The new market realities

The economy is growing at close to 4% a year, among the highest levels in the developed world.  Confidence is strong, interest rates are low, and the growth outlook is reasonably positive.What we’ve seen locally is that most clients in the construction and manufacturing sectors are running at full capacity (and beyond), on both the supply and purchase sides of the equation – people that we’re selling to don’t have the capacity to execute their own growth agendas. Until a couple of months ago, everyone was still chasing work. We’ve gone past the inflection point, and now the question is how we get all this work done?In simple terms, demand has exceeded supply. Where that happens, the price goes up. It also means that where customers used to be able to delay start dates without affecting the deadline, suppliers can now push back and avoid the cost over-runs that happen when you concertina the effort into the last few days before delivery date.For a time at least, the boot is on the other foot. Whether you increase your price or stick to delivery schedules, the negotiating power is with the provider because the customer can’t go anywhere else. It will revert soon enough, but for now there is an opportunity to build your revenue and your profit.  If you’ve got a gross margin of 30% and you put your prices up 10%, you would have to lose 25% of your revenue before your profit started to decrease.But before you start counting your dividends, recognise that while competitive pressures may have eased, there are two things that require your attention:

• Labour costs. With unemployment down and demand up, everyone is screaming for labour.  The war for talent is in full cry – we heard of someone recently who was offered a 25% salary increase and equity to stay. Our household incomes are 30% below Australia’s, and we will only make this country genuinely competitive when we start paying higher wages (you’re not going to have much choice – your competitors are talking to your best people right now, so start having conversations about non-financial benefits right now). Labour is a market too, and when demand exceeds supply, price goes up. Accept it.

• When business is slowing, cash is tight. When business is growing, cash is tight. I remember a banker telling me that 80% of businesses that go broke have just had a record sales year. Growth costs. Get a facility from the bank before you need it (if only because you won’t get one when you do need it).