ASX shares with pricing power may be in high demand this year. The tricky thing for investors and businesses to deal with is that inflation is widespread.
It's not just energy prices that have gone up, but costs like wages, rent, the supply chain and so on, have risen.
Some businesses are not able to pass on price rises for higher costs to customers. They simply have to take it on the chin.
Some commodity businesses are good examples of this. Resource businesses have to sell their materials for the price they can get on the market. This sort of situation for a business is called being a 'price taker'. In other words, that business has to take the price it can get rather than deciding on the price itself.
But, there are quite a few ASX shares that have "pricing power".
What is pricing power?
Pricing power means that businesses have the ability to increase prices and pass on higher costs to customers. They can act as an inflation hedge.
For example, think of a business that sells wood furniture. If the price of timber and their supply chain costs go up, can the business charge a higher price for the furniture with little (or no) negative impact on its demand and financials?
Lots of ASX shares and industries are facing this question – can they pass on the higher costs to customers?
Can dairy businesses like cheesemakers and infant formula producers pass on the higher cost of milk?
Are banks able to pass on the full Reserve Bank of Australia (RBA) interest rate hikes without losing borrowers?
It's these types of businesses that may be able to protect their profit during these difficult times.
Which ASX shares can pass on costs?
There are a number of examples of businesses worth pointing out.
Cloud accounting software business Xero Limited (ASX: XRO) has announced price increases for its markets of the United Kingdom, New Zealand and Australia.
Australian telco giant Telstra Corporation Ltd (ASX: TLS) announced that it was going to increase its prices for many customers in line with CPI inflation and would be reviewing a potential increase annually.
Gas pipeline owner APA Group (ASX: APA) is benefitting from inflation because its revenue is contracted to rise with inflation.
Transurban Group (ASX: TCL), which owns toll roads in Australia and North America, can increase prices in line with inflation.
Some ASX shares may have the capability to pass on costs to customers, but they may choose not to, to give their customers the best value and perhaps gain market share. Wesfarmers Ltd (ASX: WES) is an example of a business doing this.
Time will tell how long it takes for inflation to calm down in Australia and overseas.
