Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 434

Which companies have the pricing power to fight inflation?

Remember in 2011 when Netflix raised prices by dividing its streaming subscriptions from its DVD service? The announcement sparked an uproar that forced the company to issue an apology and hammered the stock price.

Today the world is in a very different place, and so is Netflix. The company is now a dominant streaming service and a megahit-making machine with more than 213 million subscribers worldwide. Its latest breakout, 'Squid Game' — a Korean drama about children’s games played with deadly consequences — captivated some 142 million households, making it the most viewed show in Netflix history.

This rising popularity has empowered the company to boost its prices. It has increased subscription rates in the U.S. four times since 2014, a period of robust subscriber growth globally. This is an example of pricing power, the ability to increase prices without losing customers.

Pricing power can be an antidote for inflation

Pricing power, always a positive for companies that can sustain it, may be a crucial competitive advantage in the year ahead. Inflation has surfaced across many global economies, and there are signs that it could linger in the coming months. The annual inflation rate in the U.S., as measured by the consumer price index, rose to 5.4% in September, its highest level in 13 years. Rising costs can erode a company’s profit margins and, ultimately, investor returns. But companies with clear, sustainable pricing power can protect their profit margins by passing those costs along to customers.

With growth slowing and inflation pressures building, I am focused on investing in companies with proven pricing power that are also the beneficiaries of secular growth trends.

Health care services: A prescription for inflation’s ills

High medical costs are a perennial ‘hot button’ issue for the government, and for good reason. Over the last 20 years, health care costs have risen at about 2.5 times the rate of broad inflation, as measured by the PCE inflation rate followed by the U.S. Federal Reserve.

Historically, health insurance companies have had pricing power and passed on rising health care costs to their customers through higher premiums. Today, companies like UnitedHealth Group are no longer mere toll collectors on the freeway of rising health care costs. They actually manage care. It is focused on helping governments and health care providers reduce spending and improve outcomes for patients. The company has been investing in predictive analytics and care delivery to reduce inefficiencies in the U.S. health care system.

They determined that the most powerful person in the care delivery ecosystem is the primary care doctor, who represents 3 cents of every dollar we spend on health care but determines where another 85 cents is spent. By getting primary care doctors involved earlier in decisions about care, UnitedHealth is seeking to keep members healthy and get more value for every dollar spent. By delivering more value, UnitedHealth can maintain its pricing power while helping to tackle a long-term problem in the US.

Semiconductors: Everywhere, in everything

The story of pricing power in the semiconductor industry is simple: Soaring demand meets limited supply. Today semiconductors can be found not only in mobile phones and laptops but also in everyday household products like refrigerators and ovens. New cars can require as many as 100 chips. Indeed, the auto industry has felt the brunt of the global shortage in semiconductor supply.

The rollout of new technologies, like 5G, artificial intelligence and cloud computing have further fuelled the world’s appetite for chips. In August, Taiwan Semiconductor Manufacturing disclosed that it would raise chip prices by as much as 20%.

Consolidation in the semiconductor industry has transformed the competitive landscape, leaving a few dominant players with potential pricing power in specialized areas of the market. For example, companies with proprietary chip designs, like Broadcom, or Dutch chip-equipment manufacturer ASML, could raise their prices in an inflationary environment.

Beverages: Thirsty for leading brands

The ability to raise prices without serious backlash not only varies across industries but also within them. In the food and beverage industry, drink companies tend to pass along higher costs to consumers better than many food companies. That’s because the beverage industry is dominated by a few players with strong brand recognition.

One example is Keurig Dr Pepper, the producer of sodas and single serving coffee pods. The company has a history of pricing power, particularly for its most popular soft drinks, which include Canada Dry, Snapple and, of course, Dr Pepper.

Video games: Not just child’s play

Once considered a minor niche in the entertainment industry, video games have soared in popularity and now represent the fastest growing segment of the world’s media entertainment industry. The global gaming industry is expected to grow to $225 billion in annual revenue by 2025.

Manufacturers have recently been flexing their power to raise prices. With Microsoft and Sony introducing updates to their Xbox and PlayStation consoles, respectively, game makers have disclosed plans to raise prices on console games to help account for the cost of creating more sophisticated games.

A prime example of pricing power potential in the industry is the annual revenue from free-to-play games like Apex Legends from Electronic Arts and Fortnite, published by Epic Games. Tencent has a 40% ownership stake in Epic. Activision owns King, the publisher of popular mobile game Candy Crush. Free-to-play games generate revenue through advertising, whose rates can be increased as costs go up and through in-game purchases.

Believe it or not, players spend real money on virtual clothing, weapons and other supplies for their gaming characters. Essentially, industry leaders can set the price for such items as they please.

The bottom line for investors: Focus on pricing power

I don’t think we are headed into a period of sustained inflation but I do believe rising costs are likely to linger in the coming months, making it the biggest risk investors will face in 2022.

With slowing growth, rising inflation and other uncertainties on the horizon, 2022 may seem a daunting environment for investors. But I’m optimistic that an active portfolio of select companies with strong pricing power can help investors thrive in the years ahead.

 

Diana Wagner is an Equity Portfolio Manager with Capital Group. Capital Group Australia is a sponsor of Firstlinks This article contains general information only and does not consider the circumstances of any investor. Please seek financial advice before acting on any investment as market circumstances can change.

For more articles and papers from Capital Group, click here.

 

RELATED ARTICLES

2025: Another bullish year ahead for equities?

Reality bites

Why investors will continue to pay up for the US market and Mag 7

banner

Most viewed in recent weeks

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Latest Updates

Investment strategies

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

Shares

Why the ASX needs dual-class shares

The ASX is exploring the introduction of dual class share structures for listed companies. Opposition is building to the plan but the ASX should ignore the naysayers and bring Australia into line with its global peers.

The state of women's wealth in Australia

New research shows the average Australian woman has $428,000 in net wealth, 40% less than the average man. This takes a deep dive into what the gender wealth gap looks like across different life stages.

Investing

The two most dangerous words in investing

Market extremes are where the biggest investment risks and opportunities lie. While events like this are usually only obvious in hindsight, learning to watch out for these two words can alert you to them in real time.

Shares

Investing in the backbone of the digital age

Semiconductors are used to make microchips and are essential to a vast range of technology and devices. This looks at what’s driving demand for chips, how the industry is evolving, and favoured stocks to play the theme.

Gold

Why gold’s record highs in 2025 differ from prior peaks

Gold prices hit new recent highs, driven by a stronger euro, tariff concerns, and steady ETF buying – all while the precious metal’s fundamental backdrop remains solid amid a shifting global economic landscape.

Now might be the best time to switch out of bank hybrids

In this interview, Schroders' Helen Mason discusses investing in corporate and financial credit securities, market impacts of tariffs, opportunities for cash investments, and views on tier two and hybrid bonds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.