Rising Costs & Maintaining Margins…

November 9 2016

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