin to see the full benefits in the fourth quarter and into next year."

Its gross profit margin was 51.8% in the July-September period, 7.6% less than it was the same time in 2019.

Polaris CEO Mike Speetzen told investors its price hikes earlier this year were "essentially just covering the costs that we're experiencing." But this fall, he added, "We were essentially offsetting those costs for the first time in quite a few quarters."

Last week, St. Paul-based Ecolab said its third-quarter results, which included an 8% jump in net profit, were shaped by a record 12% increase in the prices it charges for the cleaning and other products it sells to businesses, hospitals and manufacturers.

"With pricing and productivity work showing strong continued momentum and now fully in execution mode, we've clearly shifted our primary focus to offense," Ecolab CEO Christophe Beck told analysts.

Minneapolis-based Sleep Number raised prices throughout 2021 and this year. But it has not been able to produce and sell the number of beds it wanted because of the shortage of computer chips that go into its controls. As a result, Sleep Number's profit has gone down all year.

"It's like operating with one arm tied behind your back. You're not able to actually sell at the normal price point," said David Callen, Sleep Number's chief financial officer.