SKYROCKETING raw material costs have forced manufacturers between the proverbial rock and a hard place about the decision to either hike the cost of their finished goods or absorb the price increases into their business.
President of the Jamaica Manufacturers and Exporters Association (JMEA) John Mahfood told the Jamaica Observer that while manufacturers are struggling, exporters are facing a peculiar problem.
“Where it actually hurts more is for exporters, and the reason is that the dollar has actually been strengthening. So, when you pay for the raw materials, if you bought them three months ago you might have paid $156 dollars, when you sell them and you collect the money four or five months later and the dollar is now $154, you’re going to collect less money than three or four months ago. So, exporters are finding it more difficult now with a strengthening dollar,” Mahfood explained.
He clarified “That’s not to say we are complaining about the stabilisation of the foreign exchange; it’s a good thing. But the fact is that when you have stable foreign exchange you cannot put up your price, particularly for the export market, because it does not accept price increases.”
In comparison, he noted that for many decades US producers resorted to ‘shrinkflation’ because their inflation rate remained low and consumers refused to accept price increases. Shrinkflation refers to the practice of manufacturers reducing the contents of their products to either keep prices stable, or reducing the level of increases consumers would face had the contents remained unchanged.
“It’s much more difficult to increase prices in the US than it is in Jamaica. They had a long string of very low inflation where it was impossible to increase prices — customers just wouldn’t accept it,” Mahfood stressed.
“So if during that time in particular, when there was a cost increase, you would see them reducing the size of the product. It might be, for instance, a tea box of 25 bags may be reduced to 20 or they might shave a couple ounces off the weight of an item,” he continued.
He stated that while shrinkflation is normal in the US it is not very prevalent in Jamaica.
Nevertheless, he admitted that shrinkflation may not be very far off in Jamaica if the stabilisation of the dollar continues on its current trend.
“In the future, if we have a long period of stable exchange rate it may change from price increases to smaller packaging — but not at this time,” said Mahfood.
In the meantime he noted that local manufacturers have been sensitive to the pressures being faced by consumers; and while they have not resorted to shrinkflation practices, they have been moving slowly to increase prices.
“In Jamaica, because of the history of devaluations, supermarkets and shops are accustomed to receiving price increases on a regular basis so it’s not as hard for local manufacturers to increase their prices. But when you take into account the rapid increase in the cost of raw materials and the significant cost because of shipping, you’re looking at 20 per cent, sometimes 25 per cent increase in the cost of raw materials — and many companies are reluctant to put those types of price increases on to the consumer at one time.”
Consequently, he said manufacturers have decided to spread the price increases over time and in small increments.
“Maybe 5 per cent in January and you wait for another five per cent in July. The effect of that is that your margins decline and your profits would decline as well. The only thing you can do is consider if somehow you can increase your sales, then you can offset some of that. So as the economy strengthens it is possible that some local companies are seeing some improvement in sales, which might compensate a bit for the reducing margin,” the JMEA president stated.
He further highlighted “The other thing they can do is reduce their cost of operation but, having gone through two and a half years of COVID when things were very tough, I think most companies have reduced their expenses as much as possible and maybe, having seen profits in late 2021, they are not as quick to increase prices to the consumer.”
Looking ahead, he concluded “My sense is that in 2022 we’re going to see lower margins and we’ll continue to see some price increases, as the months go by, into the end of the year to compensate for those problems. If you look in general at the manufacturing sector of the stock market you will see a number of companies where their margins have declined and they’re taking their time to put up their prices.”