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