How to manage your business in a high inflation environment
02 Aug 2022
Inflation in Euroland from 2010 to 2014 was below 1% and between 2015 and early 2022 was nil or negative with Euro Interbank Offered Rate briefly reaching 5% in 2000 and 2008 and then turning to negative as of 2014. Similar data can be observed on major currencies such as the USD and GBP (even though central banks may apply somewhat dissimilar short term monetary policies) to the extent that if you held 1.000 monetary units in 2000, they would now be worth 1.400 Euros, or 1.500 GBP or 1600 USD. Meanwhile other large world economies fared very differently. The same amount back in 2000 would now be worth 1.600 Yuans, 3.700 Rupees, or 3.800 Reals, 7.800 Rubles or…23.700 Turkish Lira!
So whilst many businesses consider inflation management a fact of life, for many western economies the time has come to re-learn how to cope with a currently >9% inflation situation (and increasingly higher costs to borrow money) which, depending on whom you listen to, may last for months or longer – and in case you wonder if inflation accounting is good for your business, I just interrogated the internet as to which industry would do well in inflationary conditions and got 308 million results in 0.55 seconds, so I guess the resounding response is YES!
Unless you believe inflation will quickly and painlessly return to almost zero (that is called an assumption by the way) what would you as business leaders need to re-learn, or perhaps revisit if you were already active in pre-Euro days where Lira or Peseta or perhaps Drachma did easily devalue and/or offer >10% interest rates?
You may start here:
- Planning and execution of sales pricing policies need to be more rigorous with up to weekly updates feeding into a monthly commercial planning cycle
- Bottom-line protection is paramount vs top-line growth, even more so if historically achieved via promotions and discounts (it makes no sense to frequently put prices up and then discount them)
- Develop extended supply chain assumptions/collaborations to project how incremental costs may be passed downstream onto clients and consumers if at all
- Develop shorter term models to test price volatility and sensitivity in the market (this has already become necessary with e-sales, now even more)
- Rethink sourcing route to market if goods and services are obtained outside your territory and therefore subject to import penalties and currency fluctuations
- Think 0 Km = locally vs import sourced – this is also a powerful consumer marketing tool under current circumstances and protects business from network variability and extending lead-times
- Think in total delivered cost in its main vectors now and in the future by adding inflation and currency assumptions and do not relegate them to annual strategic plans as they need to be reviewed on a monthly basis so long as disruptive business conditions continue
- Inventory management will be put under pressure by growing costs of borrowing though may also represent opportunities to hedge and trade in raw materials with rapidly fluctuating costs
In summary, inflation management has made an abrupt reappearance in most western economies – in many other countries this has been a ‘business as usual’ condition for many decades so the chance is there to re-learn and perhaps re-apply it to protect and hopefully continue growth in your industry.