What the ‘shortage of everything’ really means for businesses: addressing supply chain issues, rising inflation, and cost pressures

15 October 2021

Giles GaleHead of European Rates Strategy

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Supply chain issues have rarely been more prevalent as shortages of labour, skills, energy, components and raw materials cause individuals and businesses alike major problems. With this in mind, we recently conducted a study of our corporate clients to find out the problems they’re facing and how they plan to adapt, and summarise the findings in this article.

We asked 155 of our clients – small, mid-cap and large companies across a range of sectors and predominately based in the UK – how long they believed this period of heightened cost pressures would last. If they expected higher costs to be short-lived, they could try to ride them out, whereas lasting pressures would be more likely to warrant strategic action.

Few expect the current supply bottlenecks to be over soon. Firms in finance and construction were the most optimistic about the bottlenecks being short-lived, but around half of the respondents see cost pressures persisting for a year or more. With this in mind, we’d expect companies to adopt a rather defensive approach, accepting higher costs but trying to pass them on to their customers as much as possible.

Businesses are split on whether to pass on rising costs to customers

Our next question was whether firms believed they could indeed pass on price increases to their customers, and if they intended to do so.

There was a clear divide here: 46% said they expected to pass on half or more of any increase in costs (and most of these said they expected to pass on the full increase to customers), but a third said it would be difficult for them to sustain their margins faced with higher input prices.

We asked: if cost pressures are sustained, how much do you expect to pass on to your customers?

Sources: NatWest Markets

There were some notable differences among sectors. Firms in manufacturing (52%) and services (60%) were most likely to report that they would pass on most of any higher costs. Those in retail and hospitality were least confident in their ability to do so.

Good help is hard to find, and wages are likely to rise as a result

Labour shortages in a range of industries have been hitting the headlines recently, and global surveys confirm that staffing is indeed a constrained input. These shortages have a variety of causes, including lingering caution about catching covid; people worrying about how their children will be looked after if schools close again; economic migrants to the UK returning to their countries of birth; and high household savings, which mean people don’t feel a pressing need to return to work immediately.

Unsurprisingly, many of our clients confirmed that they are having difficulties with staffing, with only 15% saying they have no problems in this respect. Many accept that they’ll have to work harder to attract the right people, with 37% saying it’s likely that they’ll consider raising pay. Interestingly, this was fairly consistent across sectors.

We asked: if human resources are a constraint, how likely is your firm to consider raising wages?

Sources: NatWest Markets

Adapting to cost pressures and potential currency weakness means locking in longer-term costs, but few firms are using financial tools to do so

By far the most popular way to address supply risks or cost pressures was via longer-term procurement contracts, even though that might mean locking in at higher cost. It was relatively rare, however, for our respondents to seek financial solutions to mitigate cost risks.

Perhaps reflecting the fact that smaller firms dominated our sample, few (12%) reported hedging energy or commodity prices and even fewer hedged against inflation. Only 3% said they were taking steps to reduce interest rate risk – even though nearly one in five view rising rates as a key concern.

We asked: regarding cost pressures, what mitigation strategies are you using?

Sources: NatWest Markets

A fall in the value of sterling (most of our respondents were from the UK) was the other main worry. Those firms for which importing goods is a key part of their trade naturally tended to highlight this risk, although manufacturers were nearly as likely to see a weaker pound as a risk, highlighting the importance of input costs.

A tough operating environment, the effects of Brexit, and concerns over government policy also linger on the minds of businesses

Despite wider talk of a recovery, there is clearly some pessimism around at the moment, with several firms suggesting that the current environment is the most challenging they have ever faced. But crucially, and perhaps surprisingly, few mentioned covid as an explicit concern, whereas problems with shipping and staffing (or skills) were both frequently raised. Comments about inflation and costs were common, with many emphasising wider supply-side problems including elongated delivery times and lower reliability.

Although not explicitly the subject of any of the questions in our survey, Brexit was also raised frequently, with some quite detailed complaints about issues ranging from customs declarations to regulations and skills shortages. Risks relating to government policy and finance were also common themes.

But it wasn’t all doom and gloom, with some firms striking a more upbeat tone. Some suggested that the inflationary challenges they were facing were likely to be short-lived, while others stated they were still confident in the outlook for UK businesses and that they were continuing business as usual.

To learn more about the implications of supply chain disruption, skills shortages and inflation risks on your financial strategy, get in touch with your NatWest Corporates & Institutions representative or contact us.

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