This past week, without surprise, we received more price increase notifications from our manufacturers (see table below). Generally, these have been increases against the product's base price. Whether across-the-board or selective, usually once a price increase is implemented, it's there to stay. So, what happens when a general price increase (due to the increased duties on imported goods) goes into effect July 1st and the trade war or tariffs end later in the year - will manufacturers rescind their price increases? When addressing this type of, albeit very real, cost escalation with a general price increase, we're naturally asking this question, and what percentage of the price increase is above and beyond the actual cost escalation due to tariffs?
Enter the use of 'surcharges'
Surcharges are not new, In our industry, we've all seen fuel surcharges and even surcharges on precious metals (remember the surcharge on the silver in electrical contacts in the '70's?). Since the trade war began last year, several businesses have been deploying surcharges as a way to recover some portion of their tariff-incurred cost escalations. So, why surcharges instead of price increases? The answer may have more to do with a company's core valuesand less to do with an accounting decision.
Six degrees of transparency
In one example, Christopher Mapes, CEO of Lincoln Electric Holdings Inc., stated in a Bloomberg interview"There is still a fair amount of uncertainty regarding the length of duration and extent of surcharge of the tariffs. Treating the tariffs as a surcharge was a more appropriate pricing mechanism than traditional inflationary cost increases."He also went on to say, "Applying a surcharge to products affected by the levies, gives customers a degree of transparency into how much the tariffs are adding to their costs."
Pass the honey please
There are yet other examples of companieswho chose the surcharge path for the sake of transparency. Upon receipt of a letterfrom our newest manufacturer partner, Schneider Electric, I became intrigued by the use of surcharges versus the ubiquitous price increase. While the word 'transparency' isn't found in the letter, its message couldn't be more transparent:"We are using a surcharge mechanism instead of a traditional price increase, as these tariffs are dynamic. If tariffs are removed by the US Government, the surcharges will be removed immediately; if amounts were to be changed in timeline or magnitude, we will adapt accordingly."
This post is not intended as a critique of how any manufacturer chooses to recover their cost escalations. These are unprecedented times for manufacturers requiring equally tough decisions and leaps of faith. The impact to our market, whether you're an end user, contractor or distributor, any manner of price increase, transparency or not, is a tough, bitter pill to swallow. Transparency though, is the honey that goes down with that pill.
