How businesses can survive & thrive through high inflation
May 11, 2022
5-MINUTE READ
May 11, 2022
5-MINUTE READ
The impact of the pandemic and the war in Ukraine has driven inflation to surge across the globe. Few C-suite executives have experienced these combined inflationary pressures and navigated their company through such an environment. In a high-inflation context, three imperatives are crucial for success and enduring competitiveness:
After two years of pandemic and a war in Ukraine that threatens modern globalization, many economists, business leaders and policy makers agree: We have entered a high inflation environment that is fundamentally challenging business leaders and the way companies operate. New dilemmas emerge every day, spanning supply chain, manufacturing operations and workforce management to financial management and customer retention.
Since the global financial crisis of 2007–2009, companies have enjoyed ongoing economic growth and low volatility. However, even before the war in Ukraine, many economies were already experiencing inflationary pressures caused by extensive fiscal and monetary support measures, a shift of consumers buying more goods versus services and supply chain disruptions. As of January, 70% of global C-suite executives were expecting significant inflation in 2022, potentially reaching double-digit rates in select countries.1 As a result, inflation is topping the priority list of many business leaders.
As war compounds issues like supply chain disruption and energy prices, the challenge has become real. Natural resource shortages along with soaring energy and housing costs, and constrained supplies of consumer goods have led to unprecedented inflation levels across major markets. As of March 2022, inflation reached 8.5% in the United States, 7.0% in the United Kingdom and 7.4% in the eurozone.2
Drivers of recent Consumer Price Index inflation
Sources: US Bureau of Labor Statistics, UK Office of National Statistics, Eurostat; data surveys as of March 2022
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When inflation will peak remains unclear. Economic and business impacts will largely depend on the length and severity of the crisis as well as policy response.3 Few business leaders today have experienced anything similar over their tenure. Now, this new reality is testing their supply chains, their people, their customers and their stakeholders.
The good news
Despite the outlook, leaders may be better prepared than they realize. The operational changes they made to navigate the COVID-19 pandemic helped their businesses survive and thrive: In fact, our research shows the largest 2,000 companies globally grew by 11% between Q4 of 2019 and Q4 of 2021.4
Value generation differed among them, however. The more digitally advanced companies navigated the crisis without compromising profitable growth.5 From December 2021 to January 2022, 90% of c-suite executives reported that their organizations were undergoing rapid digital transformation.6 Some companies—we call them ‘Twin Transformers’—also combine digital transformation with an acceleration of their sustainability agenda.7
Many forces have come together to drive high inflation, and the effects differ by industry. The impact depends on cost structure—including energy, materials and wages—as well as the ability to pass costs on to consumers.
Inflationary cost pressures on profit margin are amplified as they pass through the various layers of the economy:
Industries will face different levels of cost pressure on margins, based on their cost structure.
Cost structure and cost pressure on margin by industry in Europe
*Energy impact = Cost increase due to direct energy usage, Raw materials & supply chain impact = cost increase due to direct usage of raw materials and transmitted through the supply chain, wage & demand = cost increase due to inflation induced wage increase and demand erosion. ** Before pass-through. Ranges for high and low scenarios consistent with ongoing impact and protracted impact scenarios: Energy price scenario $110-150/Bbl for oil, $157-194/MWh for natural gas, $155-188/tn for coal. Utilities correspond to supply of electricity/gas/heat, excluding water/waste.
Source: OECD, Accenture Research energy price impact on margin simulation model.
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Utilities, like power generation and distribution, are greatly affected due to their dependence on oil and gas. However, they may be able to manage impact by passing on costs, but within the constraints of regulatory price controls.
By contrast, the consumer goods industry is exposed to the high cost of energy indirectly, as many of their manufacturing processes rely on food, raw materials and resources from directly impacted industries. Food, beverage and consumer durables are likely to see significant disruption due to their reliance on agricultural commodities and raw materials; together, Ukraine and Russia supply 26% of global exports of wheat.8 The food, beverage and consumer durables sector also is highly price-sensitive and vulnerable to consumer switching.
Other industries may suffer cost pressure even more indirectly. For example, the health industry is not a heavy direct user of energy or raw materials, but much of its cost structure depends on employee compensation. As prices of products they consume rise, workers will demand higher wages to try to maintain their purchasing power.
Remember that challenges also vary by geography and industry. Areas that rely on production from other regions may be more exposed to energy and food inflation. Other geographies may have social, political or institutional constraints that prevent them from handling inflation shocks, resulting in volatility.
Will I lose my customers if I pass on the cost of inflation? Will my competitors price me out of the market? How will I pay my employees? What’s the best procurement strategy for a highly inflationary environment? Will I remain competitive overall?
Leaders may need to make tough choices quickly. Anticipating change and planning for a range of scenarios is essential, and the more intelligence, the better.
“Intelligent” enterprises use integrated, cloud-enabled planning and performance analysis tools to improve how they capture and analyze data. From there, they can garner valuable insights to fuel decision-making around critical issues, including:
Trade-offs: What to expect and how to address them
The optimal strategy improves the company’s data gathering and analytics capabilities and uses technology-enabled solutions to calibrate the best response to the difficult trade-offs that inflation demands:
Trade-off: Customer demand and retention vs. margin
What to do about it
How to improve decisions using data and insight
How to drive operational efficiencies with technology
Data infrastructure and management powered by cloud
Pressure on industry9
Trade-off: Cost vs. resilience
What to do about it
How to improve decisions using data and insight
How to drive operational efficiencies with technology
Pressure on industry
Trade-off: Retention vs. wage inflation
What to do about it
Rethink work processes and reward approaches that drive engagement and boost productivity.
How to improve decisions using data and insight
Analyze data on:
How to drive operational efficiencies with technology
Pressure on industry
Trade-off: Cost efficiency vs. topline growth
What to do about it
Use zero-based cost approaches to improve liquidity and cash flow11 while freeing up resources for growth.
How to improve decisions using data and insight
How to drive operational efficiencies with technology
Advanced analytics to track and recalibrate costs in real time
Pressure on industry
While insights are crucial, transparency is equally so. Be forthcoming with stakeholders about the changes you’re making to address inflation, especially with customers, employees and ecosystem partners. This could be as straightforward as:
Be sure to collect feedback and response data so you can understand how stakeholder reactions may affect your business and adjust accordingly.
Inflation may be here to stay, but with solid insights and sharp decision-making, it is still possible to create value for your stakeholders. Understand how inflation will affect your industry, your ecosystem and your employees (in the short-, mid- and long-term), and act early to improve your data capabilities and build transparency on all fronts. It’s all part of the foundational strength businesses need to survive and grow—both now and when high inflation is no longer a critical concern.
The material in this document reflects information available at the point in time at which this document was prepared as indicated by the date provided above, however the global situation is rapidly evolving and the position may change. This content is provided for general information purposes only, does not take into account the reader’s specific circumstances, and is not intended to be used in place of consultation with our professional advisors. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this document and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit, or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals. Accenture and its logo are registered trademarks of Accenture.
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References
1 Accenture Survey of 3,200 C Suite executives across Geographies and Industries; data collection, 10th December 2021- 21st January 2022
2 US Bureau of Labor Statistics, UK Office of National Statistics, Eurostat; data surveys as of March 2022
3 Business and economic impact of the war in Ukraine, Accenture (2022)
4 Accenture Research analysis on data retrieved May 2022 from S&P Capital IQ and SNL Financial databases
5 Make the leap, take the lead: Tech strategies for innovation and growth, Accenture (2021)
6 Accenture Survey of 3,200 C Suite executives across Geographies and Industries; data collection, 10th December 2021- 21st January 2022
7 The European double up: A twin strategy that will strengthen competitiveness, Accenture (2021)
8 "2021/22 Grain Trade in Flux Amid Russia-Ukraine Conflict,” US Department of Agriculture Foreign Agricultural Service (2022).
9 Accenture Research based on profit margins simulation model. The model accounts for first, second and third round impacts of energy price increases. To model first and second round impacts, we embedded a detailed view of the structure and outlook of the energy market into Input-Output tables coming from OECD. The detailed view of the structure and outlook of the energy market was developed in consultation with energy industry experts. To model third round effects, we consider two channels a) impact on demand and b) impact on wages. For a) we assume that demand for each industry will follow industry GDP growth which we source from Oxford Economics’ industry data bank (data retrieved April 26th). For b) we assume that wage inflation equals consumer price inflation after first and second round impacts, and that it loops though the supply chain. Employee compensation importance for each industry is from OECD Input-Output tables. Finally, ability to pass-through cost pressure to prices was calibrated combining GTAP demand substitution elasticities with industry expert views. We simulated high and low energy price scenarios consistent with ongoing impact and protracted impact scenarios in Energy price scenario $110-150/Bbl for oil, $157-194/MWh for natural gas, $155-188/tn for coal.
10 The benefits of supply chain visibility, Accenture (2022)
11 Inflation and Economic Uncertainty, Accenture (2021)
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