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Inflation Surge in Home and Garden:State of the Industry

November 2022

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 the industry’s experience over 2021-2022, the factors posing the greatest threat, and what the gaps between countries teach us.

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Key Findings

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 2021/22, 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 wood 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 2020/21 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
2021-22 was hard for managing prices; but manufacturers had strong negotiating power
Retail sales indicators show a 2022 reset, with gains being lost and power moving to retailers
Voice of the Industry Survey Q3 2022, gauging the sentiment of home and garden companies
Looking at home and garden overall, very little of the cost structure was left untouched
The boom created scarcity of commodities, recently compounded by the invasion of Ukraine
Energy costs keep spiking, especially on gas, hurting some products in extreme ways
Labour was an inflationary driver, but in 2021 to 2022 H1 it was more a capacity limiter
The shipping impact depends on length of supply chains and the bulk m 3 to retail value ratio
Just as brands gave retailers supply problems, that originated further back in parts supply too
Examples of specific material scarcity and how it affected categories across home and garden
Home and garden companies predict an incremental 8% increase in production costs in 2023
The scarcity factor in a booming market made home and garden CPI inflation worse
In PPI data, a boom is visible in scale benefits, but European energy cost spikes start to show
Examining CPI versus commodity price data, 51% of cost rises were passed on so far
If thinking only of the last 12 months, nearly 60% of materials cost inflation was passed on
2022 home and garden inflation trends to 8% overall, but material cost pressure drives 14%
Deconstructing inflation drivers for home and garden
That was the picture for home and garden…we have also drilled down to category level
Just-in-time left business models too vulnerable to shocks; now other ideas are taking root
Reactions to disruption take us back to the old joke about traffic jams…
Understanding the context for price negotiations has rarely mattered more than it does now
The 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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