Volume 41, Issue 4 - April 2006

theBusiness

The Price of Coffee Has Gone Up!
by Lyle R. Hill

“That will be $1.50 today, Mr. Hill.”

About a half-mile from the office, on the route I take every day of the workweek, there is a McDonalds and a Dunkin Donuts. They literally sit across the street from each other. The McDonalds has a drive-thru window arrangement. The Dunkin Donuts does not. 

“So you’ve raised your prices?” I asked searching the change holder for another dime. 

I never get anything other than a cup of coffee at the McDonalds and for the last year or more it has always been $1.40. Usually I have the exact amount ready when I arrive at the first of the two drive-thru windows. 

“Yeah,” the always-pleasant daughter of the franchise owner replied, “our costs have gone up a bit so we had to raise our prices. I hope it doesn’t stop you from buying from us.”

Just about the only time I don’t stop at the McDonalds is when the line is too long … I’ve already had a cup or two of coffee at home … or I have a hankering (Note: this is a Texas term inserted here in an attempt to appease the readers from that state who regularly tell me that I need to stop using such big words so they can keep up with the rest of the country) for a Dunkin Donuts blueberry muffin. 

“Well I’ll tell you,” I replied, “as long as the coffee is hot and the service is good, I’ll probably keep stopping in.”

“We appreciate that,” she said and then quickly added, “and you know the guys across the street raised their prices too.”

For the most part, I’m not a real coffee purest. Unlike my son, Patrick, who strongly prefers the Dunkin Donut product to the Golden Arches variety, I think they are all about the same. And a 10 cent-per-cup increase, which works out to about 7 percent, is not going to keep me from having my morning coffee. If it is what I want, or need, and both the product and service are good, a fair increase to a price deemed to be initially reasonable, is not hard to swallow. OK … Texas guys, read that again just to make sure you got it straight. 

Cost increases, and the price increases that follow, are a natural part of the economic order of the universe. Sure I remember the days when, as a college student loading dog food into boxcars in Kankakee, Ill., I could buy a cup of coffee from a vending machine for ten cents. So what? I was only making a couple of dollars an hour at the time. I don’t expect to pay a dime for a cup of coffee anymore than I expect to be paid $80 for a week’s worth of work. The simple precepts of the laws of supply and demand combined with the competitive nature of a free market economy ultimately determine the basic prices for the goods and services traded in this country. Yeah, I know there are a couple of monopolistic exceptions, but they are few and far between. 

So now … right now … with the coffee price analogy fresh in our minds, let’s take yet one more look at the glass industry and the energy surcharge issue. Let me be clear that I firmly believe that the glass industry is analogous (similar to or comparable with) virtually every other industry in America today, including the coffee and donut one. It is not unique … it is not special … it is as subject to economic principle as any other business group. 

Less than four months ago, I became personally involved with the purchase of a decent size order of gray insulating units. The job requirements were such that a total of three truckloads of units made up of four different sizes of units would be manufactured and shipped to one of our jobsites. The lead time was not too demanding and there was really nothing difficult or unusual about the order. It was the kind of order that a firm like ours hopes to make several times a year. I requested pricing from five different suppliers and within a handful of days, I had my quotations. The price was to include the units, boxing per our boxing schedule and delivery. The quotes from the perspective suppliers were relatively consistent and only varied from each other by about 5 percent. Then came the energy surcharges which were as follows: 10 percent … 7 percent ... 6.5 percent ... 6.5 percent ... and 3 percent. Now it gets better—and you knew it was going to—the supplier we ended up with had quoted the 7-percent surcharge, but when they shipped and billed for the glass, they charged an 11-percent surcharge, claiming that energy costs had risen in the time frame between the quoted and shipping dates.

I think the manufacturers are clueless as to how most of the industry views them at this particular point in time. Perhaps they don’t care. A few readers respond regularly to what is said in this column. In fact, there is a hard core group of a few dozen or so that I probably hear from at least six or seven times a year. But when the surcharge topic is brought up, not only do I hear from the regulars, but I start hearing from people who have never … not once … contacted me before. Obviously, it is a very hot topic. Let me give some examples:

John Skirnick (Schaaf Glass): “Lyle, we are being robbed. I’m now paying a 15-percent energy surcharge to _____________ and this is nothing more than theft in my opinion masquerading as a ‘surcharge’ and I have to pay the taxes on it! Why can’t we all get together and do something about this absurdity?”

Mark Pritikin (Creative Mirror): “If glass manufacturers are totally exposed to natural gas price fluctuations, you would think that some of them would hedge their exposure by using the futures markets. Other industries do it … even pig farmers. Instead, the domestic glass manufacturers move in lock step with price increases via energy surcharges. Isn’t this a form of price fixing? They deserve to lose their business to the foreign imports.”

Mark Neal (El Dorado Glass and Mirror): “Lyle, I just received two notifications of increases in energy surcharges from our two major glass suppliers. As with most glazing subcontractors, I am unable (due to time and intelligence constraints) to pick through the mumbo-jumbo legalese … but I do know the bottom line. My energy surcharge costs are going up from 9 percent to 15 percent of invoiced amount. Where is this all going?” 

I have never, to the best of my memory, heard from any of the above three people before. And these are but a sampling of what they wrote and what I’m getting from a whole bunch of people. Pritikin, a good thinker and very articulate businessman, actually followed up his first e-mail to me with additional information on how to track natural gas prices. Some of the questions he raises relative to the correlation between actual natural gas price fluctuations and surcharge increases are intriguing to say the least. 

There seems to be a growing consensus that something needs to be done, but nobody seems to know what it is that can or should be done. Note the following:

Dick Petrie (AGS Inc): “You’re gonna love this one, Lyle. One of our glass suppliers, which also sells us some metal parts, is now adding the surcharges to the metal parts they sell as well as to the glass. They determine the metal surcharge amount on a per-pound basis. What do you think about the idea of publishing everyone’s surcharge prices in the magazine each month? Maybe that would help clear up the confusion, because right now you have some suppliers charging by the pound and others by the square foot. And of course, several simply apply the surcharge to the total dollar amount of the invoice itself.

What a joke!”

Johnny “The Mooch” Rago (more or less unemployed): “Ya know, Hill, the problem with you guys is you’re all talk. Stop yapping and start acting! For a small fee, Jungle Jim Brunney and I will personally take care of this surcharge thing. We will, for a lack of a better term, offer you protection from these bums. And think about it, Hill. Who better to protect you from those crooks than crooks of your own?”

Anonymous: “I’d like to weigh in on the surcharge issue, Lyle, but for reasons that will be quite obvious to you, I must insist that you do not reveal my name. But having said this, here are my thoughts. In an industry with principles and standards, one would think that there would be a forum for the resolution of what virtually everyone agrees is a very distasteful situation.

However, if you look at the various associations that claim to represent our industry, none seem to offer much help. There is one that you can’t go to because it is too dominated by the people who have created and are perpetuating the surcharge situation. Another is of no help because it goes to great lengths to avoid taking a position on any matter of any kind and also relies heavily on the manufacturing community for funding. Others are simply too weak or too bogged down in other issues to be of any assistance. Unfortunately, the contract glazing community does not have a voice of its own at the present time.”

While we don’t buy great amounts of what most people would refer to as “stock material,” we probably still purchase 5 to 7 truckloads of mirror a year and probably another 10 to 12 truckloads of float products … quite a bit of it being laminated … and it is, as stated above, very hard to sort out the legitimate from the ludicrous when it comes to the surcharge issue. I have become more involved (mostly out of curiosity) with our purchasing activities during the past few months and quite candidly, sometimes I can’t make heads or tails out of what’s going on. Some manufacturers refer to their surcharge as being tied to the NYMEX three-month average of the natural gas futures price index. Others claim to be charging “after the fact indexed rates” meaning that this quarter’s surcharges are based on last quarter’s actual cost differential. Others quote the U.S. Department of Energy Index and then claim to adjust it for the “prior 12 week average.” One fabricator actually sent a letter to us stating that in spite of the fact that the primary glass manufacturers had raised their surcharges by almost 70 percent, he would only be adding 20 percent to his current surcharge amount. What a guy! 

In preparation for this article, I called an old contact of mine at one of the larger fabrication operations from which we buy and asked him where he thought the surcharge thing was headed. His exact reply was, “we’d like to get the surcharge up to about 25 percent or so and then hold it there til the end of the year.” Note that he did not say “we think it might” or “we should be prepared if…” or anything expressing a connection to what could happen with regards to energy costs. His exact words were “we’d like to get.” When I questioned him on this, his only response was “hey, don’t make us out to be the bad guys here. We’re just doing what everyone else is doing.”

I believe that the real problem lies in the fact that the manufacturers and fabricators have not had a meaningful price increase in several years and the surcharge arrangement allows them to get what they apparently cannot otherwise obtain: an increase in price that is not only much-needed but rightfully deserved. 

Is there too much supply and too little demand? Have the suppliers become as efficient as they can be and beaten down their raw material suppliers to the point that there is no more to be squeezed from them? Is the fact that Pilkington has apparently been sold while PPG reports a dismal year for its glass operations a sign that the options left for the industry are running out? I don’t know. I’m not going to pretend to have any of the answers and quite candidly, I’m not even sure I have the right questions either. And maybe my premise is wrong to begin with. Maybe there is a relatively small, but very vocal group of people who really despise this whole surcharge thing while an even larger group—the silent majority if you will—either don’t care or have given up on trying to fight it. I’m not sure. 

There are, however, two things that I am very sure of at this point. The first is that we have a very frustrated group (the size of which I may not be able to determine but of which I am a member) of end users of architectural glass products who are completely fed up with the manner in which they believe they are being treated. Secondly, I gotta go get another cup of coffee … no matter what it costs! 

Lyle R. Hill is president of MTH Industries of Chicago.
lhill@mthindustries.com

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