Cost pressures and inflation to lift prices of consumer products

The prices of consumer products are expected to rise significantly next year, according to a new study by AlixPartners.

The report, titled ‘Margin Protection in Times of Inflation’, asked executives of manufacturers and retailers globally on their predictions for the development of costs across the value chain.

The survey found that 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.

Only six of the categories assessed were expected to see costs coming down within the next 18 months: steel/metals, chemicals, timber, flour, corrugated packaging and plastic packaging.

“Cost inflation is impacting every part of the value chain, but is especially pertinent in the categories of transport and freight, and raw materials,” said Hisham Abdul Khalek, a Director at AlixPartners in the Middle East.

The consumer impact

Both manufacturers and retailers told AlixPartners’ researchers that they are actively looking at ways to mitigate cost inflation, and not surprisingly, passing on the cost increases to consumers is the most cited strategy.

In the manufacturing segment, manufacturers expect to increase their goods sold by an average of between 8% and 16%. How much of that increase ends up with consumers depends on the strategies followed by retailers, with some planning to pass all this cost increase to consumers in the form of higher prices, while some retailers may opt to take a (small) hit to defend their market shares.

In the consumer goods segment, 95% of consumer goods companies told AlixPartners that they are working on plans to pass on cost increases to consumers.

Khalek said that with rapid increases in costs, “manufacturers and retailers are now drawing the line and understandably seeking to protect their margins.”

However, he asserted that companies should look into more options than just passing on costs to consumers. “Additionally, executives need to maintain ongoing visibility on costs in this dynamic market, accelerate robust risk management mechanisms, explore alternative suppliers and supply chains, and explore other long term mitigation actions.”