Business and inflation: Who will sink or swim
Supermarkets, liquor stores and well-loved brands are likely to do well as inflation soars, while businesses that focus on being the cheapest are set to struggle.
New Zealand is feeling the cost of living crunch as prices rise and annual inflation accelerates, jumping from 1.5% to 6.9% in just 12 months.
Economist Shamubeel Eaqub said businesses that sell necessities tend to cope well when inflation is high.
‘‘If you’re selling things like food, fuel, electricity, utilities, those kinds of things, you’re very protected, and you can pass on those cost increases very easily,’’ Eaqub said.
Businesses that cater for people trying to save money by staying at home also succeed – think the liquor store instead of a bar.
‘‘Rather than going to the movies, you might choose to get a Netflix subscription. Or you might choose to get rid of your subscriptions, because they’re costing a lot of money, and you might watch normal TV.’’
People who still want a treat will budget, for example getting takeaways instead of going to a restaurant.
Businesses can adapt, for example discounting or advertising different types of products.
But a common mistake in times of economic stress is to pull back on advertising and trying to understand what customers are doing, Eaqub said.
‘‘In fact, that is the most important time that you need to understand what your customers want, and what you can do to meet that.’’
Businesses selling relatively luxury products for middle income or low income households would also be feeling the squeeze, he said.
Inflation was particularly problematic for lower income households, which could move from having a little bit of discretionary income to having to cut back on necessities.
Consumer confidence has fallen to a record low as households battle financial pressure from inflation and rising home loan rates, according to the Westpac McDermott Miller Consumer Confidence survey released last week.
Most businesses had not experienced this kind of inflation before, Eaqub said.
‘‘There are no easy solutions other than to make sure you get good advice, talk to your accountant, talk to your business advisor, talk to your peers, because everybody’s going through the same uncertainty.’’
Toss Grumley, business adviser at Wolf & Fox, said potentially any business could do well in an inflationary market if it had a strong brand.
‘‘Stronger brands have lower price elasticity, this means that if the businesses pricing needs to move up they will see only a small change in demand.’’
Businesses seen as desirable, or premium, with a good reputation could put their prices up without affecting demand too much, and could even boost profitability.
On the other hand, a business that just focused on being the cheapest was more likely to see demand drop once it began to lift prices, he said.
‘‘There are no easy solutions other than to make sure you get good advice.’’
Shamubeel Eaqub economist