Rising Costs & Maintaining Margins…
Inflation in the offing…
- It would be surprising if Sterling’s collapse didn’t lead to rising input costs
- Companies must pass rises on or see their margins fall
- Marmite, Walkers & Toblerone have been in the spotlight
- Others must follow – but consumer groups will be vigilant
Where will the rises stop?
- Consumers will face higher prices but employers will resist calls for pay rises
- If they are successful in this resistance, consumers will bear the cost & this will be a one-off
Another economic variable – but the strong still feed off the weak…
- But companies may try to maintain their % rather than their cash margins
- Take the instance of a £9 (net of VAT) meal that costs £3 to supply
- The cash margin is £6, the % margin is 66.6%
- If costs rise by 50p (to £3.50) then:
o Should the company raise its price to £9.50 (and hold its cash margin)?
o Or should it raise prices to £10.50 to hold its percentage margin?
Of course, the temptation will be to attempt the latter:
- This leads to risks – that inflation becomes baked in – but it can lead to higher profits
- For companies with some room to ‘take price’, it can lead to a profit windfall
- Operators with strong customer support and existing low prices may benefit materially