Inflation has become a hot topic. While the UAE and other GCC countries have not experienced the surge in prices being witnessed in other parts of the world, this region is not immune to inflationary pressures. Businesses of all sizes are feeling the pressure of increasing inflation rates, but how did we get here? And what action can businesses take to mitigate inflationary risks?
According to the International Monetary Fund, inflation in the UAE is expected to be at 3.7 per cent in 2022, falling to 2.8 per cent in 2023. Contributing factors to increasing inflation in the region include geopolitical tensions, high energy costs, supply chain disruptions and the rise in consumption taxes in some GCC countries. While the UAE's inflation rate is one of the lowest globally, businesses operating in the emirates are still feeling the sting of increasing costs.
UAE-based and international businesses are facing supply chain disruptions as energy and raw material prices continue to rise and organisations seek to source materials at lower costs. These supply chain shortages can lead to delays in production and delivery, impacting revenue and profitability. For some businesses, decreased consumer spending has affected revenue, as fewer products are being sold. Higher inflation can also lead to increased competition, as businesses employ strategies to maintain or grow market share. The effects inflation has on businesses vary, depending on the business. However, the need to take action to mitigate the threat of inflation is common to all organisations.
To provide guidance to mid-market businesses, Grant Thornton has released the 'Essential action plan for managing in inflationary times'. The seven-step plan can be used to assess the current priorities and progress of companies and provides practical guidance on how businesses can adapt to mitigate inflationary risks. While this isn't a list of everything companies could do, it provides essential starter actions that will have the maximum impact.
Action 1: Identify and mitigate the risks of inflation for your business
Inflation impacts all parts of a business, so engaging with people across every level of the organisation to create a plan for managing high and prolonged inflation will net the best results. As part of the process, identify the risks and draw up a plan to mitigate them. Once developed, review this plan regularly to ensure it evolves in step with the threat. Inflation can erode margins so quickly that it's also critical to plan more frequently, consider a wider range of outcomes and develop accurate models.
Action 2: Take action to limit external cost increases
UAE businesses have a wide range of options to limit external cost increases, including locking in prices, bulk buying, renegotiating terms with suppliers or changing suppliers. While inflationary pressures have been driving costs up, not all suppliers are reacting to the same degree. Now is a good time to carefully review supplier contracts and look for opportunities to enhance terms or even take goods and services out to bid.
If businesses opt to hedge against price increases through bulk buying or advanced ordering, they must consider the additional pressure this places on inventory, working capital and storage space requirements. Action should be taken to leverage advanced inventory optimisation techniques, industrial engineering and experienced operations improvement teams to optimise their distribution footprint and return on inventory investment.
Action 3: Outsource more activities to lower costs
Outsourcing may seem like an old solution to a new problem, but the benefits it offers are now more compelling than ever for international companies looking to both lower costs and address the skills shortage. To complement the benefits of outsourcing, businesses should look at the current design of their processes and explore optimisation opportunities through a range of modern technological tools. A relevant example is a finance function transformation exercise which not only makes processes lean, but also brings in accuracy and efficiency.
Action 4: Improve your understanding of the true cost to serve clients
Most mid-market companies around the world still don't accurately and regularly calculate the costs and profits of individual customers that they serve. Yet customer segmentation provides critical information if businesses are to protect their profitability by actively managing their customer base during this time. Once the customer segments are clearly defined, the focus should be on understanding the cost to serve each respective segment. It is important to be clear about what costs are included in these calculations – such as supply chain, sales and marketing, and customer success – and allocating them appropriately to individual customer segments.
Action 5: Change your pricing strategy to it is more in line with cost increases
The majority of UAE businesses surveyed by Grant Thornton have increased their prices in response to rising costs, with 87 per cent raising prices at the same level or above cost increases. While it may be tempting for businesses to think price increases are the answer to inflation, they cannot just price their way out of this problem. Price increases are rife with risks – notably the loss of customers and competitiveness. Businesses must assess customer experiences (and the implied cost to serve) together with profitability. If customers are unprofitable, businesses may decide to scale back the profitability to bolster profitability.
If prices still need to be increased, there are multiple factors to weigh up, including existing contractual terms, timing of the increase, nature of historic increases, who the increases should apply to, whether you can link the increases to new features and customers' willingness to pay. Organisations could also try to tie increases to new service levels or product features, or even working out what customers already get for free that businesses could potentially build out and charge them for.
Action 6: Take action to improve capital structure
Not only are input costs increasing, but so too are costs of capital as interest rates rise in order to contain the inflationary pressures. Companies need to optimise their costs of capital, and also look at scaling up or down the level of working capital to meet their needs. Businesses should monitor their capital position more closely. In the short term, if businesses are healthy and have plenty of cash, then they can consider strategies like bulk buying to beat inflation. If the opposite applies, then they may need to look at sourcing additional capital and managing debt. Businesses may need to look at other providers and sources of capital and shop around. Access to finance will change, and so too will the importance of different sources so companies will benefit from getting some advice on other products and advice on structure.
Action 7: Take steps to improve internal efficiency and costs, and/or reduce waste
There's only so much organisations can do to stop higher prices washing through their business, and once they do, the next thing to focus on is internal efficiency. If businesses can do more with less, and cut down on the wastage, they may be able to offset the higher prices – and lower their environmental impact. What really drives internal efficiency is technology. Technologies such as automation, robotics and machine learning can improve productivity by lowering output costs and allowing companies to deploy human capital more effectively. Data is also really important in understanding true costs, which plays a critical role in informing a company's decision-making processes.