Firms fear margin squeeze

8 September 2010

8 September 2010 | Helen Gilbert

Global companies have warned they will be unable to boost their profitability over the next 12 months as they compete with raw material price hikes and inflation.

 A KPMG study of 6,200 manufacturers and service providers across 17 major economies worldwide found that companies anticipate squeezed margins as input costs rise or remain static, and they feel powerless to increase the prices they charge.

An overwhelming 88 per cent of service firms expect input costs to increase or at best remain static over the coming year. The cost outlook is almost as bleak among manufacturers with 82 per cent predicting a rise or no change to input expenditure and nearly half (45 per cent) anticipate increasing input costs.

Yet just one fifth of services firms and less than a third of manufacturers expect to be able to command higher prices this time next year for goods and services.

Martin Scott, partner at KPMG Performance and Technology said, in profitability terms, the majority of firms would be in no better position next year with many predicting margins to contract.

“Raw material price hikes, competitive pressures, mounting energy costs and rising inflation are all cited as contributing factors to an increasing global cost of production,” he said.

“Without the ability to pass escalating costs on to our customers, firms will struggle to grow profits over the coming year, raising serious doubts over sustained economic recovery.”

The study also revealed that British businesses are even more pessimistic on input and output prices than their overseas counterparts. Almost half (46 per cent) of British services firms expect a rise in input costs over the next year, more than 50 per cent higher than the global average of 30 per cent.

And nearly two thirds (63 per cent) of UK manufacturers expect rising input costs, 40 per cent higher than the global average of 45 per cent.

Firms will “need to explore innovative pricing and bundling strategies”, said Scott. “We expect to see multinationals accelerating their push into emerging markets,” he added.

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