Despite inflation being at a more than 20-year high, manufacturers and retailers globally, including in the Middle East, are expecting further inflation in consumer products costs of goods sold (COGS) in 2022, by circa 10%. That’s according to a new Cost Inflation Flash Survey undertaken by AlixPartners. The report, named Margin Protection In Times of Inflation, surveyed companies on their perception of the current state of cost inflation.
Cost inflation is impacting every part of the value chain, but is especially pertinent in the categories of transport and freight, and raw materials. Across the 15 categories surveyed, respondents expect further cost inflation versus original budgets in all categories for the next six months, with sugar, electronics, timber and transportation cost inflation anticipated to hit 10% or more. Furthermore, only six of the categories were expected to see costs coming down within the next 18 months (steel/metals, chemicals, timber, flour, corrugated packaging and plastic packaging).
Cost inflation has the potential to hit manufacturing EBITDA by 20-30% according to those surveyed. It is therefore unsurprising that both manufacturers and retailers are looking at ways to mitigate cost inflation. In fact, 95% of consumer goods companies plan to mitigate cost inflation by passing on cost increases. Manufacturers are expected to pass through 8% to 16% COGS increase to retailers, retailers plan to defend a 5-10% COGS Increase.
Hisham Abdul Khalek,Director at AlixPartners Middle East, weighs in: “With the rapid rise in the cost of production and raw materials, the lines are being drawn up by manufacturers and retailers as they seek to protect their margins. There are a number of tactics that companies can consider to achieve this goal, additionally, executives need to maintain ongoing visibility on costs in this dynamic market, accelerate robust risk management mechanisms with current or alternative suppliers, assess how much of this cost can be passed through to customers and how to architect this to minimize volume loss, identify potential portfolio changes to protect overall margin in the short and long term, and explore other mitigation actions across the organization to minimise total impact. “