If you believe, as I do, that inflation is in our near future, investors beware! To succeed in an inflationary environment, investors must carefully choose the companies in which they place their hard-earned money. If chosen properly, investors are at the very least able to maintain their purchasing power, whereas poorly chosen companies will simply eat away at your nest egg. Let’s look at two companies that may face tough headwinds in an inflationary environment, as well as two companies that should carry on just fine.
Apple Inc. (NASDAQ:AAPL) is the first company that I believe will see its core begin to rot in an inflationary environment. Apple Inc. (NASDAQ:AAPL) enjoys massive profits in the higher-end spectrum of the personal computer, tablet, and smart phone markets. Despite the Great Recession and high unemployment, consumers have continued to purchase these high-priced electronics. Unfortunately, computers and airline tickets have something in common: their prices have been in a long-term decline. In an inflationary environment of 6%-8% per year, I believe Apple Inc. (NASDAQ:AAPL) will find it quite difficult to pass its increased costs on to its consumers. That leaves it with three options, two of which are bad news for the business: (a) raise prices to keep up with inflation and potentially price itself out of consumers wallets, (b) keep prices steady or increase slower than inflation and have smaller margins, or (c) find a way to make their input costs less than they are today. As you can see, only the last option helps the business, but the company would already be doing that if it were possible today.
Next up, we have Chipotle Mexican Grill, Inc. (NYSE:CMG). The restaurant industry is particularly sensitive to inflation, but I believe Chipolte is a bit worse off than the average restaurant. Positioning itself above fast food but below expensive sit-down restaurants, Chipotle has dominated the fast-casual food arena for the last few years. Despite the Great Recession, the company was able to continue its expansion and boast large same-store sales numbers quarter after quarter. I think it is the company’s position in the fast-casual segment that may cause it more damage than the average fast-food restaurant if/when inflation sets in.
In order to maintain its margins, Chipotle would need to pass on all of its increased costs onto its customers or find other ways to reduce its input costs. Unfortunately for Chipotle, that may be difficult, due to its position in the restaurant field. If it raises its prices too quickly, it risks pricing itself out of the fast-casual food category. If it doesn’t raise prices fast enough, it quickly see its margins deteriorate. Unlike Buffalo Wild Wings (NASDAQ:BWLD), customers do not eat at Chipotle for its environment. Although inflation would negatively affect the wing-slinging Buffalo Wild Wings, the sports-lover environment, as well as some tasty beer, may be enough to keep its patrons coming.
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