Margin watch. Rising costs threaten profitability over the medium term…

June 22 2016

Some costs are rising but the CPI isn’t…

Labour & commodity prices up, CPI stuck at 0.3%

The oil price has doubled in 3mths, sugar is +71% on a year, OJ is +41%
Soybeans are +19% & even coffee, corn & pigs (+6%, +9%, +15%) cost more
NLW and NMW are jacking labour costs by 5%, 6%, 7% annually
Rent, rates & other ‘labour-heavy’ services do nothing but go up
But the UK CPI is stuck at 0.3% & price rises have to be ‘earned’

Cost-cutting is great but, at some point, margins will take the strain

HMG is trying to drive inflation – and it is using OPM (other people’s money) to do so
There may be unintended consequences
Companies are striving for efficiencies to head off cost rises
But this is nothing new. Cost cutting tends to be finite, margins may ultimately suffer

Looking for the silver lining:

It’s hard not to view this as another borrowing income from the future
However, for B2C companies, the NLW etc. will put more money in customers’ pockets
The savings ratio might go up – but it probably won’t
Hence incremental cash could/should be spent down the pub
An optimistic view would have a virtuous circle being created
On the other hand, profitability (and ultimately employment, GDP etc.) could suffer