Finance chiefs across industries are facing higher costs as the economic rebound drives up demand for raw materials, components, energy and transportation. Wages are also on the rise, adding to the expenses executives need to cover.
Pandemic-related backlogs and shortages have created a supply crunch and the easing of lockdown restrictions has stoked consumer demand. The combination is sending inflation surging to levels not seen in more than a decade. Many of the current generation of chief financial officers have limited experience in managing inflation, following years of low cost increases in the U.S. and elsewhere, making them seek past playbooks for strategies.
“Today’s CFOs have rarely experienced high inflation like in the 1970s or 1980s,” said Hardik Sheth, a partner at Boston Consulting Group and leader of the consulting firm’s CFO excellence practice.
The Federal Reserve last month raised its median forecast for inflation this year, projecting consumer prices will rise 3.4% in the fourth quarter from a year before, up 1 percentage point from the March forecast. Companies in the second quarter said they expect input prices to grow 4.4% over the next 12 months, up from the 3.1% increase they forecast in the first quarter, according to a recent survey of finance executives by the Association of International Certified Professional Accountants, an industry organization.
From increasing product prices to cutting costs, CFOs have various tools they can use to curb the impact of inflation. Here are some options:
Forecasting and Planning
An inflation forecast can help finance chiefs get a better understanding of how costs and expenses for supplies, transportation and wages might develop in the coming quarters, allowing them to prepare and take actions if needed to offset any increases.
Based on its internal projections, food manufacturer
J.M. Smucker Co.
, for instance, expects higher inflation rates for this year and the beginning of next year, finance chief
said last month. The company said it is increasing consumer prices across the product portfolio while also looking for productivity savings.
“When you have an unstable market situation, you want the ability to push a button to run multiple scenarios,” Mr. Sheth said. “The ability to forecast and do so quickly is critical in such an environment.”
While the Federal Reserve and many economists predict that inflation will be transitory in nature and level down next year, questions remain. Officials of 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 a majority now think that there is a greater chance that inflation will be higher rather than lower than expected.
Many CFOs in recent weeks have said that they expect elevated inflation until the end of the year, and that inflation would ease in 2022 and 2023.
Companies from cereal maker
General Mills Inc.
to power-tool manufacturer
have announced price increases for some or all of their products in recent months.
Executives face a balancing act when raising prices. They have to make sure the changes are in line with what competitors are doing to avoid losing customers, and determine whether the new price covers expected cost increases in the coming quarters to minimize successive price increases to consumers.
“You don’t want to keep having pricing discussions with your customers every three months,” said
CFO of spice seller McCormick & Co. The company, which is raising prices by an undisclosed percentage, expects its costs will go up by a mid-single digit figure this year.
“We take prices when [we] feel the cost increases are not transitory in nature,” Mr. Smith said. “With the recent increases in transportation costs, we waited until it was clear these costs were staying higher than in the past.”
CFOs can make operations more efficient, lowering costs across the business by cutting or reallocating certain spending, often in combination with other steps. “The traditional way of combating inflation is by controlling expenses,” BCG’s Mr. Sheth said.
PLC, the building-products company, is working to offset higher costs through productivity programs launched earlier this year, CFO
said. Several teams within its research and development group now coordinate their spending efforts based on shared priorities and growth potential, he said. The firm also brought all manufacturing and distribution under one leader. Johnson Controls expects to save $550 million from the two programs by the end of fiscal 2023.
Johnson Controls also is raising prices across the board on goods and services. The company, which expects inflation to continue in 2022, is unsure if it will have to stay on that course. “We’re all assuming it [inflation] will last for longer than not,” Mr. Leonetti said.
Making a Sales Push
Companies are ramping up efforts to boost revenue for either a particular business line or across all divisions to shield their bottom lines. More revenue can help offset costs as they usually don’t rise as much as companies’ sales.
will likely consider new sales initiatives, cost-cutting measures and more price increases should inflation persist, CFO
said. Such sales efforts would include loyalty programs and expanding partnerships with other businesses.
Red Robin’s sales totaled $326.3 million during the 16 weeks ended April 18, up 6.6% from the prior-year period but down 20.4% from the 2019 period. The company hasn’t provided revenue guidance for the year.
Companies also expect to benefit from increased U.S. consumer spending, which has risen well above pre-pandemic levels. Spending on goods in May rose nearly 20% from February 2020. Household spending increased by 4% in 2019, the smallest annual increase since 2016, according to the Commerce Department.
Buying When the Price is Right
Some businesses try to limit their exposure to inflation by making strategic purchases of goods or raw materials when the price is low or before it goes up. Such buying usually only covers a portion of the supply that companies need and can occur when the opportunity presents itself.
McCormick is one of the companies that looks to buy when the price is attractive. The strategy helps the company secure supply and moderate product cost cycles, Mr. Smith said. The company is also working to introduce lighter packaging to reduce the impact of higher transportation costs on its finances, among other measures, he said.
Micron Technology Inc.,
a memory-chip company, has accelerated certain component purchases but also held off on other occasions, CFO
said. “We try to time those decisions to take advantage of pricing opportunities in the marketplace,” Mr. Zinsner said. The company has used this strategy when buying materials to supply its factories and when purchasing energy.
Other companies, for example grocers and supermarket chains, in recent weeks have increased their stockpiles of goods to protect against higher prices.
Companies are also looking to grow their network of suppliers to increase their bargaining power and to be less exposed to the pricing policy of a few vendors. Signing longer-term contracts can help with locking in better prices, as it gives the company and its suppliers better visibility into the future and allows them to plan ahead.
Some executives are looking to hedge currencies or raw materials to limit price swings, either by using derivatives such as a futures contract or by negotiating directly with suppliers. Companies can use such contracts to protect against changes in the price of raw materials or currencies.
, a Denver-based food maker, bought all of its raw materials from suppliers early and locked in prices before its costs soared, CFO
said on an earnings call last week. “We’ve been protected really nicely through the first three quarters,” Mr. Cunfer said, referring to the companies’ nine-month period ending in May.
Simply Good Foods, which expects mid- to high single-digit inflation over the next year, plans to continue hedging directly with suppliers to offset higher materials costs, Mr. Cunfer said. “We’ll continue to be opportunistic and lock in prices where we see value,” he said.
—Kristin Broughton contributed to this article.
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