With prices on the rise, consumers and small business owners are feeling the strain of soaring costs 

by RUPINDER SINGH 

DUTCH Lady Milk Industries Bhd revealed on Nov 15 that it has to fork out more money to build its new state-of-the-art plant in Bandar Baru Enstek, Negri Sembilan, due to “unprecedented” inflation. Thankfully, it has deep pockets. 

The dairy product manufacturer said that spiking inflation rate has significantly increased the cost of materials, fuel, labour and now estimates the total capital investment for its new manufacturing facilities to increase to RM600 million from RM400 million between 2021 and 2025. 

Lately, Dutch Lady has used the word “unprecedented” rather regularly to describe the inflationary headwinds that it is facing. 

Back in June, MD Ramjeet Kaur Virik told media that Dutch Lady was facing industry-wide headwinds notably the global supply chain disruption, raw material price volatility and “unprecedented” global inflation that are posing a challenge for the group as it aims to keep its products affordable for consumers. 

She even cautioned that more price hikes could be on the horizon for consumers amid the raw material price volatility due to inflation. 

As the price of raw materials used in dairy products increases — the dairy company has in turn passed the increase in costs by raising product prices. It has instituted several price hikes last year and early this year for selected products. More price hikes could be on the cards amid raw material price volatility due. 

Although faced with these “unprecedented” inflation headwinds, Dutch Lady still managed to show earnings and revenue growth for the third quarter ended Sept 30, 2022 (3Q22). Its net profit increased close to 20% to RM24.4 million from RM20.38 million a year ago, due to higher demand for its products and higher sales prices. 

Hit Hard Small Businesses

While some of the biggest companies continue to record profits and drive-up costs, small businesses have been feeling the squeeze. 

With prices on the rise, consumers and small business owners are feeling the strain of soaring costs. A majority of small-business owners say their businesses’ financial health has suffered due to inflation. 

Small businesses are under pressure from inflation. Their options: Raise prices at the risk of losing sales or accept loans to cover some expenses in order to retain their profit margin. 

In addition to the poorer profit margins caused by cost hike, small businesses that operate across borders have also had to cope with the increasing exchange rates as a result of anti-inflationary measures. Anti-inflationary measures also increase cross-border taxes and tariffs, making imports and exports unfavourable for small businesses. 

The surging prices of food items and basic essentials are forcing business owners to hike up food and retail prices just to keep their businesses afloat. 

According to research by Grant Thornton, businesses are applying different pricing strategies to cope with rising inflation with the top choice is, unsurprisingly, raising their prices. Others had chosen to absorb part, if not majority, of the cost to avoid losing customers although this would cause a dent in their profit margins. 

The research showed that 82% of Malaysian businesses had been increasing prices in response to inflation which had pushed key input costs of businesses in the country up nearly a fifth (19% on average) led by raw materials (up 22%) and energy (19%). Bank and interest costs, meanwhile, have surged 19% and tax bills have risen by 17%. 

Grant Thornton Malaysia PLT country managing partner Datuk NK Jasani said the sentiment about inflation had shifted rapidly at the start of 2022 from being a transitory, predominantly supply chain and release of pent-up demand issue, to one that had taken a firmer grip. 

To cope with inflation, they have found that businesses are applying different pricing strategies. Some 37% of businesses have increased prices in line with inflation, while 33% have increased prices above inflation. Only 12% of businesses have increased prices below their costs. 

“To avoid losing customers, some businesses choose to absorb part if not majority of the cost, causing a dent in their profit margins,” he said in a statement. 

It noted that businesses were squeezed hard between rising prices and customer’s unwillingness to pay more and that could result in them going out of business when they could not hold the fort any longer. 

Operating Cost 

As SMEs have been steadily picking themselves up as the economy gains traction, business owners, however, now struggle with the rising operating cost due in part to supply chain disruptions and higher raw material prices. 

SME Bank Bhd’s inaugural SME Sentiment Index indicates that SMEs are optimistic about the current economic recovery phase, however, many are still in need of financing aid to manage their working capital and struggle with rising operating costs. 

Mindful of the negative impact to 2022 the customers, SME Bank said SMEs are trying to switch to cheaper suppliers or find alternative raw materials before opting to pass the burden onto customers by raising prices of their products or services. 

Close to 80% of the SME Sentiment Index respondents indicated the need for cash assistance via financing, despite the rising interest rate environment. The index also showed that 45% of the respondents are currently looking for additional financing solely to manage their working capital requirements. 

In such a scenario, liquidity plays a critical role. A report by Experian Information Services (Malaysia) noted that liquidity remains key to the survival of Malaysian SMEs to sustain and benefit from Malaysia’s growth-driven economy. 

It noted that corporations have been able to weather liquidity pressures and their ability to borrow remains stronger than their SME counterparts, according to its Trade Bureau Industry  Debts Turned Cash (i-DTC) study which measures credit repayment data between September 2020 to August 2022. 

Conversely, it said SMEs have seen a softening of cashflow stresses, but recovery is flat from May to August 2022. 

“Smaller enterprises remain cash vulnerable particularly with recent inflationary pressures, competition for labour, difficulty in securing loans and the rising cost of borrowing (interest rates),” it said. 

Additionally, the study noted that SMEs continue to struggle to take full advantage of the post-pandemic rebound in the economy. 

“Compounded by the slower uptake of digitalisation in certain segments, the absence of building scale and access to liquidity are among the areas continuing to challenge their cash positions,” it said. 

In the analysis, Malaysian companies and SMEs were examined across seven key industries including construction and hospitality/food and beverage (F&B). 

While SMEs in the hospitality/F&B sector recorded the biggest recovery on a year-on-year basis, the study showed that liquidity and access to capital remains key to SMEs in this sector as it seeks near-term expansionary measures to scale their operations for growth. 

On the other hand, corporations in the hospitality/F&B sector are demonstrating a reverse trend of slower payments in recent months since early 2022. 

With the country having entered an endemic phase of Covid-19, access to manpower continues to challenge hoteliers, travel agencies, restaurants and cafes in scaling their business to full capacity, despite growing domestic and international demands. 

Many in the sector have called for the government’s support to expedite foreign worker approvals to meet urgent manpower requirements to drive recovery, it said. 

Construction Recovery 

Meanwhile, the study showed corporations and SMEs benefitted from recovery in the construction sector across the last 12 months. 

It pointed out that the government has implemented various initiatives to support the construction sector to bounce back from the impact of the global economic crisis. 

This includes the plan to establish the Public Private Partnership (PPP) 3.0 model, a specialised mechanism to fund infrastructure projects in the 12th Malaysia Plan (12MP) between 2021 and 2025, as well as several incentives to improve employment rates and support businesses. 

Compared to a year ago, construction SMEs have managed to see a 21-day improvement from August 2021 to August 2022. 

Conversely, the large corporation construction sector has also seen a 34-day improvement over the same period as construction projects and activity resumes. 

“With global inflationary pressures expected to persist, it is commendable that the government continues to provide support through the many subsidies put forward for Budget 2023 to help Malaysia weather the headwinds,” said Experian Information Services (Malaysia) CEO Dawn Lai. 

“From our observation, monitoring of suppliers, clients and cashflow continues to be important for Malaysian companies to be able to ride through the tides of uneven economic recovery. Cash preservation will continue to be the focus for smaller Malaysian enterprises where they have less ability to demand preferential credit terms from their clients,” she concludes. 

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• This article first appeared in The Malaysian Reserve weekly print edition