Last week, high street bakery Greggs announced an increase in the price of its sausage rolls due to supply chain issues. Supply chain challenges are currently a common issue for organisations around the world, brought on by unexpected world events and continued economic and governmental changes. Is Greggs the first of many organisations to pass on these growing costs to the consumer?
The global supply chain and impact on cost
The interconnectedness of a global supply chain often means that when one price goes up, others will follow. Increases in transport, labour and energy costs are contributing to inflation around the world. While consumer price inflation has been considered to be low and stable for the last 20-years, unsurprisingly this has changed the last few years and we’ve seen a large jump in the price growth alongside the discussions about the role of supply chain disruptions.
The pressure on goods prices are parallel to our changing lifestyles. Since the start of the pandemic, our living and working arrangements globally changed. Many organisations had to shut down and demand for certain sectors diminished, take for example catering or entertainment. However, other sectors thrived, such as food, consumer goods or healthcare. This unexpected demand severely affected the availability of such goods, and with it, their prices.
The supply chain and inflation
So how is the supply chain linked to inflation? As inflation is the rate of changing prices, usually measured compared to the previous year, the substantial increase can partly be explained by the economic halt with depressed overall consumption and prices. This ‘base effect’ reflects the fact that the reference price level from a year before was at its lowest, accentuating the increase this year.
As supply chains become more unpredictable, with long lead times for products and increased costs of transportation (earlier this month one of our blogs highlighted how organisations were using high cost flight options for transportation due to the port disruptions) it’s costing more for organisations to get their products on the shelves. However, the risk of passing this cost onto the consumer can often run the risk of losing customers, whereas in Greggs case the high demand of the sausage roll outweighs the risk of the increased cost. Basically meaning, consumers will continue to buy the in demand item, and the business can worry less about the increased cost of getting the sausage roll on the shelf.
Fazit
Before the pandemic, prices were typically predictable and only increased by small amounts each year. Competitive pressures reduced the pricing power of firms. But, in the last year consumer demand has increased as economies re-opened, which is part issue of the demand on the supply chain. But, at the same time, rising input prices are matched by the strong consumer demand, so organisations can charge higher prices without putting off customers and depressing their sales. Firms know their competitors are facing similar cost pressures with supply chain inflation so it’s easier to pass on the costs, safe in the knowledge it’s likely their rivals will do the same. The increase in cost of the sausage roll might be the first of many.
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