Pricing power refers to a company's ability to raise prices without losing customers. Typically we think technology companies or critical software developers are companies that have pricing power and that may be true. But we often don't think about mature businesses like Home Depot (NYSE:HD) and Lowe's (NYSE:LOW). And yet these two may have strong potential to raise prices without losing business.
In this video clip from Motley Fool Live, recorded on July 15, Fool contributor Jon Quast talks about Home Depot's and Lowe's pricing power with follow contributors Danny Vena and Brian Withers. To him, many purchases at these home-improvement stores aren't discretionary purchases, making consumers more likely to pay up for what they need. Of course, that's assuming they even notice the increased prices in the first place.
Jon Quast: As I pondered this question over which companies have pricing power, I think that you're right on with Netflix, and the numbers bear that out. They have demonstrated pricing power, therefore, they must have it. But it is a discretionary purchase. That's something for me that, as I thought about this question, which companies have pricing power, the consumer discretionary purchases, that was really hard for me, so I elected to go with two here but for the same reason.
Lowe's and Home Depot, to me, have pricing power. The reason I would say that these home-improvement retailers have pricing power, is because the purchases that we make there aren't as discretionary as maybe a Netflix or Disney+ subscription [from Walt Disney]. When you need something, you really need it for your home. If your water heater goes out, unless you want to be taking cold showers and wait for prices to come back down or something, you bite the bullet, you buy the new water heater.
These are things that we are accustomed as homeowners or as a landlord. You're accustomed that these expenses are going to crop up every now and then. And maybe because they are infrequent -- for example, do either of you know what a brand-new toilet costs down to the dollar? Probably not because we don't buy toilets everyday.
Danny Vena: I would say right around 600 bucks [laughs] because we had new toilets installed when we moved into this house, so we got the flush saver toilet that gave you the option of the full flush or the third flush.
Quast: Oh, there you go. But for most people, if the price was $120 or whatever the toilet is, $200 today, if it was $220 next week, they probably wouldn't have noticed that price creeping up because it's not a regular purchase that they're incurring.
The other thing I'd say with home-improvement retail is, and I don't want to go to anecdotal here, but I'm preparing my home to sell right now. You know what? I can't afford to wait for supply chain issues to get worked out. The sliding door that I'm replacing in my home, I wanted a certain one that was at a lower price point, they don't have it because of the supply chain issue, so I had to bite the bullet and buy the next one up.
Brian Withers: Jon, it's interesting that you bring up supply chain issues because I was thinking about every time I've gone into Home Depot, I've never walked out empty handed. Those times that you need something from your home, they've done an exceedingly good job over the years managing their supply chain and having the right things in the store. I think a little bit, that's how they've kept Amazon at bay all of this time. To your point, if it's on the shelf and the thing is broken in your home, it needs to be fixed. I think that's a great perspective and insight that you brought -- and two fantastic operators certainly in the retail space.