PRICES UNDER PRESSURE
Of NZ firms expect higher costs in the next 12 months, the highest in a decade of firms plan to raise their prices in response to higher costs Cost of trip to shops to go up as retailers in all sectors feel burn of rising costs, writes Aimee Shaw
Price hikes across all retail categories are expected in coming months as increasing and compounding cost pressures on businesses flow through.
Increases to the minimum wage rate and incoming sick leave entitlements, paired with the cost of freight almost doubling since the onset of coronavirus and increasing international procurement prices, are expected to push up the prices of everything from clothing, footwear, appliances, through to homewares, hardware, sporting goods and grocery items.
Retail NZ says businesses’ cost bases and overheads are growing at alarming rates and increased costs at the shelves are only a matter of time.
The latest Retail Radar survey of Retail NZ members shows two thirds of retail businesses expect to see prices increase over the next quarter.
Retail NZ’S Greg Harford told the Herald that multiple factors were at play making it more expensive than ever to run a profitable business.
“There’s been a big explosion in demand for product overseas so the cost of buying goods internationally has increased, the cost of freight has more than doubled — and that’s a big component of the costs we face here in New Zealand, and we’ve had the big minimum wage hike kick in a few days ago, which is driving [increased costs] of employing people and not just people on the minimum wage.
“Right across retail, employers are trying to maintain relativity within their teams, they have effectively given many people a pay rise, and there are more [increases] coming down the track,” said Harford.
“The cumulative impact of all of that has resulted in huge pressure on margins and in a world where the net retail margin is 3.9 per cent, it is not sustainable to absorb those costs.”
A report by Craig’s Investment Partners questions whether rising cost pressures and inflation could derail New Zealand’s economic recovery.
The Reserve Bank expects headline inflation to increase from its current 1.4 per cent level to as high as 2.5 per cent through the middle of the year. However, this could be short lived, the report outlines, with forecasts suggesting it won’t exceed 1.6 per cent in 2022.
The ANZ Business Outlook survey shows that expectations of cost increases are at the highest level in more than a decade. About 74 per cent of firms expect higher costs over the next 12 months, while 49 per cent plan to raise their prices in response.
Firms expect inflation to remain slightly below 2 per cent — the highest level in two years.
Craig’s private wealth research team argue that some inflation is not necessarily a bad thing — providing “it doesn’t get out of hand and that it goes hand in hand with improving growth”.
They outline that the global economy is expected to gain momentum over the next two years as vaccine rollout efforts accelerate and countries gradually reopen their borders.
International Monetary Fund forecasts point to world growth of 6 per cent in 2021 — the biggest global
growth boom in 40 years.
Craig’s analysts say corporate earnings “should recover in a similar fashion”.
They say modestly higher inflation would be welcomed by many policymakers.
“Central banks have been desperately trying to generate some inflation (and to avoid the far worse scenario of deflation) for years, so they may be quietly pleased with this progress, to some degree.”
Retail NZ says the message it has received from its retailer members was that “prices are expected to start creeping up” over the next three months across a broad range of goods.
Increases to costs were being felt across all portions of the market, and no categories of goods would be immune from the price hikes, Harford said.
While retail was often considered cut-throat and competitive, the increasing costs businesses were footing were no longer able to be absorbed or delayed, Harford said, adding that the hikes had been a long time coming.
“What we’ve seen over quite a long period is pressure on costs and prices. A lot of that hasn’t necessarily in past years flowed through in the way that we might have expected it to, but the cost increases we are seeing now are of such a substantial nature that it is likely they will move through pretty quickly.”
Employers and Manufacturers Association chief executive Brett O’riley agrees — he says price hikes are the last resort for businesses, and he believes rising inflation does have the potential to derail the country’s economic recovery.
“You just can’t keep laying more costs on businesses without it having an impact. Unfortunately this outcome was entirely predictable,” O’riley told the Herald.
The cost increases we are seeing now
are of such a substantial nature that it is likely they will move through pretty quickly.
Greg Harford, Retail NZ
“It’s the perfect storm or imperfect storm because you’ve got the global supply chain and freight issues that are massive and businesses have nowhere else to go — if you reduce service you lose customers so your only other choice becomes increasing prices.”
The National Party has called for no new business legislation for the next two years. O’riley said EMA supported this as it would minimise disruption and put the brakes on rising costs in an area of business that could be controlled.
“With the minimum wage increase, we argued that the increase should be made smaller — to acknowledge the fact that we are in a very difficult time. We’ve been willing to be prudent and cautious around public health, what about being prudent and cautious around business health?”
The Herald had not received a response from Commerce and Consumer Affairs Minister David Clark or predecessor Kris Faafoi’s offices at the time of publication. “At the time when the economy is starting to get [back] on its feet, you don’t want to provide disincentives for businesses to be able to hire people or to be able to operate,” said O’riley.
Rising costs and legislation
Increasing business costs are largely a result of the coronavirus pandemic, which has put severe pressure on international supply chains at both shipping and manufacturing levels.
The cost of freight has more than doubled since the middle of last year and some retailers had reported paying up to three times the typical rate to get goods into the country following shipping constraints and delays.
The minimum wage increased by $1.10 to $20 per hour on April 1 and later this year the Government is set to double paid sick leave entitlements from five days per year to 10 days.
The increase to minimum wage on its own was significant, Harford said, particularly for smaller firms. This had crept up by 30 per cent over the past four years, he said.
“It’s not a bad thing, but it does have flow-on impacts to retailers’ abilities to hold prices.”
O’riley said increases to the minimum wage were redundant if a big portion of earnings were cut at the other end of the scale with higher goods costs.
“You can’t just move the cost dial in one part of the economy and think that it’s not going to have an impact . . . if [government] is trying to improve the cost of living for people there is no point choosing a blunt instrument like minimum wage without recognising that it is going to have an impact somewhere else in the economy,” he said, adding that he would not be surprised if the price increases that flow through are “significant”.
“Businesses have levers they can pull.”
O’riley fears the price hikes would be felt most greatly by those with the least money.
very
limited
The Retail Radar survey found two-thirds of firms expected the minimum wage increases will have an impact on their business in the quarter ahead.
About 37 per cent of retailers said they would be less able to reward staff performance, while 34 per cent said they would have to decrease the number of hours of work they offered employees. Thirty per cent of retailers said they expected to cut the number of people they employ over the next three months.
Retailers have for more than six months been riding the Covid-19 wave of increased consumer spending as the borders have remained shut to international travel.
While a big portion of the country’s largest and mid-sized retailers had significantly increased their profits and sales revenue since the middle of last year, Harford said those gains were short-term and businesses couldn’t easily absorb rising costs.
Then there were also small retailers that had not been afforded the same luxuries, he said.
“Increased sales is what we’ve seen across the retail sector, [but] increased sales does not necessarily equal increased profitability — it just means that there is more cash going through the store. Secondly, that positive spending that we have seen has been very unevenly spread across the sector, there are businesses that have done well in terms of sales but there are . . . those that have done truly terribly.”
‘Unprecedented’ times
Retail commentator Chris Wilkinson, managing director of First Retail Group, said businesses were facing unprecedented times, and there had never been a time prior to this whereby businesses were facing such rapidly increasing costs on all fronts.
“We’ve got a double whammy in terms of supply challenges, freight, but also source issues; factories not being able to secure products to produce these items, which has meant that there is scarcity, which also drives price increases,” Wilkinson told the Herald. “There are unprecedented challenges.”
Wilkinson expects supply issues to continue further into the year, and the costs of goods to continue to increase outside of the next three months, particularly within the home improvement and construction sector, and appliances category.
“Globally, the world is seeing similar types of demand. With Europe and North America coming back online and lockdowns ending, people are back out spending and demand from those countries will be ramping up as well so New Zealand will be quite a way down the food chain as far as suppliers are concerned.”
‘Cautiously optimistic’
According to Retail NZ’S Sales Index there was a strong lift in spending in March. Average retail spending per site was up 29.8 per cent compared with the same month last year.
Despite ongoing challenges, Harford said he remained “cautiously optimistic” about the trading outlook for the sector over the next few months.
The key to maintaining business positivity lay with ensuring Auckland and the rest of the country does not return to operating under alert level restrictions, he said.
Trade could also be affected by the transtasman bubble opening up from April 19. While good news for Aotearoa, it would likely mean heightened domestic spend in recent months would pull back, he said.
The biggest risk remained increasing retail prices which, if substantial, could cool spending, he said. “I think things will go okay over the next few months, the problem is that you’ve got more cost increases on the horizon; if that flows through to price increases that might flow through to reduced spending.”