In the current climate, though, hard-headed (and hard-hearted) cost control won’t be enough to maintain profitability. The remaining cost inflation must be pushed through to customers. Many businesses are about to learn the difficulty of raising prices without crimping demand. The companies that wield this superpower often share a few attributes: weak competition, customers’ inability to delay or avoid the purchase, or inflation-linked revenue streams. A strong brand also helps. Starbucks boasted on an earnings call in May that, despite caffeinated price rises for its beverages, it has struggled to keep up with “relentless demand”.
Recent data hint at softer consumer sentiment, however. This makes it riskier for firms to roll out frequent price increases. Amber lights are blinking, from McDonald’s, which has speculated about “increased value sensitivity” among burger-munchers, to Verizon, which detected customer “slowness” in the most recent quarter. The ability to push through price increases as customers tighten their belts requires careful management. In contrast to the last high-inflation era, managers can use real-time algorithmic price setting, constantly experimenting and adjusting as consumers respond. Nonetheless, all firms will still have to take a longer-term view on how long high prices will last and on the limits of what their customers will tolerate. That is finger-in-the-wind stuff.
Even if they keep revenues and costs under control, ceos are discovering what their predecessors knew all too well: inflation plays havoc with the balance-sheet. That requires even tighter control of working capital (the value of inventories and what is owed by customers minus what is owed to suppliers). Many firms have misjudged demand for their products. Walmart lost almost a fifth of its market value, or around $80bn, in mid-May, after it reported a cashflow squeeze caused by an excess build-up of inventories, which rose by a third year on year. On June 7th its smaller retailing rival, Target, issued a warning that its operating margin will fall from 5.3% last quarter to 2% in the current one, as it discounts goods to clear its excess inventories. Payment cycles—ie, when a firm pays suppliers and is paid by customers—become more important, too, as the purchasing power of cash delivered tomorrow withers in inflation’s heat.https://www.economist.com/business/2022/06/08/how-to-run-a-business-at-a-time-of-stagflation