Intense competition and weak demand growth prevent multinationals from passing on cost increases to customers
Margin pressures in South Africa will cause multinationals to struggle to fully pass on rising costs to their customers given weak demand dynamics and intense competition. Rather, companies must evaluate what proportion of these cost increases they can they pass on. In this environment, MNCs should review their pricing cycle in tandem with their product portfolios; price increases are more likely to be tolerated by customers if they follow an increase in package sizes, or the provision of new value-added services. MNCs are also advised to focus on the most profitable and resilient products lines and customer segments given weak demand growth.
Headline inflation rose sharply to 5.9% YOY in December, the highest rate since March 2017 and a marked change from the 16-year low of 2.9% in February 2021. Meanwhile, producer price inflation reached a record high of 9.6% YOY in December. Surging inflation has been driven by the higher domestic fuel prices following the increase in global crude oil prices in H2 2021, rising electricity tariffs, and the impact of higher global shipping costs that have driven up the cost of imported product. However, food price inflation has run counter to these trends: the rate decelerated from 6.9% YOY in August to 5.5% YOY in December thanks to strong domestic agriculture production that has eased food price pressures.
Headline inflation will continue to rise during Q1 2022, because global commodity and shipping costs will remain elevated. Additionally, electricity tariffs will rise significantly. Eskom, the electricity utility, is seeking approval for a 20.5% YOY increase in tariffs this year. However, the inflationary surge is expected to ease in H2 2022. The stability of the rand will partly counterbalance higher imported prices, and strong domestic agriculture production will curtail food price inflation. Furthermore, the South African Reserve Bank has scope to tackle inflation by quickening the pace at which interest rates are increased over the coming months.
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