Business Planning - Inflationary pressures

How can horticulture businesses respond to Brexit-fuelled inflation? Neville Stein outlines the options.

Enthusiastic readers will have noticed that typically I write about strategic subjects that are most likely to impact on our industry over the long term. This next series is no exception, as I will be exploring a real giant of a subject - the implications of Brexit and how we might respond.

Theresa May is so frequently quoted as saying: "Brexit means Brexit," a catchy strapline that actually means very little at all. For example, we are still at the point where no one is quite sure what exactly Brexit will bring in terms of trade or movement of labour.

With that in mind, I will objectively and constructively consider possible scenarios of what may happen and how we as an industry and as individual businesses might rise to the challenge and the opportunities.

There is much confusion over what might happen in the economy as a result of Brexit. It will mostly depend on what type of structures and agreements the Government can negotiate with our foreign partners. However, most people agree that inflation will initially rise because we have seen a fall in the value of the pound and that makes imports more expensive.

The governor of the Bank of England, Mark Carney, has warned that Brexit could result in high inflation and low growth - a view shared by many city analysts including JP Morgan, Pantheon Macroeconomics and Capital Economics. Writing in The Independent, Emma Charlton said: "Quickening inflation looks set to erode almost two years of real-wage growth, undermining the key driver of the economy." Clearly, as even the most optimistic economist will agree, consumer spending will be the loser. Higher inflation will mean consumers having less in their pockets, particularly if, as predicted, wage growth slows.

Prepare for inflation

How then can you prepare your business for inflation? If you can, try to raise your prices, even if just by a small amount, and do it gradually - one or two per cent. At least then if there is huge inflationary pressure, your customers will not be penalised with a large jump in prices all at once and will be less likely to see you as acting with an opportunist agenda.

If you are a retailer, a useful way of fairly painlessly increasing prices is to change the offering. For example, you might sell a bowl of soup in your cafe for £3.95. You might easily achieve a price increase if you change the product to a large bowl and throw in a free granary roll. In essence, what you are doing is adding more value. The fresh vegetable market is a classic example of added-value products - ready diced carrots cost more than a bunch but, of course, convenience is the added value.

However, you do have to consider "menu costs"

- the practical costs associated with changing your price lists. In a period of rapid inflation, price lists may need to change frequently, which can be costly. Using modern technology can reduce such expenses.

Protect your margin

In raising prices what you are aiming to achieve is to protect your gross margin. Do not make the classic mistake of failing to account for all the costs involved in producing and selling that final product. You might manage to protect your gross margin, but what about all those other overheads that have increased? These are the things that will affect your net margin and they include utility costs, insurance, IT and phone usage.

In an inflationary landscape we would expect these to also rise, but good deals should be available for those who shop around. Do not assume that just because you have been with an insurer or utility company for years that they will offer you the best deal. Just remember that any price increases you make will need to take account of the impact of inflation on your overheads. Failure to do so will invariably reduce your net profit.

There are other ways to ensure your margins remain healthy rather than just raising prices. You might, for example, try and achieve lower input prices by aggregating your purchases with other producers or retailers. In recent years we have seen the growth in buying groups, many of which have been very successful through aggregated purchasing in reducing the input cost of goods sold in garden centres.

Maintaining strong cash reserves will also help you in a period of high inflation, although cash can be a questionable investment during inflation because its value decreases due to diminishing buying power. But having a cash reserve can be useful, enabling you to afford higher costs particularly as costs so often increase faster than you can raise your prices.

A cash reserve will buy you time before you can put up your prices or develop that added-value product. You can also improve the amount of cash in your business by ensuring that your customers pay on time. If you are in the fortunate position of having a lot of cash in your business, then you can stock up on inventory before prices go up - a pretty useful strategy if you have room to store extra inventory and it is non-perishable. Balance the advantage, however. Do not spend all you have and do retain some cash reserve.

Capital investments

Typically a period of high inflation causes business uncertainty and confusion as the cost of investing changes frequently. This makes organisations less willing to borrow to invest due to uncertainty over future costs and returns. Having your own cash reserves allows you flexibility and speed of response to react to opportunities. Just make sure you allow for inflation when doing your cost-benefit analysis.

As inflation bites, inevitably there will be pressure on you to also increase wages, and smaller businesses could see profits eroded as the payroll goes up. The challenge here is not to automatically shed workers with redundancies or by cutting hours but to make your workforce even more focused and productive so their increased smarter output brings in the business you need to cover the higher wages. We will look at employment issues and Brexit later in this series.

In general, Brexit will bring challenges and opportunities for employees and employers alike, and perhaps the first challenge for everyone, whether they are a retail assistant, a landscaper or a company director (or all three), is to review their own responsibility and willingness to make it work. It will require effort from every level of staff and I believe it will be those businesses with the "we are all in it together" mentality that will profit best in the long run from this seismic quake of Brexit in our business and economic lives.

Neville Stein is managing director of business consultancy Ovation


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