INCREASING BUSINESS MARGINS, THE SEARCH FOR THE NEW HOLY GRAIL

In recent years, new economic trends have emerged that are generating additional costs to companies' operating accounts, as well as an increase in the prices that consumers pay, an increase in the expenses faced by governments and, in short, they are having an impact on the economy in general. For me, these trends are structural in nature, such as inflation, rising interest rates, regionalization of supply chains, the aging of the population, the new energy mix, sustainability and, for Europe, higher defense spending and the financing of the reconstruction of Ukraine.

Reflecting on the macroeconomic situation helps us to better understand the framework in which companies will operate over the next decade, because the impact of rising costs will be significant and will leave winners and losers. To deal with it, companies have orthodox solutions, such as raising prices or production volumes to increase sales and reduce costs, or heterodox ones, such as changing the business model.

If we focus first on solutions based on price increases, we must take into account the impact that this decision may have on sales volume. There are sectors that are very elastic (sensitive) to price variation and others that are less so. A good example of demand that is inelastic to price changes is currently the tourism sector (hotels and airlines), which have passed on the cost increase in the prices of their offerings by up to 30% without losing volume. Airplanes and hotels have never been as full as they are now, as all of us who travel on vacation have seen this summer. The same is true of luxury businesses (watches, cars, etc.), which have passed on the cost increase without losing sales thanks to the demand and loyalty of the wealthy classes when purchasing these products. But this is not the case when it comes to consumer products: any price variation can immediately bring down the volume of sales.

If we focus on volumes, in saturated and even declining markets, increasing volumes means expanding market share and household penetration, and doing so on a continuous basis is very difficult, especially in highly competitive markets such as supermarkets and retail. It is often necessary to invest heavily in marketing to increase brand equity and thus have an impact on consumers' purchasing decisions.

Can costs be reduced? This is currently a constant challenge, down the road continuous cost cutting creates disruptions in operations, for example due to a lack of human resources. Artificial intelligence and its application to practical solutions may be part of the solution, but I fear that, if it happens, it will be in the medium or long term.

From experience I know that increasing margins in inflationary periods is a combination of three solutions: increasing volumes, increasing prices and lowering costs; the big question, the holy grail, is the relative weight that each of them should have, i.e. on which of the three we should focus our teams the most. But there is also another way of expanding margins, perhaps more heterodox, which is to evolve the business model with new strategic decisions. My preference has always been for value creation based on generating long-term growth and supported by strategic decisions that focus the team on new distribution channels, new products and new geographies. A disruptive strategy that replaces conventional aggregation strategies (a little more each year). This often means rethinking the business model in order to increase margins in both the short and long term.

With the new global economic trends, I fear that rethinking the strategic dashboard to open up new options, with courageous decisions to grow the business, will be the best way to find the holy grail, increase margins and strengthen the viability of our companies. Executives and boards should spend more time generating and discussing options and less time looking for cost reductions that are bread for today and hunger for tomorrow. And there are already examples such as Enrique Tomas, within the food sector, which has been able to expand to other channels its sale of fresh sandwiches, which can now be found in vending machines. Or meat companies, which are vertically integrating to produce ready meals for supermarkets.

Entering new markets and geographies will continue to be an important growth vector given the demographic evolution of some areas, and increasing margins will cease to be a simple tactical discussion of cost reduction and become a strategic discussion linked to long-term expansion projects. This will be the new holy grail for an era with structural inflation linked to these new trends.