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On August 13, Alliance Laundry told investors that its second quarter revenue rose 7% to $477 million, and that pricing actions taken to offset tariffs and other cost increases contributed slightly more than half of their growth.¹ Alliance's costs went up, it raised prices, and the result was reported as growth.
Every price increase above us has a business to go to
The distributor sits one stop below the manufacturer. EVI Industries, a publicly traded distributor in our industry, told shareholders in its annual report that it has tried to mitigate tariffs through supplier negotiations and increasing selling prices, and added a sentence most of us are familiar with from our own stores. Price increases may result in reduced customer demand.²
The landlord renews the lease at a new number. The lender raises rates. The utilities increase rates. Each of those businesses receives a cost increase, converts it into a price increase, and hands it to the next business down the chain.
At every one of those stops the increase arrives as a quote, an invoice, or a renewal, and the business receiving it can absorb it, defer it, negotiate it, or forward it. It happens on paper, between 2 companies, and the person who sees the number is a buyer whose job includes reading numbers like that.
Then the increase reaches the laundry business.
The increase ends at a sign a client reads in our business
When the increase reaches a laundry business, the next buyer is a person with a basket of clothes, standing in front of a machine, reading a number on a sign or our website. The price increase stops being a line item and becomes a posted price, and a posted price has properties and personal implications that an invoice doesn't.
An invoice is read once, by a purchasing manager who can negotiate it or forward it to the next buyer. A posted price is read every visit, by every client, compared to what it said last time, the laundry business down the street and the only responses available are to pay it or go elsewhere.
I started calling this the last stop. Every business above us in the chain is a stop along the way. We're the last one, and the last stop is the only place in the chain where a cost increase has to be announced to the public (in one form or fashion) in order to be passed along.
Economists have measured what happens to a cost increase as it travels toward that last stop. When the 2018 tariffs hit, the increase passed through to importers almost completely, nearly 95% within a year. By the time the same tariffs reached the retail shelf, a 20% tariff showed up as a 0.9% increase in the price of affected household goods. Holding the retailer's margin would have required a 9.3% increase. The retailers absorbed most of the difference by earning less.³ During the 2022 inflation, the New York Fed surveyed firms and found the average business passed through roughly 60% of its cost increases, and the 2 reasons firms gave for not passing through more were contracts and competition.⁴
The share passed along shrinks as it gets closer to the consumer. That's the chain working the way it's built to work.
Clients accept the increase and judge
There's a reason the posted price behaves differently, and it was measured in 1986 by Daniel Kahneman, Jack Knetsch, and Richard Thaler.