High Prices Will Continue Until Morale Improves
Capital One is plotting to exploit a loophole in its purchase of Discover, and more in this week’s business round-up.
by Eric Gardner, More Perfect Union
Even some investors are starting to wonder if Unilever’s prices are too inflated
Earlier this month, Unilever—the consumer goods giant behind Ben and Jerry's ice cream, Dove soap, and Axe Body Spray—faced criticism from investors over its reluctance to lower prices on certain goods. The company has consistently raised prices since the beginning of the pandemic, prompting an analyst at asset management firm Sanford Bernstein to wonder if that commitment was "going to stop you from doing the right thing on pricing."
In 2023, the London-based conglomerate recorded almost $65 billion in sales, with price increases driving nearly 7 percent of the growth. Crucially, for the first time since 2021, it sold slightly more units across the entire business than it did the previous year. Specific geographic regions and products, however, are buckling under the pressure of persistently high prices.
Unilever, and nearly every other major consumer goods company, justifies these price hikes by offering new "innovation" or simply passing on commodity inflation to consumers.
At Unilever, higher prices are justified by new offerings such as plant-based ice cream, different flavor pairings, or unique packaging. Roughly one in five worldwide ice cream sales are through Unilever brands, and last year, Unilever raised ice cream prices by nearly 9 percent while selling 6 percent fewer units. "There seems to be a material disconnect between the language of the results update and what consumers are saying or doing," the Sanford Bernstein analyst concluded.
On the inflation side of the price increases, Unilever executives said they expect commodity prices to continue rising into 2024, prompting speculation from investors. "If I look at your raw materials, I see them being down quite a lot," a JP Morgan analyst said. "I find it a bit difficult to understand how it's not flat or even negative for the year."
Walmart executives are surprised that prices are still stubbornly high
Walmart, America's largest retailer by revenue, said prices did not drop as much as the company's forecasters anticipated. Clothes and food staples like eggs and apples are cheaper than last year, but were outweighed by price increases in paper goods and cleaning supplies.
"Prices are lower than a year ago, but not as much as the trend line would have suggested," Walmart CEO Doug McMillon told investors on Tuesday.
The Arkansas-based giant saw sales grow to $648 billion last year, an increase of about 6 percent from 2022. Meanwhile, operating profit—which measures how much money a company made before taxes and depreciation—jumped 13 percent to $22.2 billion. According to executives, a primary driver of the new profits was advertising.
In the last few years, Walmart has invested heavily in building out what is called a retailer media network (RMN), essentially selling search advertisements on Walmart.com and in-store displays. This year, global advertising sales grew 28 percent to $3.4 billion, with significantly higher margins than the company's traditional retail business.
A version of RMN is at the center of the FTC's antitrust complaint against Amazon, arguing that the online giant used its immense market power to turn its marketplace into a pay-for-play scheme harming consumers and small businesses. (Walmart has not been accused of similar conduct.)
On Tuesday, Walmart announced plans to acquire television manufacturer Vizio for $2.3 billion. McMillon summed up the company's goal to investors: "This acquisition accelerates the build-out of our advertising platform into the connected TV business."
Basically: Walmart wants to sell ads in stores, on websites, and on television screens.
Capital One plans to buy Discover, potentially exploiting a loophole.
Capital One announced plans to acquire Discover for $35 billion, a move that would give the financial services giant its own payment network—and create the nation's largest credit card company in the process.
But the merger could also allow the combined company to exploit a loophole in key financial regulation, potentially raising prices for both consumers and merchants in the process.
The loophole, first reported by Matt Stoller at BIG, has to do with how the government regulates the banks that issue credit and debit cards and the technology networks that process the transactions. Right now, Capital One issues credit cards, but the transactions are processed through Mastercard and Visa's networks. "An issuer, aka a bank, is regulated like a bank, while a network is regulated like a network, which includes price caps on debit cards," Stoller writes.
The price caps Stoller refers to are the Durbin Debit Rule.
During the financial crisis, Congress realized that the massive technology systems gave an incredible amount of power to the companies that owned them. Accepting credit and debit cards is a requirement for most modern businesses, and the network companies knew that–charging higher and higher fees to process transactions.
So in 2010, Congress capped what the networks can charge merchants for processing debit transactions. Thanks to lobbying by American Express, however, companies that issue cards and own their technology networks are exempt from the rules. "A bank that owns a network isn't regulated at all on its network," Stoller writes.
Discovery is a relatively small actor in the space, processing just 4 percent of American card transactions—but it crucially owns its network.
Under the new company, Capital One would not only become the largest issuer of credit cards by loan volume, but it would able to process all of its transactions on the Discover network. Free to set both the interest rate it charges consumers, which has about doubled across the industry in the last decade, and what it charges merchants. "The holy grail, Capital One CEO Richard Fairbank told investors during the deal announcement, "is to be an issuer with our own network."
The deal is expected to undergo intense scrutiny from federal regulators. On Tuesday, Senator Sherrod Brown (D-Ohio) said, “We will be monitoring all developments to ensure that this merger doesn’t enrich shareholders and executives at the expense of consumers and small businesses.”
PG&E's profits hit the highest level in decades as monthly bills are set to top $300
Pacific Gas and Electric (PG&E), California's largest power company, posted a profit of $2.2 billion last year, its highest since 2004. Now it’s set to go even higher, requesting a temporary rate increase that would send the average monthly energy bill above $300.
PG&E justified the increase in funding improvements to mitigate forest fires. The request comes just months after the California Public Utility Commission approved a hike increasing consumers’ energy bills by $32 per month, an increase which went into effect in January. (PG&E had asked for a hike that would have increased bills by $38 per month.)
In many cases, PUCs become captured by the private industry they're meant to regulate, as our recent story on FirstEnergy revealed. Former CPUC commissioner Loretta Lynch offered sharp criticism of the regulatory body this week after PG&E reported its 2023 profit.
"The PUC is supposed to be a watchdog, but instead, the PUC is a lapdog," Lynch told Bay Area News Group Thursday. “When PG&E asks for a rate increase, the PUC’s response is how high should it be.”
PG&E has previously been fined billions of dollars for its role in sparking California's deadly forest fires. In 2020, the company paid nearly $2 billion to the state for using poor equipment that created the 2019 forest fires, which burned hundreds of thousands of acres and killed 129 people. The Wall Street Journal reported that from 2014 to 2017, company equipment was responsible for over 1,500 forest fires in the state.
Now it appears that PG&E wants consumers to foot the bill for their compliance.