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