The news earlier this week that Guardian Glass was raising prices on many of its product categories up to 40 percent was a stunner. But should it have been?
I know, I know. I know what you are going to say. The Guardian of years past would not have done things this way—they wouldn’t have issued such a breath-taking letter. Except that’s precisely how they’ve been doing it for the past few decades. Long before our first online story about such increases in 2011, customers received price increase letters. The ten-day notice seems short, but I can’t imagine what length of time is “right” for such an increase.
Please don’t think me insensitive because I am not. This enormous increase will be problematic for many readers, especially those who have locked in pricing with their customers or generals but not with their suppliers. For others, it will be passed along or marked up and passed along.
1. It’s still a supply and demand issue. Supply is down, and demand is up, which usually leads to higher prices;
2. Glass is an energy-heavy business. At the moment, energy costs in manufacturing and transportation are very high. These costs must be recouped.
Weekly Average Price of Gasoline in the U.S. including Taxes
3. Industry price increases have been accused of masquerading as surcharges for years. Some surcharges have made sense, some have been tied to irrelevant or out-of-date measures, and some have never varied, but many in the industry see surcharges as ad hoc price increases by another name. Accurate pricing might help alleviate this issue.
4. Increases in glass pricing have not kept pace with other construction materials. No one believes that glass has gotten cheaper to make, yet look at these stats from the past 32 years on glass pricing vs. other construction materials.
Construction Material Price Index by Product/Material,
5. Price increases have risks. All companies want to increase profit; savvy companies recognize that price increases often are met by a loss of market share– and customers. Significant price increases lead even the most loyal customer to look elsewhere. The leaders of companies that institute high increases have no doubt run the numbers. They believe that the risk of not raising those prices is greater than the risk of losing some customers.
Their competitors, too, are also assessing the situation internally. They will decide whether an increase in their pricing is warranted versus how many customers they will pick up if they do not.
5. Glass is not ice cream. Nor is it tissues or batteries or gasoline. Just look at what’s happened to the cost of most products in the past year. Their prices have gone up, or their components have been replaced by lower-cost ones, or their package size has decreased. Or a combination of all three. Price increases to glass have no such place to hide. It is priced by the square foot and save the surcharges; there are few ways to increase prices stealthily.
Guardian is not the only manufacturer raising prices. Numerous other companies have instituted significant increases this year. This interesting December 2021 article published by The Business Standard, a business publication in Bangladesh, showed what the market in that country was going through.
There are some things those initiating the increases can do to answer customer questions and help handle the uncertainty.
First, manufacturers should clearly announce when such increases will be effective and what they will cover. There is currently some confusion over Guardian’s announcement, effective June 20th. Does that mean it’s effective for new orders placed on June 20th or beyond? Or does it cover orders placed before that date but delivered after June 20th? And, if pricing changes, can the purchaser cancel the order? After all, they ordered it at a different price.
The customers who get hit the hardest with such increases are those with fixed-price contracts. They have committed to supplying products at a particular price because they traditionally have been able to buy products under the price at which they sell. These price increases “have the potential to take some businesses down,” said one contract glazier who did not want his name used. “They are challenging to navigate.”
He went on to say that some GCs understand the situation and will try to deal with it, but “the ones who will feel it most have government or fixed price agreements. Those customers are not inclined to understand or agree to increases.”
The Game Changer
My prediction is that we will see three trends advance in the future in response to such volatile price changes. They will change the rules of the construction game. I would anticipate the following:
1. Price escalation clause in most contracts. No longer can the contract glazier, the glass retailer, or fabricator absorb adjustments in their material costs without adjusting the cost to the purchaser. “We see a large increase in the inclusion of escalation clauses in construction contracts,” said construction attorney Tim Fandry of Gray Reed at a recent conference. “Having product pricing tied to increases, specific indices, or other measures will become much more common.
2. A greater explanation of allowable price increases will be included in construction contracts. Customers will want to protect themselves by having agreed terms detailing when or why prices can be changed, how much notice is given, what products it applies to, and if the purchaser has a right of refusal. Increases themselves may be limited to a certain agreed-upon percentage.
3. Price protection. Contract glaziers and other customers will pay a percentage fee to protect their pricing throughout the contract’s life. This construction equivalent of buying down mortgage points could become more popular as the market fluctuates. This seems like one of the best solutions available. Customers pay a bit extra for the security of knowing their material costs are stable. Suppliers have new profit centers and additional incentives to keep costs as low as possible for their customers.