Market Perspective

As Inflation Stalks Europe, Companies Can Find Relief by Unlocking Working Capital

September 29, 2021
The C2FO Team

Navigating inflation and supply chain disruptions in Europe and the UK isn’t easy, but focusing on your cash conversion cycle can help mitigate these pressures. 

In 2020, the beginning of the COVID-19 pandemic brought significant supply chain disruption in the form of factory closures and personal protective equipment shortages. And while this year has brought different dynamics, supply chain issues continue to be a significant challenge for companies in Europe.

In March, a large shipping container infamously blocked the Suez Canal for six days, holding up goods worth billions of dollars and disrupting supply chains across Europe. 

The Brexit Effect

In Europe, and particularly in the UK, these macroeconomic events exacerbated disruptions that had been mounting since the British electorate voted in 2016 to leave the European Union, the world’s largest free-trade area.

Goods, services and workers had hitherto moved unhindered across the narrow strait separating the British from their European counterparts. But when the clock struck midnight on January 1, 2020, the shutters came down, and customs barriers went up.

The thousands of ferries and cross-channel trains that for decades had carried millions of trucks laden with goods across the Channel suddenly went eerily quiet.

Almost two years later, the repercussions are still being felt. UK supermarket shelves are empty of many essential items, and packages are piling up in logistics centres as logistics companies struggle to find the drivers they’d previously sourced on the European mainland.

The UK’s Road Haulage Association estimates that the number of truck drivers in the UK has fallen to 500,000 from 600,000 before the pandemic. The pandemic has deepened the problem as many supply-chain workers were told to isolate themselves after contact with COVID-infected people.

Rising prices

Flush with trillions of dollars provided by government stimulus measures around the world and clamouring to spend money they’d hoarded during pandemic lockdowns, consumers went on an epic shopping spree.

In the final three months of 2020, European consumers spent €1.7 billion, up 14% from the previous quarter. The picture was similar in the UK, where shoppers spent just over £320 billion in the fourth quarter, a 16% increase over the previous three months.

Supply chain shortages and rising demand have brought widespread disruption; restaurant chains had to close stores after running out of chicken, while shortages of basic food supplies have led to empty shelves in supermarkets. Fuel deliveries, test tubes and school uniforms have likewise faced significant disruption.

It’s not just consumer goods that have been affected by shortages. Commodities and raw materials have also been in short supply. For businesses, the cost of materials has also risen. According to the World Bank, commodity prices have jumped as much as 10% since before the pandemic.

For many companies, this has resulted in substantial price hikes. In July, Unilever CEO Alan Jope warned that the company was facing “very material cost increases,” including a 70% increase in the price of palm oil, as well as a 40-50% rise in shipping costs,  according to The Guardian.

“Our first reflex is to look for savings in our own business to offset these costs, but these are of a magnitude that will require us to continue to take some price increases,” he commented.

Other European companies have recently had to hike prices. According to the Financial Times, Europe’s largest paint maker, AkzoNobel, has increased prices by 4.5% in light of high demand alongside supply chain disruption. For AB InBev, the rising cost of cans and transportation have hindered profits, despite rising sales.  

Semiconductor shortages 

These shortages added to the strain of producers already struggling to find enough supplies to satisfy their customers. Nowhere was this more starkly apparent than in the semiconductor industry.

Silicon chips that power products from refrigerators and games consoles to computer servers have become very hard to source. Consumers who bought tech gadgets to while away the long days of Covid isolation and businesses who stocked up on computers for remote staff helped put extraordinary pressure on chipmakers.

Automakers may have added to the problem as they stocked up on chips for electric vehicles, which often need ten times more semiconductors than petrol cars

Even so, they have been forced to reduce production. European brands such as Porsche and Skoda said they expect factory line delays, and Toyota said it would slash its production by 40% in September

Inflationary pressure

Clearly, this combination of low supplies and high demand is causing inflationary pressure. In the UK, inflation reached 2.5% in June, although it has since slowed to the Bank of England’s target rate of 2%. 

The BofE predicts inflation could temporarily reach 4% this year, raising the possibility of increasing interest rates. 

In the 27 countries of the European Union, inflation surged to 3% in August from 2.2 % the previous month — the highest it’s been in ten years. 

In July, the European Central Bank (ECB) hiked its inflation target from ‘below but close to 2%’ to 2%, stating that the target is symmetric – “meaning negative and positive deviations of inflation from the target are equally undesirable.” The ECB has also indicated interest rates will not be increased until inflation reaches the 2% target around 2023.

Small and medium-sized enterprises (SMEs) feel the pinch 

It’s a perfect storm, which has created massive time and financial costs for companies, which have been forced to rethink their supply chain strategies rapidly. That’s especially the case for smaller companies and manufacturers.

The HSBC Navigator report found that a third of companies are now selecting suppliers based on how effectively the operating country has managed the COVID-19 pandemic, while 28% are selecting based on operational resilience and the ability to deliver quickly.

Big firms usually have the financial firepower to buy ahead of the inflationary curve and lock in supplies before prices rise. SMEs don’t always have that luxury. Take restaurants in Europe, for example; they’ve been battling food inflation that surged to 4.3% in 2020.

Opinions among economists are split on whether the recent surge in prices is transitory or likely to remain. Indeed, with interest rates so low – and few signs that central banks intend to raise them – consumption rates may remain elevated.

For businesses small and large, it’s worth planning for the worst. Fortunately, there are tried and trusted ways they can take to mitigate the impact of higher prices.

C2FO helps companies manage their cash conversion cycle

Cost-saving measures will only go so far, but having money to buy supplies upfront will significantly reduce medium-term overheads. Even if firms don’t have such levels of spare working capital, companies can manage their cash conversion cycle to their advantage.

In an inflationary environment, the inventory price can rise – while the value of sales can decrease between the purchase date and the date when payment is collected. Working capital optimisation is one way that companies can mitigate these pressures. Additionally, banks will look to offset the cost of rising inflation through higher interest rates, making it much less affordable for small businesses. 

C2FO can help companies reduce their cash conversion cycle and navigate the pressures of this challenging market. When it comes to paying suppliers, C2FO’s early payment solution allows them to accelerate their cash flow, reducing the risk of supply chain disruption and protecting the business ecosystem. 

C2FO can also help businesses reduce Days Sales Outstanding by offering suppliers early payment in exchange for a discount, which means companies can access the cash they need to buy inventory and materials before prices rise further.

C2FO can help mitigate margin compression

As the last few years have shown us, nobody can predict the future. But one thing’s for sure: those corporates who can mitigate squeezed margins due to higher supply costs will have a big advantage in the post-pandemic market. 

Before the pandemic hit, retailers often absorbed costs when suppliers raised prices because stiff competition forced retailers to keep prices stable. Now, companies will pass on the majority of these increased costs from suppliers to consumers, according to the New York Times.

C2FO has been helping customers mitigate margin compression due to higher supply costs related to these macroeconomic events. Businesses experiencing margin pressure due to the rise in commodity and production costs should explore early payment options for their suppliers. The resulting yield could be an efficient way to offset commodity cost inflation. 

The Bottom Line

The spectre of stagflation, economic stagnation and rising inflation looms over the global economy. In the 1970s, stagflation ushered in expensive debt and high employment as central banks used monetary policy to restrict the money supply to bring down costs. 

Since then, many large businesses have learned their lessons and have prudently locked in debt at a longer-term fixed cost. However, not all companies have that ability.

In today’s global economy, businesses are dependent on each other. No matter how protected a larger firm has made themselves, if their business ecosystem suffers, so will they. The danger still lurks as a toxic combination of rising commodity and liquidity costs could impact the supply chain.

The answer to combat inflationary prices is surprisingly simple: Allow suppliers to accelerate payment on approved invoices. Early payment bypasses lending constraints and provides fast, affordable liquidity to support suppliers in all supply chains. 

Want to take control of your cash flow?

Early payment through C2FO can help.

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