How are small businesses in the GCC affected by global inflation?

Inflation has been the biggest subject for both consumers and businesses alike, brought about by a range of political and economic factors, far beyond an individual’s control. While IMF expects inflation to average 7.5% globally this year, the GCC states are faring far better with the forecast standing at 3.2% albeit up from the projection of 2.8%.

Now, while GCC inflation is expected to ease in the second half of 2022, inflationary headwinds will weigh on household consumption and the non-oil recovery into 2023.

Rent, food and transport comprise the majority of consumption in the GCC. There has been over a 20 per cent rise in fuel prices over the past few months, as motorists are staring at a double-digit increase following Russia’s military aggression on Ukraine.

As the cost of doing business increases due to global price increase, the question then is whether local businesses are going to pass on these costs to customers or are they going to take it upon themselves.

“We have not yet increased the prices and are doing everything we can to manage the situation without passing on the increase in costs to our consumers. We understand that it is already tough for people to absorb the increased prices of petrol, groceries and so forth,” said Erika Doyle, founder of Drink Dry, a non-alcoholic drinks marketplace based in the UAE.

Inflation is particularly hitting small and medium business hard. Data from MetLife and the U.S. Chamber of Commerce found that 85% of small-business owners surveyed expressed concern about inflation. And 1 in 3 listed inflation as their top business concern.

“Inflations and rising costs of living are making people think twice about spending on ‘nice to have’ items. Petrol, costs of schooling and property/rental prices are going up and therefore people are becoming more conscious about spending. I believe Drink Dry products sit in that ‘grey’ area between necessities and luxuries. Alcohol free drinks are a way of life for so many people, same as veganism or vegetarianism so we have not seen a decline in sales yet but are following the situation closely,” she added.

Now, while the GCC states are shielded from the massive surges in costs and rates of inflation seen in the western nations due to policy levers, structural economic factors, and the absence of a traditional political cycle, its large dependence on food imports makes the impact felt, especially for SMEs.

And the biggest driver of the increasing costs for businesses is supply chain. “In the last 18 months the carton prices have gone up globally and we have seen an increase of 75% in our packaging costs. We have also witnessed around 50% increase in last-mile delivery courier charges,” said Erika. “Drink Dry sources the vast majority of its products from overseas – mainly mainland Europe and the UK. The shipping costs have literally doubled since we made our first shipment in 2020. And more than anything, it is the availability of the shipping containers that is causing the delay.”

Managers can take quick actions to contain the impact of inflation on their companies’ profitability. These tactics start with a detailed assessment on their contractual exposure. Now, many companies have to assess, analyse and target key elements of their sales or external spend which should be indexed or non-indexed.

“The downside to that is we are now holding more stock than usual, which has an impact on our cashflow as a business. But we simply cannot allow for any of our products to be out of stock. Drink Dry has built a very solid reputation as a supplier in the market and we have to make sure that we work to these standards,” she said.

While supply chain drives inflation, inflation drives disruption. This pairing of inflation and disruption has resulted in massive supply chain changes. The cycle of rising inflation requires a response that combines new technologies and the reskilling of people. This combination of human ingenuity and technology underpins a more resilient supply chain. But this isn’t as easy, as businesses would hope.

“There is a real lack of talent and people in the market post-Covid. A lot of employees have set up their own businesses or have simply changed their careers. This significantly impacts the company’s staffing costs compared to previous years,” she added.

If input prices are rising, there are two things retailers can do – adopt cost-cutting measures and hike prices. The ability to pass all or some of these costs on to customers will be partially determined by their willingness and ability to pay. The competitors’ ability to absorb price increases will also impact pricing dynamics.

“The current scarcity and accessibility issues surrounding the acquisition of raw materials, coupled with high demand and shipping cost increases are the most major contributors to rising costs,” echoed Sara Chemma, founder and CEO of Citron.  “During this precarious time, it is important for governments and regulatory bodies to consider multiple options to support the companies most in need.  Trading subsidies, custom fee reductions and revised clearance rates could be very effective and some European countries are even considering a reduction of VAT on key consumables that could be highly useful.”

Manufacturers and retailers have adopted creative tactics over the decades to increase prices without customers really feeling the pinch of it. For example, there is the ‘shrinkflation’ tactic FMCG manufacturers love, where less of a service or product is offered at the same price. Another approach may be to cut frills or charge extra for value-adds. For example, restaurant owners may consider not offering free bread to customers ahead of their meal.

While it might seem like an uphill battle for SMEs in the retail sector, the fact that inflationary trends are forecasted to be stabilising soon, and the direct impacts of geo-political factors are largely cushioned in this region, should come as a respite. In addition, measures taken by the government and other agencies such as Dubai Chamber of Commerce’s Business Mentoring and Support (BMS) program that was launched in response to Covid-19 in 2020 that aims to connect SMEs with large corporations to help them navigate various challenges have also helped many businesses survive in a strenuous economic landscape.