Abnormal cost inflation has caused waves of pain for companies since late 2020, but our new Inflation Projection Tool launched in July 2023 strongly indicates that tools and hardware in home and garden stands out as a category where companies were harmed more than most (and brands more than retailers, so far). This sector is badly dislocated around its ability to pass on costs from production to end consumers.
The new inflation tool gives a wider sector-level perspective of production cost pressures to compare with internal figures, and see what impacts are moving down the product pipeline. Brands can understand if their costs are abnormally high or low, while retailers can see the kind of pressure heading towards them from brand partners ahead of arrival, and everyone can see how much of the production inflation pressure is being reflected in retail pricing. This gives a better context to plan ahead.
We can see new insights about cost sharing, negotiations and achieved gross margins
Global production costs for tools and hardware rose by 33% since pre-pandemic 2019, mainly through scarcity pressures and disruption to raw materials (especially steel) and shipping costs. In the meantime, consumer price tracking in the CPI index for Europe and North America shows an average 13% rise in shelf prices for tools and hardware.
Close to 20 percentage points of the 33% cost inflation from production factors 2020-2023 were absorbed by brands and retailers, rather than being passed on to consumers
Source: Euromonitor International
Europe and North America account for 80% of global sales value in Passport in this product sector.
Retailers have greater power when demand is soft, which is evident in this situation
In a booming market, brands are favoured in price negotiations – the brinkmanship tactic (“take the increase or I don’t deliver”) with stock as the scarce factor – makes passing cost increases forward much easier. This dynamic is evident in the numbers, where this dislocation between costs and prices only really began after demand peaked late 2021 and softened in early 2022, crashing after the start of the war in Ukraine.
Once demand softened, retailers became far more worried about consumer propensity to purchase amid the cost-of-living crisis, and they had the power to push back on price negotiations, with brinkmanship serving retailers rather than brands (“swallow the increase or no new orders”). Even as costs continued to rise, pressure in stores visibly depressed retail prices from April 2022.
Thus, there is a 20-point gap between actual cost pressure from production and what was passed on to consumers. To dig a little deeper, it is important to analyse the gross margins of both brands and retailers in the sector, which paints a decidedly stark view of how 2022-2023 price negotiations progressed.
Stanley Black & Decker is the leading brand globally in tools and hardware and thus can be expected to wield about as much power in negotiations as any brand in the sector. During 2022 alone, the product sector added 19 points of production and shipping costs. In that period, Stanley Black & Decker managed a 7% price increase, whilst at retail in those markets, prices marginally dropped.
The leading brand in tools and hardware created a better situation for itself than many peers – although that did not save it, as, including currency movements, it recorded a 13-point drop in gross margin in 2022, and an 18-point drop versus 2019 (pre-pandemic
Source: Euromonitor International
In the latest results, one of the biggest cash-generating business models of the industry was barely breaking even (at 0.3% profit).
Its performance can be compared, in terms of gross margins, with the leading retailers in the sector in the above chart. Gross margin varies by retailer but the movement within each is comparatively small over the period, and the average stayed flat at 29%.
The tools and hardware sector is dislocated for margin management
There has been a pressing need for tools and hardware manufacturers to pass costs forward to retail to protect their margins. However, since early 2022, they have (for the most part) failed. Negotiations in 2023 have existential-level cost pressures sat within them.
Retailers are likely to assume that the latest 2023 deflationary trends on input costs mean savings can be passed on – making brand positions even more challenging, because a shared perception of what “win-win” looks like is irreconcilable if one side has unrealistic expectations. In addition, the legacy of a 20-point hole in gross margins means that a win-win for brands may well look and feel like a negotiating loss to retailers.
This dislocation makes brand investment into direct-to-consumer more attractive; the other side of the same coin is that retailer investment in private label is easier to justify. Both reactions are an attempt to be less dependent on one another, although neither party would want to see such a strategy from their partner across the negotiating table.
The pattern above is for tools and hardware, but it is not limited to this sector. Studying the data in the new Inflation Projection Tool, it is evident that this cost dislocation is repeated in many other categories. In a broader context, there is a rise in the number of home and garden players in danger of bankruptcy, with multiple industry icons having tipped over the edge in the first half of 2023.
As of July 2023, the home and garden Inflation Projection Tool is available in Euromonitor’s Passport system for subscribers.