Six ways to break out of the inflationary squeeze

By Claire Fox and Zelf Hussain

Your business and its customers are facing a perfect storm of rising costs and prices. Fuel, material and sourcing costs are being driven up by disruptions ranging from the lockdowns in China to the continuing war in Ukraine. Adding to the inflationary pressures are rising salary costs. With skills in short supply, you may find yourself in a bidding war to attract and retain key talent. Your workforce might also be increasing their pay demands to help meet the increasing cost of living.

We are seeing that retail and business customers are being ever more careful about how much they spend. Unsurprisingly, therefore, one of the most common questions we hear from the businesses we advise is: “How can we sustain margins without pricing ourselves out of the market?” When considering the answer, it’s important to recognise that the current situation is markedly different to previous downturns. As a result, we often find that the kind of solutions that might have worked in the past are proving ineffective.

Consumer sentiment slides

Consumers and businesses in all major economies are struggling with this inflationary spiral. But, in a consumer-led and sentiment-driven economy like the UK, the effects can go deeper and be more difficult to overcome.

The scarring impact of inflation is highlighted in our latest consumer confidence survey. Confidence has dipped to an all-time low. Looking at spending across different categories, we’re even seeing a drop in how much people spend on their children, which is normally the last area to be cut.

No easy answers

In the past, the default responses would have included passing on the rising costs to customers. But with inflation cutting into business profits and households facing one of the sharpest falls in disposable income on record, we believe that many customers will opt to spend less rather than pay more.

Thanks to the low lending costs we’ve seen until recently, another option would have been a step-up in borrowing to help ride out the storm. But with interest rates rising and credit availability tightening, this might be a prohibitively expensive course, even if it is a possibility.

As neither of these options may currently be feasible, businesses could be tempted to cut back on investment. But as we explore in our latest Act now to recover report, Priorities under pressure – the hidden cost of haste, this could leave your business on the back foot on containing costs, stabilising supply chains and keeping pace with customer expectations on digital transformation and environmental, social and governance (ESG) priorities.

In relation to supply chains in particular, we’re seeing a shift to bigger inventories within many businesses. The move from a ‘Just-in-Time’ strategy to ‘Just-in-Case’ can help to avoid some of the shortages. But by increasing storage costs and paying more to suppliers before the money comes in from end customers, this could increase working capital costs and solvency risks. This is especially true now that credit lines and factoring are becoming more expensive.

Easing the impact of inflation

So what are the alternatives? Drawing on our work with a range of clients, six priorities stand out:

Focus on what customers really value
Rethink savings and investment
Accelerate transformation
Keep driving ESG
Harness partnerships to strengthen supply chain resilience
Anticipate what’s coming

Focus on what customers really value

Business clients and end-consumers will still spend, but they want value for money and will go to a competitor if they don’t get it. The key is understanding what matters to your customers, and aligning this with your ‘pricing architecture’. From what we’re seeing in the most price-sensitive retail and consumer sectors, this doesn’t simply mean that products need to be cheaper, but must have clear value to the customer. Creating new pricing architecture to focus on value brand products, special offers or creating smaller pack sizes could be an option. There is evidence that many businesses are looking again at range rationalisation to help reduce storage, transportation and marketing costs.

Rethink savings and investment

Cutting costs across the board could undermine your ability to compete. A better option is to focus on the ‘good costs’ that boost capabilities and drive value, while eliminating the ‘bad costs’ in areas such as process inefficiencies and working capital leakage. For example challenging the back office support to ensure it is lean and focused, identifying the low value activities in your business. Being Customer Led and understanding what your customers really value provides the ideal starting point for distinguishing the good costs from the bad.

Accelerate transformation

Digital transformation might seem like a second order priority when cash flows are so tight. But if targeted effectively, it can strengthen customer understanding and sharpen decision-making, while enhancing service and driving out needless costs. When consumers have such a keen eye on value for money, these advantages are more important than ever.

Keep driving ESG

Just like investment in transformation, it can be easy to neglect ESG considerations in favour of what might seem like more immediate priorities. But again this would be counterproductive. Our Priorities under pressure – the hidden cost of haste report not only highlights the extent to which consumers value sustainability, but also the fact that nearly three-quarters of investors assess ESG when extending finance.

Harness partnerships to strengthen supply chain resilience

Moves to consolidate and nearshore supply chains can all help to strengthen security, while reducing your carbon footprint. You can take this further by partnering with other businesses and sharing each other’s supply, sale and shipping platforms. Forming partnerships with a competitor might seem counterintuitive, but working together can drive efficiencies for all parties involved.

Anticipate what’s coming

Rising inflation and subdued demand make effective scenario planning and working capital forecasting more important than ever. The more you understand what’s on the horizon and how your business will perform, the better your ability to manage the risks and sustain confidence among suppliers and creditors will be. If you do detect trouble ahead, forecasting enables you to move early in engaging with creditors and tackling issues before they escalate.

Act now to reap the benefits

What cuts across all these priorities is the need to address longer term challenges as well as applying short-term fixes. Get in touch if you would like to know about what we’ve learned from helping a range of companies navigate through this tough new environment.