Auditing UAE
UAE businesses have been to pass on the higher cost they are incurring onto their customers. Image Credit: Supplied

Dubai: A majority of mid-sized businesses, including those in the UAE, have failed to take steps to protect their operations from inflationary influences, according to a Grant Thornton study. While the UAE is seeing some of the lowest inflation rates in the world, businesses are still feeling the pressure of increasing costs.

Businesses reported cost increases of 18 per cent for energy and utilities, 17 per cent for raw materials, and 14 per cent for wages and staff compensation. Around 16 per cent increases were reported for equipment, bank and interest costs and taxes. A majority of UAE businesses surveyed increased their prices in response to rising costs, with 87 per cent raising prices at the same level or above cost increases.

Responses from UAE businesses were in-line with the global average, with 32 per cent increasing prices over cost increases to improve margins and 53 per cent increasing prices to exactly match cost increases to protect margins. Around 8 per cent opted to absorb cost increases rather than passing the costs onto customers to grow their market share, but this is unlikely to be a sustainable approach in the longer term, said the report.

“The price increases we are witnessing from businesses around the world, including those in the UAE, are an extraordinary display of pricing power,” said Samer Hijazi, Abu Dhabi Office Managing Partner at Grant Thornton UAE. “These recent price increases have been supported by a perfect storm of strong demand and supply shortages, but this situation won’t last forever. Mid-market businesses need to take a range of different, proactive steps to deal with inflation in the longer term. They can’t simply continue to price their way out of this problem.”

Businesses in Turkey, Argentina, and India reported the highest increases in prices overall, while Sweden, China, and Japan have experienced the lowest increases. The study found that only a quarter of respondents are acting beyond price increases to plan for managing inflation. The most active countries in terms of businesses taking strategic preventative measures are Nigeria, India, and Singapore.

UAE falls into the lower half of the table. While 37 per cent of the country’s businesses are changing their pricing strategy in line with cost increases and 31 per cent are focusing on product or service differentiation, only 14 per cent are taking action to reduce levels of debt or interest. “The first step for any UAE-based organisation, whether trading locally or internationally, must be to identify and mitigate the risks of inflation to the business,” said Hijazi. “Once a plan is in place, businesses need to take action to limit external cost increases.”

Other actions in the plan include outsourcing more activities to lower costs and ameliorate labour shortages, gaining a better understanding of the true cost of serving clients, changing price strategies to be more in line with cost increases, taking action to improve capital structure, and taking steps to improve internal efficiency and costs and reducing waste.