Inflation: Friend or Foe?

January 12 2017

Background:

  • Many consumers have little or no first-hand experience of inflation
  • The two 5% spikes in 2008 and 2011 were ‘aberrations’
  • We were in short pants (or not born) in the 20% plus days of the 1970s
  • Nobody’s suggesting we’re going back there but there’s a rumble in the price jungle

RIP deflation – here’s a Brave New World. Velcro vs Teflon:

  • Deflation’s not a thing anymore
  • So remember, when costs fall, you cut prices slowly (and not by much)
  • When costs rise, you pass then on (plus a bit) like a hot spud

Only the Lonely – AKA Bad Inflation:

  • If only your costs rise, you may not be able to pass higher costs on
  • Unsympathetic customers, whether B2B or B2C, may shun your products
  • Examples may include single commodity price rises, single currency issues
  • Or shortages due to remote events such as trebling of hard drive prices post 2011 Thai floods

Unconscious Collusion – AKA Not Bad Inflation (don’t say ‘Good’):

  • If cost rises are widely spread…
  • If they are well-flagged…
  • If they are universally ‘understood’…
  • If they are not the ‘fault’ of greedy suppliers…
  • Then they may be passed on and everyone, accidentally, will make more money

Where are we now?

  • It will be interesting to see if Tesco etc. ‘reluctantly’ accede to producer price demands
  • We believe they will because, if not now, then when?
  • They will seek (but perhaps fail) to maintain their ‘consumer champion’ status
  • Pubs, bars & restaurants will put through price rises Q1
  • We think these will see % margins fall but will materially widen cash margins
  • Now that’s fortuitous, isn’t it?

Major beneficiaries:

  • Low margin, high volume operators should benefit most
  • However, remember these companies are most negatively exposed if rises don’t stick
  • But they will stick. Operators will bank profits and thank their lucky stars
  • Or possibly they will pat themselves on the back & trumpet their skill, erudition

*Words & phrases to watch out for:

  • Don’t refer to ‘enhanced margins’. ‘price gouging’, ‘take advantage’ or ‘good inflation’.
  • Do use the words ‘reluctantly’, ‘restraint’ and ‘after many years’

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