Inflation Surge in Home and Garden: Company Actions Taken to Cope

January 2023

Challenges for the home and garden industry in 2021 and 2022 included unreliability in supply, with demand vastly exceeding supply, causing shortages and thus cost spikes. Following Russia’s invasion of Ukraine, the challenge in the short term is the ability of companies to pass on increasing costs in a market where demand has turned soft. This report looks at how companies responded to cost inflation and stock disruptions threatening the business model, and the big margin lessons of 2022.

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Key findings across the “inflation surge” reports in home and garden

There is a lesson to be retained about passing costs forward whenever the opportunity allows

Some product categories absorbed in their margins more than half of the cost of materials inflation in 2021/2022, often with a view to temporarily and partly cushioning supply chain partners and consumers from full shocks. With 2022 demand changing from booming growth to decline, the difficulty in passing forward delayed cost rises ramps up, raising questions about everyone being able to seek win-win outcomes and the strength of business models.

Defeated by victory - the advantages of being in a booming sector have led in some cases to a margin crisis

There were other factors at work; the cost waves in timber gave earlier warning versus metals of how serious this inflation period was going to be, and exposure to shipping inflation also mattered. However, the clearest motive visible in categories that passed costs forward rigorously as soon as demand allowed was a sense of vulnerability. Profit lines cushioned by factory scale gains during 2020/2021 did not feel the true margin urgency until later in the crisis.

One in three companies (half in Western Europe) cannot yet see when their supply chain issues will be resolved

83% of home and garden companies were at least moderately harmed by supply issues in the 12 months to August 2022. Some categories, such as homewares and home furnishings, are tracking to return to full availability, but home improvement is not expected to recover until 2024, and gardening may not yet have reached the peak of disruption. In Europe particularly, there are companies that see no end yet in sight for their supply problems.

Passing costs forward is expected to improve in 2023, but a demand drop is widely anticipated

The industry is expecting an 8% increase in the cost of production in 2023, due to energy trends, and anticipates passing that through into its own pricing better than in 2022, and in some cases raising prices over this level, attempting to recover previously lost margins. This is linked to a widespread view that demand is going to drop by more than 4% and any current terms sales growth seen in 2023 will come purely from anticipated price increases.

Scope
This is one of three linked reports published Q4 2022 on inflation surge in home and garden
Key findings across the “inflation surge” reports in home and garden
The many layers of global inflation
Commodity impact: Inflationary cost pressure varies with exposure to different materials
Assumptions and calculations driving the home and garden inflation projection tool
2022 home and garden inflation trends to 8% overall, but materials cost pressure drives 14%
Propensity to raise prices has been lower in home and garden versus other sectors
Tools inflation trends to 10% overall in 2022, with residual materials cost pressure driving 19%
That impact in tools is visible in 2022 margin management results for the sector leader SBD
This is linked to reactive measures in SBD to stabilise the ship and recover lost ground
Furniture inflation trends to 10% overall in 2022, with materials cost pressure driving 13%
IKEA had to change its franchise dynamic around price increases to handle these pressures
Excess manufacturing capacity is a recurring theme driving reactions and price increases
Cost cutting was widespread, but many large actions were started back in March 2020
Stealth price increases were visible, but not standard (or very easy) in home and garden
Substantial effort at cost saving is clear (accumulating the pass-through and margin hit rates)
Examples of specific materials scarcity and how it affected categories across home and garden
Stock disruption is not universally easing across home and garden, severe issues continue
Gas price spikes are causing extreme supply disruptions particularly in glass and horticulture
Proportion of companies that engaged local suppliers or increased spend on private label
Reducing exposure to shipping or currency volatility includes embracing more local suppliers
2023: Falling demand, small growth via price rises, and improved cost pass-through rate
34% of home and garden companies cannot see a supply solution; other sectors are worse off
Deconstructing inflation drivers for home and garden
Painful margin lessons in 2022/2023 must be retained, just as 2020’s big lesson was forecasting
Retail sales indicators show a 2022 reset, with gains being lost and power moving to retailers
There is a strong and painful lesson about passing cost through when you have the chance
Defeated by success - the impact of booming versus declining demand on margin missions
Understanding the context for price negotiations has rarely mattered more than it does now
This report looks at company actions; it is one of three lenses for inflation surge in 2022
Scope of the home and garden inflation projection tool and ongoing intentions

Home and Garden

This project has a strict focus on sales to consumers only. Trade and professional sales are excluded. Home and garden refers to gardening, home improvement, homewares and home furnishings.

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