Russia’s devastating invasion of Ukraine is driving a wave of inflation and supply chain disruption that is already affecting consumer goods producers and retailers worldwide. From the soaring cost of raw materials to a breakdown in key transportation networks, the war is causing real problems for consumers, suppliers, and retailers alike.
The most obvious impact so far has been on the food sector. Prior to the conflict, Russia and Ukraine accounted for 30% of global wheat exports between them; when Russia attacked its neighbour, the price of a bushel of wheat increased from $8.84 to a high of $13.64 within days. While the price eased back to $11.58 by late March, that still represented a 25% increase on the pre-war market.
That assumes, of course, that buyers can get hold of wheat. Ukraine has 20 million tonnes of wheat and corn left to export from the 2021-22 season, but it is struggling to get exports out of the country. With Russia blocking ports on the Black Sea and the Sea of Azov effectively closed to freight, traditional supply chain routes are now out of commission.
For many developing countries, this spells disaster. Countries such as Indonesia, Egypt, and Pakistan are heavily dependent on Ukrainian wheat and are already beginning to experience shortages. The United Nations Food Programme, which feeds 125 million people worldwide, sources around half of its grain from Ukraine.
More developed markets may be better able to cope because they have the wealth to pay higher prices. But prices are rocketing: the United Nations says food price inflation globally is now at 24%, an all-time high. It’s not just wheat—the price of vegetable oils, sugar, and many other products is also climbing.
Food producers sourcing raw materials for the manufacturing process therefore face significantly higher costs. Few producers are in a position to cope with input prices that are 24% up on a year ago. And to make matters worse, even once goods are ready for sale, the cost of getting them to customers is also on the increase.
With fuel prices surging as concern grows about the supply of oil and gas given Russia’s importance in this market, the cost of shipping, relied upon by many consumer goods businesses, now stands at four times’ its historical average. A container that might have cost $4,000 to ship from China to the U.S. 12 months ago might now cost as much as $16,000.
The worst-case scenario for some consumer goods producers is that key supply routes have just shut down. Rail links from Asia to Europe, for example, that pass through Ukraine or Russia—and sometimes both countries—may not be able to continue operating.
This kind of disruption is very difficult to escape for any business with international exposure, whether you’re buying materials from partners in other markets, or selling to customers on a cross-border basis. In the consumer sector, even businesses not affected by soaring food prices are going to run into transport and logistics problems.
How, then, to cope with these issues?
How do producers selling their goods to retailers around the world begin to mitigate some of the problems now threatening their profitability, and even their viability?
There are no magic solutions, but by working strategically to confront problems, it is possible to start to exert more control. And the good news is that many producers will have had recent experience of doing exactly that; much of the disruption caused by the Ukraine war mirrors the problems caused by the COVID-19 crisis over the past two-and-a-half years.
Start by getting as much visibility of your exposure as possible. What are the current pricing pressures at each stage of your supply chain, both for raw materials and for transport costs? What impact will these have on your margins? And is it possible to make some estimates about likely movements in the months ahead?
Once you know where you stand, you can begin to address the problems. Talk to key suppliers about their plans to mitigate these issues. Have full and frank conversations with your customers about the price increases you may now need to implement, as well as the potential for delays to supplies. Where customers are unable to accept the price rises you propose, does it make economic sense to continue supplying them? If not, are there other customers prepared to pay for your goods?
It’s also worth thinking about the longer term. Just like the COVID-19 crisis before it, the Ukraine war is a reminder that international businesses are potentially vulnerable to global issues that are completely out of their control. Maybe it is time to revisit your supply chain arrangements. Perhaps it is a push to look for more local sources and suppliers. Equally, if you’re dependent on a number of key overseas markets, find ways to diversify to protect your business from future disruption.
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