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The last few years have been incredibly volatile for FTSE 100 sharing. Several factors contributed to the steep inflation rate, such as the financial support provided during the pandemic, rising commodity prices, and uncertainty.
In an effort to reduce inflation to a sustainable level, many central banks are forced to raise interest rates more aggressively than before.
There is no doubt that external factors affect individual companies more often in recent years. Findings firms with maximum control over prices are more likely to outperform during this period. This is known as ‘pricing power’.
I have identified three companies that all have this capability, which I will buy for £1k.
Diageo
An effectively managed company with consistently high demand for a wide range of products will always be in a strong position. Having a large profit margin that allows prices to drop when times are tough is better for consumers.
With a five-year operating margin of 31%, the alcoholic beverage company Diageo can easily adjust prices in line with customers’ spending habits. This flexibility, as well as having great logistical advantages due to its size, means that even if inflation and foreign exchange volatility appear in 2022, the company will continue to grow.
Burberry
Firms that focus on the top of the income scale see the main force of pricing power. By focusing on these high-income consumers, companies can adjust prices with minimal disruption to demand.
A 10% increase in some clothing companies can cause consumers to shop at cheaper places. However, if the premium piece price of Burberry (clothing increases, consumers with brand loyalty will probably accept this increase. This is shown by the 2022 revenue growth of 11% when compared to the same period in 2021.
Unilever
Companies that develop products that consumers need regardless of price are also in a strong position during economic uncertainty. When material or supply chain prices rise, the increased costs can be quickly passed on to customers without affecting demand.
Consumer goods company Unilever (LSE: ULVR) clearly falls into this category. CEO Alan Jope stated: “consumer response in terms of volume softness has been very muted, consumers have been very resistant.”
Unilever develops the following important products:
- Personal Beauty & Care;
- Food & Refreshments;
- Home care segment.
The company is very flexible in its cost structure, due to its experience in high inflation markets such as Argentina and Turkey. As a result, Unilever can raise prices by 12.5% in 2022 while still maintaining growth in revenue and profit.
Conclusion
Avoiding all the impacts of the wider global economy is, of course, impossible for companies. However, by investing in people who have the ability to react to dramatic changes in the cost of goods and services, my portfolio can still outperform during economic uncertainty.
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