Managing margins in a slow market
Demand for B2B consumables is slowing. Organizations that have not felt this yet should get prepared. More likely, organizations are experiencing it already and be looking at why demand for their products appears to be falling faster than consumer demand.
Understanding this is key to determining next steps and any course corrections necessary to accommodate the rapidly changing economy.
In this post we ask if organizations should revisit the strategic short-term goals set for this year in light of the rapidly changing economic environment seen since late Q4 2022 and offer an idea for an alternative approach in 2023.
The current economic environment is very different to that experienced for the first ten months of 2022.
In 2022, demand was high, driven by consumer demand for end products multiplied by complex global supply chains working to replenish and refill inventories that had been wiped out during the pandemic.
As organizations scrambled to secure and purchase raw materials and semi-finished goods, prices throughout the supply chain started to rise. In most B2B markets, every organization’s finished product is another organization’s raw material supply.
As those prices and costs within supply chains rise, this became one element of the complex economic scenario that drives inflation.
In the summer of 2022 interest rates increased to combat inflation. Interest rates in the US started to increase early in the year, but still remained below 3% until September of 2022. Between September 2022 and February 2023 there were four base rate increases taking interest rates up to 4.75%.
As the cost of borrowing increased, consumer spending overall started to slow and focus more on consumer essentials. As markets slowed, demand for all the raw materials needed to make products also slowed.
Many organizations looked at the economic data and concluded that they needed to manage inventories more conservatively, adjusting levels to meet the anticipated lower demand. In this scenario, ‘managing’ and ‘adjusting’ inventories means ‘reducing’.
Seeing this coming and adjusting strategy accordingly may only be half of the challenge. When a loaded supply chain comprising multiple distinct organizations looks to reduce inventories, the impact of slowing demand is compounded significantly. Organizations that may have taken a solid approach to reducing inventories of their own and controlling their own spending, may not have anticipated that their customers and markets would likely take the same steps.
Suppliers caught within a complex supply chain that are not anticipating this change will start to question why demand for their products is falling so much faster than they expected. Have we lost share? Is our competitor eating our lunch?
The risk here is that when markets slow, and expectations, incentives and strategies are aligned to growth, that growth will likely come at the expense of margin. Chasing volume growth to achieve revenue goals in a slowing market and destocking supply chain will result in lost margin as competitors fight for the available demand.
Add to this scenario the potential for falling raw material costs, a likely scenario with lower demand, and we have a storm on the horizon that needs to be navigated with great skill and nerve.
This is a challenging scenario to manage. Public companies and large PE backed organizations committed to goals set in Q3 2022 may be unable or reluctant to make changes to those commitments.
We believe that there is sufficient change in the economic environment in the past four months to require a review of any goals or targets set in late 2022.
We also believe that successfully adapting to this economic environment brings more long-term benefits and strength to the organization than any short term attempts to ignore it and push ahead with growth goals set in 2022.
Specifically, we believe that the shape of success should be reconsidered for 2023 with a renewed focus on quality of business and incremental profitability through margin management, and less focus on volume.
Applying a strong margin management process is a powerful approach to achieving bottom line goals for 2023.
(We can run a margin management process for you but that is not the purpose of this post)
A strategic dive into margin management ensures that production units, sales teams and development teams are aligning efforts on those products that will deliver the strongest profitable performance for the organization, which will then also be better prepared when markets return to growth.
We do not believe the markets will remain slow for long. Focusing on margins and profitability today and avoiding the temptation to grab share at the expense of margins will ensure a stronger performance when markets recover later in 2023.
Julian Cass
March 2023
This blog post represents thoughts based upon our observations and experiences. It is written to be thought provoking and not intended to be acted upon directly. If you would like to discuss your specific scenario or would like to know more about how our margin management deep dive program can support your goals & strategy contact us here
