Economists are struggling to explain why economic growth in developed nations has remained persistently weak since the 2008-09 Global Financial Crisis, despite record-low interest rates and strong asset-price inflation in some markets.

Some argue monetary policy is losing its potency. Others say excessive debt, higher now than before the GFC, is weighing on consumer demand and driving deflation. Harvard Professor Larry Summers’ theory of secular stagnation – a chronic shortfall in demand that leads to a combination of low growth, low interest rates and low inflation – is gaining traction.

I suspect economic models are struggling to capture the effect of technology on corporate pricing power. It’s hard to lift prices when technology is enabling competitors to offer the same goods online for much less. One industry after another is watching technology erode its pricing power – think print media, retailing, travel and other services where prices are falling.

This trend, expected to strengthen in the next few years as more industries are affected, has important investment implications. Finding companies with latent pricing power, or even the ability to maintain prices as demand weakens, has never been more important.

The term “pricing power” is increasingly misunderstood. In years past, pricing power was evident in companies with monopolistic, duopolistic or oligopolistic industry positions. The industry gorillas could maintain or even lift prices when the going got tough.


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Today’s notion of pricing power is rapidly changing. Technology is driving genuine sustainable competitive advantage, high customer switching costs, and latent pricing power. Insurgent companies, or “disrupters” are threatening more industry incumbents.

REA Group is a good example. It successfully lifted its prices in the face of an industry backlash. As the dominant property portal by far, REA was able to exploit a stronger competitive advantage and lift prices. Customers had to use it.

If economic growth remains sluggish this decade, investors will pay a bigger premium for companies able to lift prices without hurting sales volumes. Profit margins can only be maintained for so long by cutting costs. At some point, companies need to lift prices to  deliver the earnings growth that drives a sustained high return on equity.

Finding stocks with real pricing power is hard work. Obvious candidates, such as REA Group, Seek and are fully valued. Domino’s Pizza Enterprises is another with latent pricing power, but it is too pricey. Cochlear, ResMed and CSL have genuine pricing power and valuations that reflect that advantage. Funeral operator Invocare is another.

Below are six stocks that have pricing power for different reasons, and are okay value:

1. Platinum Asset Management: In the highly competitive fund-management industry, Platinum’s brand and long-term investment record are significant competitive advantages. The same could be said of Magellan Financial Group. If needed, investors would pay higher fees to access the country’s top global equities managers. But with strong funds inflow, neither fund manager is likely to test its pricing power in a hurry.


Source: The Bull

2. MYOB Group: Accounting software providers have an enviable source of pricing power: high customer switching costs. Once users are familiar with the software and integrate it within the business, it becomes hard to leave. Accounting software is highly competitive, but it is difficult for small businesses to change providers without time costs. MYOB could lift prices modestly without a significant backlash from its customers.


Source: The Bull

3. Challenger: The wealth manager seems an unlikely candidate for pricing power, given the highly competitive financial services industry and its position in the lower-margin, price-sensitive annuities market. But Challenger is building an exceptionally strong brand and position in the retirement-income market. It is becoming synonymous with annuities and arguably has scope for modest fee rises. With annuities demand expected to grow, Challenger does not need to take risks on pricing.


Source: The Bull

4. Infomedia: The online provider of car-parts information is a key player in its global automotive segments. Its parts catalogue, unavailable elsewhere, is a significant source of competitive advantage and underpins Infomedia’s latent pricing power. Reliable recurring income and the potential for higher pricing are a potent combination.


Source: The Bull

5. Burson Group: The distributor of automotive aftermarket parts is another unlikely inclusion in a list of companies with pricing power. Its competitive advantage is derived from a network of more than 130 stores and operational efficiencies that make it the go-to parts distributor when car-repair shops need same-day parts turnaround. If needed, there is scope to lift prices on parts distribution, such is Burson’s market position.


Source: The Bull

6. NextDC: The data-centre operator has busily opened centres and secured tenants in the past few years. Significant price rises are unlikely as it lifts utilisation rates at its data centres. But do not underestimate the value in NextDC’s state-of-the-art data centres, which are hard to replicate in crowded capital cities. Or the high customer switching costs once companies get used to storing and managing their data off-site at NextDC centres. Like others on this list, NextDC has scope to lift prices in coming years to capitalise on stronger data-centre demand and as growth matures.


Source: The Bull


Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at Nov 6, 2015.