James GordonWith inflation reaching 2.8 percent in August, it was inevitable that the Federal Reserve would begin to raise interest rates. In a speech earlier this week, Fed Chair Janet Yellen said the Fed was “close to” raising rates. Blanchard, however, has argued that the Fed should wait before raising rates. His concerns are that inflation is too low, and that the Fed is not in a position to raise rates because the economy is still weak.
Inflation is an issue that affects almost everyone on some level. It’s cost of living is rising faster than the rate of our salaries, and the cost of goods and services are growing faster than their price. It’s very real, and it’s a problem that CFOs around the world are trying to tackle head-on by evaluating how they are spending their money, and what they are doing to try and mitigate this problem.
Financial managers in all industries are facing rising costs as the economic recovery increases demand for raw materials, parts, energy and transportation. Salaries are also rising, adding to the costs that managers have to cover.
The pandemic-induced scarcity and shortages of goods led to a shortage of supply, and the relaxation of embargo periods stimulated consumer demand. As a result of this combination, inflation has reached levels not seen in over a decade. Many of the current generation of CFOs have limited experience with inflation management after several years of weak price growth in the United States and elsewhere, forcing them to look to the past for strategies.
Today’s CFOs have rarely had to deal with inflation as high as in the 1970s or 1980s, says Hardik Sheth, a partner at The Boston Consulting Group and head of the consulting firm’s CFO development practice.
Last month, the Federal Reserve raised its median inflation forecast for this year, predicting that consumer prices would rise 3.4% in the fourth quarter from a year earlier, up 1 percentage point from its March forecast. Companies said in the second quarter that they expected input prices to rise by 4.4% over the next 12 months, compared with a forecast of 3.1% in the first quarter. This is according to a recent survey of financial services executives by the Association of International Certified Professional Accountants.
CFOs can use a variety of tools to mitigate the effects of inflation, from raising product prices to reducing costs. Here are some options:
Forecasting and planning
An inflation forecast can help financial managers better understand how costs and expenses for materials, transportation and wages may change in the coming quarters, so they can prepare and take steps to offset any increases, if necessary.
Based on its internal projections, the food company has
J.M. Smucker Co.
for example, expects higher inflation this year and early next year, the finance chief said.
Tucker Marshall.
said last month. The company said it was raising consumer prices across its product line and also looking for ways to reduce productivity.
If the market is volatile, you need to be able to run through multiple scenarios with the push of a button, Sheth says. The ability to make predictions and to do so quickly is essential in this environment.
Although the Federal Reserve and many economists expect inflation to be temporary and to decline next year, questions remain. Officials at the Federal Open Market Committee expect inflation to slow to 2.1% by the end of next year and 2.2% by the end of 2023, but most think it will be higher than expected.
Many CFOs have said in recent weeks that they expect higher inflation for the rest of the year, with inflation easing in 2022 and 2023.
Inflation in the US recently reached its highest level in 13 years, sparking a debate about whether the country is entering an inflationary period similar to that of the 1970s. Jon Hilsenrath of the WSJ looks at what consumers can expect.
Price increase
Companies of the muesli producer
General Mills Inc.
Power tool manufacturer
Stanley Black & Decker Inc.
have announced price increases for some or all of their products in recent months.
Managers must compensate for price increases. They must ensure that the changes are consistent with competitors’ actions so as not to lose customers, and determine whether the new price covers expected cost increases in the coming quarters to minimize continued price increases for consumers.
You don’t want to talk prices with your customers every three months.
Mike Smith,
The finance director of spice maker McCormick & Co. A company that raises its prices by an undisclosed percentage expects costs to rise by about single digits this year.
We raise prices when we think cost increases are not temporary, Smith said. Given the recent increase in transportation costs, we waited until it was clear that these costs would remain higher than in the past.
Olivier Leonetti, CFO of Johnson Controls.
Photo:
Johnson Controls International
Streamlining of activities
CFOs can improve operational efficiency by reducing costs across the organization by reducing or reallocating certain costs, often in combination with other actions. The traditional way to fight inflation is to control spending, said BCG’s Sheth.
Johnson Controls International
PLC, a building products company, is trying to offset higher costs with productivity programs launched earlier this year, the company’s chief financial officer said.
Olivier Leonetti
Said. Different groups within R&D now coordinate their spending based on common priorities and growth potential, he added. The company also consolidated all production and sales under one management. Johnson Controls expects to save $550 million by the end of fiscal year 2023 through these two programs.
Johnson Controls is also increasing the prices of its products and services. The company, which expects inflation to continue into 2022, isn’t sure it needs to stay the course. We all expect it [inflation] to last longer, Leonetti said.
Sales promotion
Companies are stepping up their efforts to increase sales, either in individual business units or in all business units together, in order to safeguard their profits. Higher revenues can help offset costs, as they typically do not grow as fast as the company’s sales.
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Restaurant chain
Red Robin Gourmet Burgers Inc.
likely to consider new sales initiatives, cost-cutting measures and significant price increases if inflation persists, the company’s CFO said.
Lynn Schweinfurt.
Said. These sales efforts include loyalty programs and the development of partnerships with other companies.
Red Robin’s sales for the 16 weeks ending 18. April ended at $326.3 million, up 6.6% year-over-year, but down 20.4% from 2019. The company gave no indication of revenue for the year.
The companies also expect to benefit from rising consumer spending in the US, which is well above pre-pandemic levels. Spending on goods was almost 20% higher in May than in February 2020. According to the Commerce Department, household spending increased 4% in 2019, the smallest annual increase since 2016.
Buy if the price is right
Some companies try to reduce their inflation risk by making strategic purchases of goods or commodities when prices are low or before they rise. These purchases usually cover only a portion of the materials needed by the companies and can be made when the opportunity arises.
Lynn Schweinfurth, CFO of Red Robin Gourmet Burgers.
Photo:
Red Robin Gourmet Burger
McCormick is one of those companies you want to buy when the price is attractive. Smith says this strategy allows the company to ensure continuity of supply and shorten product cost cycles. The company is also working on introducing lighter packaging to reduce the financial impact of increased transportation costs, he added.
Micron Technology Inc,
memory chip company, has accelerated the purchase of some parts but delayed others, the CFO said.
David Zinsner.
Said. We try to make these decisions in time to take advantage of price opportunities in the market, Zinsner said. The company has applied this strategy to the purchase of materials to power its factories and to the purchase of energy.
Other companies, such as grocery and supermarket chains, have increased their inventories in recent weeks to protect themselves from price increases.
Companies are also seeking to expand their network of suppliers to strengthen their bargaining position and become less dependent on the pricing policies of multiple suppliers. Long-term contracts can contribute to better prices by giving the company and its suppliers a better view of the future and the possibility to plan ahead.
Some managers seek to hedge currencies or commodities to limit price fluctuations, either by using derivatives such as futures contracts or by negotiating directly with suppliers. Companies can use these contracts to protect themselves against changes in commodity or currency prices.
Simply Good Foods Co.
The Denver-based food manufacturer bought all of its raw materials upfront from suppliers and got prices before costs skyrocketed, according to the company’s CFO.
Todd Kanfer.
said last week when announcing the results. We were very well covered in the first three quarters, Kanfer said, referring to the nine-month business period that ended in May.
Simply Good Foods, which expects inflation to be in the low single-digits next year, plans to continue to hedge directly with suppliers to offset increases in material costs, Kanfer said. We will continue to act opportunistically and price where we see value, he said.
-Christine Broughton contributed to this article.
Write to Mark Maurer at [email protected] and Nina Trentmann at [email protected].
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James Gordon
