Analysis Economy Raising prices is not the only way to protect margins from inflation By Shane McGinley August 12, 2022 Creative Commons Balancing the books: some short-term cuts may have long-term drawbacks Report finds 53% of UAE firms plan to increase pricesCosts controlled by bulk buying and renegotiating supplier terms Outsourcing more activities such as IT recommended Amid the onslaught of rising UAE business costs, a newly published industry report has outlined where exactly the pain is being felt most. While some firms are opting to raise prices, experts outlined some of the other short-term strategies companies are adopting in order to help keep their margins healthy. The latest S&P Global Dubai Purchasing Managers’ Index (PMI), issued earlier this week, found that while costs in the non-oil sector eased in July, inflation is still strong and the second highest since late 2017. Gulf set for more belt tightening as interest rates keep risingUAE businesses keep squeeze on profits as inflation bites “Fuel prices again impacted firms’ costs, notably in the travel and tourism sector where input prices rose the most since this index began in 2015,” David Owen, an economist at S&P Global Market Intelligence, said. The International Monetary Fund forecast that UAE inflation would reach 3.7 percent this year, falling back to 2.8 percent in 2023. While low compared to the 6.6 percent forecast for advanced global economies, Grant Thornton’s International Business Report, also issued this week, outlined where exactly costs are rising. A survey of 5,000 mid-market businesses in 28 countries found that energy and utilities bills in the UAE increased 18 percent, wages and staff compensation went up 14 percent, and equipment, bank and interest costs were 16 percent higher. Another report by insurance broker Marsh showed that raw material costs have also surged, with building metal products costing 46 percent more year-on-year in the first quarter of this year. Steel rose 25 percent, cement was up four percent, and bricks were 17 percent more expensive across the same period. Recent S&P Global PMIs have shown that UAE firms have been reluctant to increase prices, aiming to remain competitive despite rising business costs, but this is changing. “There was also evidence of rising pressure on firms’ selling prices,” Owen said. “Although overall charges levied for goods and services were broadly unchanged since June, this ended a 12-month sequence of discounting. “The monthly rise in the Output Prices Index, at 3.8 points, was also the largest on record.” Pushing up prices The Grant Thornton report found that 53 percent of respondents in the UAE were planning to increase prices in line with rising business costs. Some 32 percent plan to increase prices even more than the rate of costs are increasing, in a bid to boost their margins. Samer Hijazi, Abu Dhabi Office managing partner at Grant Thornton UAE, said that, in his experience, 90 percent of clients are willing to negotiate and accept some form of increase, rather than disrupt the present working arrangement. “These recent price increases have been supported by a perfect storm of strong demand and supply shortages, but this situation won’t last forever,” he said. “Mid-market businesses need to take a range of different, proactive steps to deal with inflation in the longer term. They can’t simply continue to price their way out of this problem.” Hijazi said there are a number of things businesses can do in addition to raising prices. This includes locking in prices, bulk buying, renegotiating terms with suppliers, or even changing suppliers. “In a high inflation environment, these basic countermoves can make a significant difference in limiting costs and protecting margins,” he said. Food for thought Within the competitive hospitality sector, Naim Maadad, chief executive and founder of Gates Hospitality and a board member of UAE Restaurant Group, said venues have seen key food items, such as chicken and beef, increase by around 12 percent. However, they have not been able to increase prices to the same extent. “It is very difficult to pass on the entire increase,” Maadad said. “People will feel it immediately, so we have chosen to absorb as much as possible and are working hard with our suppliers to see how we can best maintain existing prices. “We do not do portion reduction as one of our strengths is value for money.” Many restaurants with multiple venues can bargain harder than single operators. Jen Blandos, founder of Female Fusion, a UAE-based community of female entrepreneurs with more than 20,000 members, said results can be achieved by negotiating collectively. “We are constantly working with suppliers of business services to provide big discounts for our members. “Shipping and courier fees are a big expense for many SMEs in the UAE right now, and Aramex [the UAE logistics company] has been incredibly supportive by providing discounted rates for our members,” she said. Blandos said the group has also negotiated for members to get a 25 percent discount on legal advice from the Crimson Legal firm. The Rove hotel brand has also agreed to offer member discounts, and Mastercard has offered members training on how to become more digitally savvy and improve their online sales. Outsourcing Grant Thornton recommended that business costs could also be reduced by firms outsourcing more of their activities, especially within the IT sector. “Pre-Covid there were times when everyone wanted people sitting in their offices,” said Shankar Garg, managing director for the Middle East and Africa at Xebia, a US-headquartered global IT consultancy company. “When I used to tell them that we have offices in India and we can do this work for at least half of the cost that we charge you in Dubai, they said, ‘no, we have great offices, why would we want people sitting in India? We want people sitting here.’ But that has changed completely.” However, Robert Kew, founder and managing director of IT support services company Kew Solutions, warned against making short-term cuts that may have long-term drawbacks. “I have seen many businesses look to cut costs – particularly with technology and hardware – while this can be a quick win at the time, more often than not it leads to costs in the future. “A laptop bought on an online reseller platform might save a business owner AED200 ($54.46), but it comes without the warranty and without the knowhow that an IT service provider gives.” On a positive note, the Grant Thornton survey found that only four percent of respondents said they had done nothing at all to combat the impact of inflation.