Inflation on products and energy can call into question the business model of many sectors of activity, such as food distribution.
Caught between galloping food price inflation and energy costs, the food retailing industry’s business model is now under threat with 12/13% inflation.
Increases that consumers can no longer afford. This is reflected in volumes: fish has fallen by between 20% and 30%, meat by 12% and fruit and vegetables by 8%.
Not to mention the “energy wall” which will cause a considerable increase in costs for the sector.
This will undermine the model of mass retailing, which will have to massively increase prices in order to hold out, but in doing so will see a deterioration in the volumes sold. Production systems are not designed to sell much less product.
Many causes contribute to inflation
Macroeconomic causes of inflation:
- Demand for goods and services exceeds pre-pandemic levels.
- Restrictions and closures around the world are causing instability in production capacity and supply chains.
- China’s zero covid strategy, with frequent lockdowns, is further tightening international supply chains, leading to shortages of goods and higher prices.
- Global tensions and political pressure from sanctions and restrictions are disrupting supply chains and causing shortages.
- Protectionism and import duties raise prices.
Microeconomic causes of inflation:
- Talent shortages increase competition; consequently, talent prices rise and costs to firms increase, leading to higher prices.
- Price increases due to supply chain constraints and macroeconomic developments lead companies to raise prices. Often the price changes are larger than necessary, leading to accelerated inflation.
- Microeconomic scarcity can also lead to higher prices. When industries deliberately do not want to increase production to meet increased demand, because they do not want to expose themselves to additional costs when demand falls, or they want to limit supply in order to artificially increase prices and margins.
- Price opportunism – If companies are not directly affected by the supply chain or other reasons, they see prices rising and try to increase their prices to increase their profit margins.
Companies can fight inflation.
In view of the latest inflation figures, it is very likely that we will have to continue to live with it. With the added risk of an economic bubble bursting. Companies must therefore act and react to these changes.
1. Understand what is going on in the world
Companies should regularly monitor developments to see what the international market climate is like. Stock markets, commodity prices, or even labour market data are good leading indicators to follow and monitor and will give you valuable information in your value chain variables.
2. Strengthen your financing
It is in the interest of companies to improve their financial structure to have longer maturities. Strengthening equity, obtaining long-term loans from banks and even suppliers, seeking convertible debt and obtaining guarantees for outstanding loans are all avenues to be investigated to strengthen the company’s sustainability and establish a safety margin that will limit the impact of a decline in free cash flow.
3. Understand the entire value chain
It is important to understand the entire supply chain (or value chain) and, in particular, to examine exposure to external supply and demand shocks. This understanding also includes identifying potential risks directly or indirectly related to suppliers. It may be necessary to maintain adequate stock levels and develop alternative sourcing strategies when stocks run out and just-in-time supply is interrupted.
4. Strengthen employee retention and communication
In times of uncertainty, employees lose productivity, and recruiting and training new employees is extremely costly. It is therefore very important to keep morale and employees in the company to be operationally flexible, save costs and avoid labour shortages.
5. Adapting your strategy
If the outlook for revenue and general economic development is uncertain, it is important to streamline activities and act more in a short-term survival mode, without sacrificing key initiatives for the future core business. This is a good opportunity to distinguish between promising and less successful projects. Creating dashboards to refine the growth of the business and analyse the profitability of future opportunities can help to make better decisions.
It is important to better understand which projects are adding value and which core business activities need more support.
Comco Consulting will help you to diagnose your business model. Do not hesitate to contact us to find out more about our support offer at contact@comco-consulting.com