Are companies profiting from inflation?  - Economic policy

Are companies profiting from inflation? – Economic policy

Many companies are suffering from the crisis. But others have taken advantage of the context to raise their prices much more than necessary and are generating comfortable margins. Will they be able to do so much longer?

In mid-March, carmaker VW proudly announced that it made a profit of 15.4 billion euros last year, up 75% from 2020. Yet the group sold last year 8.6 million cars, or 6% less than in 2020. It is even 2.4 million less than in 2019, when profit reached 14 billion. How to make more profit by selling less? The answer is given by the CFO of VW: “Customers were ready to buy better equipped cars and the premium brands went through the year better than the so-called volume brands”. In summary, due to the shortage of cars, VW has managed to sell more expensive cars, on which it makes large margins. Another example is salmon, the price of which has doubled in one year (it has gone from 10 to 20 euros per kilo). This increase is explained by excess mortality on farms, the rise in fish feed prices, etc. Nevertheless, the Norwegian group Mowi made a record profit in the first quarter (more than 206 million euros), double that of last year. Admittedly, many companies are suffering and must, as in mass distribution, textiles, food products or parcel transport, reduce their prices to retain their customers: bpost has announced price reductions on parcels, Colruyt, Delhaize and d ‘others try to keep the prices low. But some seem to take advantage of the scarcity and the impossibility of doing without their products or services (one thinks for example of certain energy producers) to increase their margins. Statisticians have been looking for a very long time at the margin rate of companies, which measures the share of the wealth created by companies that they keep after they have paid wages (this rate does not take into account the depreciation, taxes and interest on loans). And they observe that the margins generated on average by Belgian companies have never been so high since the appearance of covid and then the war in Ukraine. “The profit margin of non-financial corporations recorded a further increase in the fourth quarter of 2021, standing at 46.1%, compared to 45.2% in the previous quarter”, notes the National Accounts Institute (ICN). It is, moreover, a general phenomenon. In the United States, the economist Josh Bivens (Economic Policy Institute) estimates that since Covid, more than 50% of the price increases observed in the non-financial sector are explained by those of profits (the increase in wages does not intervene only up to 8% and those of other costs at 38%). For us, it is in industry that we see the strongest increases. This awakening of margins is partly the consequence of the strong recovery that followed the end of the confinement period. But what is surprising is that this phenomenon started well before covid (between 1996 and today, the margin rate has gone from 36 to 46%) and that it is more pronounced with us than with our neighbors. The Price Observatory, which has been monitoring the evolution of prices and margins since 2009, confirms this: “Between 2010 and 2017, gross margins for the entire manufacturing sector increased more in Belgium than in neighboring countries”. And this can be seen in particular in the manufacture of transport equipment (excluding motor vehicles), electronic products, machinery and equipment, but also in rubber and plastic products, the chemical industry or the manufacture of metal products. . The increase can be explained by a lack of competition in certain markets, adds the Observatory. It’s no secret that Belgium suffers from a lack of competition in certain sectors, ranging from energy to accounting services. But he adds that many other factors come into play: “increased efficiency, innovative breakthrough, higher productivity can also lead to increased profits”. Studies tend to show that the digitalization accelerated by the covid would already have a positive impact on productivity. In addition, adds Philippe Ledent, senior economist at ING and professor at UCLouvain, “the structure of an economy differs from one country to another. Margin rates are very different depending on the sector, and a country can be more specialized in a sector where the margin is smaller”. Our country is, for example, more specialized in refining, metallurgy, chemicals, pharmaceuticals and textiles than our neighbours. “The figures are therefore not necessarily comparable,” he points out. To this long-term evolution has also been added a new element: covid and aid from the public authorities. Aid which may be of a different nature from one country to another, leading to different accounting. “A tax credit will not be counted in the same way as a direct subsidy. I therefore wonder if this gap between countries is not also linked to aid measures”, remarks Philippe Ledent. However, there remains a feeling, which is moreover confirmed by the most recent results of listed companies: the profits generated in recent quarters are surprisingly very good. “Obviously, listed companies do not represent all companies. But they seem to have been able to preserve their margins so far, either by raising their prices or because they still benefit from supply contracts at prices that had been fixed in the past”, tempers Philippe Ledent. But pricing power, this ability to pass on price increases to end customers, is not given to everyone. It is more present in companies whose products or services are difficult to substitute, such as cars, energy or construction materials. Bernard Delvaux, CEO of Etex, the manufacturer of plasterboard, fiber cement panels and insulating materials, explained a few weeks ago that “so far, we have managed to respond to inflation by raising our We were able to pass a price hike on to our customers in the second half of last year already, followed by another in March when energy and commodity prices spiked again.” . The CEO of Etex added, however, that “the increases we imposed on the market simply offset those of our costs”. Etex was thus able to maintain its margin (Rebitda) at around 20%. Will this ability to generate high margins last? We could have an answer by scrutinizing the confidence barometer of business leaders. At the end of May, it was still much higher than that of consumers. “I am surprised, observes Philippe Ledent, that business confidence indicators have not fallen further despite the shock of the war in Ukraine, and while consumer confidence has collapsed”. How to explain this result? “It’s not simple, replies the economist. inflation that we have today. And businesses are more used to hedging themselves against fluctuations in commodity prices, rates, currencies, etc., than the consumer.” There may therefore be greater inertia in costs than in selling prices, which would explain the increase in margins. “But you have to be careful, continues Philippe Ledent. I don’t think this situation will last (the confidence barometer of business leaders published after this interview, is also showing a decline, Editor’s note). The power of “Purchasing is very affected, inflation plays on the psychology of consumers, even those who can cope. Already, we are seeing some decline in retail sales. A decline that should have an impact on the power of businesses to impose their prices. You can only increase your prices if you have enough customers.” Business sentiment is therefore likely to catch up with consumer sentiment, but this may take some time. “We already perceive, in the latest corporate communications, a change in tone with the announcement of many uncertainties for the second half of this year”, says Philippe Ledent. On the other hand, some companies that have increased their prices have not yet experienced large cost increases. Because of their coverage policy and the duration of their contracts, but also because at the salary level, one of the largest collective agreements in the country provides for indexation per year, at the beginning of the year. And so for those who are subject to it, the big indexation of salaries will only occur at the beginning of next year. “In 2023, will these companies be able to pass on these increases to their selling prices? I’m afraid not,” said the ING economist. In a recent column, Philippe Ledent compared this situation to a game of musical chairs. “Until now, he wrote, there are as many chairs as players. In other words, the majority of companies have been able to maintain their margins by deferring cost increases to prices, which would explain the maintenance of a rather decent business morale. But little by little, the number of chairs is decreasing as household consumption slows. In such an environment, all companies will no longer be able to raise their selling prices, starting with those at the lowest pricing power.”

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