Greg Portell, Lead Partner, Global Markets at Kearney and WWD Global Impact Council member, said his firm’s first executive survey two years ago showed respondents were “cautiously optimistic” about the next inflationary cycle. But that changed to pessimism in the Fall 2022 report. In Kearney’s most recent survey, industry executives were more positive – even noting that inflation is likely to wane over the next few months.
Here, Portell explains what drives inflation and how it impacts companies, which includes some positive outcomes.
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WWD: What are some of the macroeconomic factors that are driving inflation?
Greg Portell: The current inflation arc is unique in recent history in the fact it is driven by both supply-side and demand-side economic pressure. There are real costs associated with supply chains – labor, scarcity and energy – that drive up pricing. At the same time, government stimulus and residual rebound private sector spending creates demand which exceeds supply across many categories.
WWD: What are the different types of inflation, and how does it impact business?
G.P.: Multi-directional inflation such as the current cycle has two impact vectors on business. First, the P&L will reflect the higher costs to operate. This will manifest on the inventory, COGS and labor lines. There is also an impact on international purchasing power depending on currency valuations. Second, the capital structure will reflect higher debt costs and potentially overstated asset values. The increased cost of capital may ultimately shift investment decisions and a renewed consideration of debt-to-equity ratio thresholds.
WWD: What were some of the key findings in Kearney’s latest inflation report, and how does it compare to the prior survey last fall?
G.P.: During Kearney’s first executive survey almost two years ago, a majority of surveyed executives were cautiously optimistic about the impending inflationary cycle. Many viewed it as a chance to shake up stale competitive environments and fresh investment in innovation. However, as the cycle stretched, sentiment in the Fall of 2022 had turned pessimistic. Most of the gains from price increases were being used to bolster income statement outcomes and investment in innovation was relegated to opportunistic programs. Our current survey reveals a shift back to positive perspectives. The optimism is driven by a few considerations: internal cost management programs are starting to show results, stabilization of the interest rate/inflation relationship and cooling of the employment markets.
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WWD: What did the findings reveal in terms of executive expectations of the duration of the next inflationary cycle?
G.P.: Executives surveyed are expecting inflation to wane in the next 6-9 months. In the past, those expectations have been overly optimistic. Yet, this time, the macroeconomic factors seem to support the 6-9 months window.
WWD: What are some of the differences between negative inflation outcomes versus positive ones? And where does the executive sentiment lie within that?
G.P.: When economies expand, inflation naturally follows. When the two measures move in harmony, inflation can be characterized as positive. Stated differently, inflation represents true economic growth. Examples of negative inflation emerge when there is a rise in costs without a subsequent rise in economic productivity. Sources of negative inflation have roots in energy costs, labor costs and demand shocks – all of which have whispers in today’s context.
WWD: How should executive leaders react to the impact of inflation? What strategies can they deploy?
G.P.: Beyond standard cost management hygiene and programs, successful executives are taking five actions:
- Streamline portfolios – shift attention to the highest margin items and cut underperforming product lines
- Bolster supply optionality – invest in defined optionality of the supply base and find hidden pockets of opportunity through unique partnerships and potential vertical (and virtual) integration
- Price dynamically – shift to higher margin pack sizes while passing through cost increases across the portfolio; typically, by breaking from industry pricing traditions
- Rebalance resources – allocate resources to the higher performing brands, products and markets taking care to include the impact of labor markets on supply, demand and capabilities
- Invest in innovation – build a case for continued price increases after the economic pressures slow by reinventing product lifecycle plans and category innovation
WWD: Anything else that executive leaders need to know?
G.P.: Although this is the first inflationary period for many executives, there are clear playbooks to manage outcomes. Winners and losers will be defined by both speed of execution and rigor of outcomes. It is important for leadership teams to have clear visibility and confidence in how the internal and external programs manifest to their bottom line.