Kiwi firms to get harsh lesson in pricing
As revenues feel pressure of flagging growth some can push up prices and not lose customers but many can’t
Listed companies in this situation could face share price pressure on two fronts. Investors will value them lower because of decreasing profitability, and also due to question marks over margin sustainability.
Global economic growth remains solid, although activity has clearly slowed from earlier in the year. Trade tensions, rising interest rates and mixed messages out of China are all contributing to a slower growth outlook.
The domestic economy has also come off the boil, and it’s not just business confidence surveys telling us so. House prices are much more subdued, consumer spending is a Apple has been able to maintain a price premium for its products as demand waxes and wanes.
little softer, and the migration boom is past its peak.
Companies will have to contend with this less buoyant picture of demand, as well as steadily increasing costs.
There are signs of capacity constraints in many parts of the world, with the construction industry here in New Zealand a good example. Sooner or later, this could lead to wage pressure, as could the industrial action we’re seeing across the public sector.
Headline inflation is likely to remain deceptively low, but costs will creep higher for many employers nonetheless. Insurance, rent and
rates are all rising, while regulatory and compliance costs are likely to become more of a burden, rather than less.
Some businesses are better placed to deal with this than others. Bigger firms usually weather the storm better than small ones, because they have scale.
Companies selling products that can’t be easily substituted also do well in this environment, while those reliant on consumers having more discretionary income tend to suffer.
Vector, Chorus and the electricity retailers are some that fall into the first camp, while healthcare companies are also resilient. Those
more sensitive to changes in the economy, such as retailers, could find themselves in the latter group.
Strong brands tend to do well when it comes to pricing power. One global example is Apple, which has been able to consistently maintain a price premium for its products. In this regard, the next few years will show us just how strong the a2 brand is.
A weaker currency could help or hinder, as businesses attempt to demonstrate pricing power and maintain profitability. Those with export earnings might have a slightly stronger buffer to absorb rising costs.
On the other hand, companies purchasing raw materials internationally or with offshore costs could find it tougher as their purchasing power falls in tandem with the NZ dollar. A company like Sky TV comes to mind, as do some retailers.
The corporate reporting is about to ramp up in a big way across the local market.
With all the talk of a slowing economy, a lot of focus will be on revenue growth trends. I’ll be watching for signs of rising costs just as closely.