Economy bites as 87% of Kiwi businesses battle increased running costs

Businesses continue to absorb the impact of inflationary pressures in New Zealand as running costs increase ahead of market prices.

Creating a new operating environment dynamic as a consequence, organisations are shifting focus from COVID-19 to managing rising costs and improving productivity in response to the country slipping into a recession.

According to 2degrees’ latest Shaping Business Study, 87% of Kiwi companies have experienced an increase in running costs during the past 12 months, a percentage which has almost doubled within the space of two years (53% in 2021).

For the majority, the spike has been sizeable with 90% enduring double-digit rises in operating expenses, notably between 11-20% (29%) and 21-30% (25%).

Business running cost increases can most be attributed to:

• Labour costs: 54%
• Utilities, insurance, leases: 48%
• Interest rates, cost of capital: 42%
• Raw materials: 40%
• Government regulation / policy changes: 23%

Other reasons include sales and marketing (18%), implementing or upgrading technology (17%), compliance (15%) and research and development (6%).

According to findings, medium-sized businesses housing between 21-50 employees are “significantly more likely” to reference labour costs (69%) as the primary factor while larger sized organisations (51+ employees) cite implementing or upgrading technology (33%).

Despite such context, only 63% of Kiwi businesses have increased prices in response, suggesting that many organisations are having to absorb inflationary impacts.

The number drops to just over half (54%) when asked if they plan to increase prices during the next 12 months, down from 61% in 2022. Within this group, most will increase prices by either 1-10% (39%) or 11-20% (33%).

“This is the second straight year that we’re seeing cost increases across the board for businesses but the impacts of that aren’t being felt equally,” noted Andrew Fairgray, Chief Business Officer at 2degrees.

As noted by Fairgray, while the pandemic may be in the rearview, the business outlook is still filled with challenges in New Zealand.

“What we see in the market and in this report is that the businesses who can thrive in this environment are those who can find innovative ways to increase productivity, whether that’s through attracting and retaining great staff or making more effective use of digital tools,” he added.

Business outlook gradually improving

As the economy gets to grips with a new set of challenges, Fairgray said businesses are moving from just getting by to a more measured outlook.

Specifically, the number of business leaders who are “surviving” and just getting by dropped by six percentage points to 23% with most organisations (53%) now “reviving” and getting things back on track.

In addition, 17% of organisations are “thriving” and performing stronger than ever before, up 14% compared to 2022.

“Other measures of optimism and outlook have stayed consistent from last year, as business leaders acclimatise to the new normal,” Fairgray explained.

According to findings – conducted in partnership with Perceptive – 41% of business leaders are feeling about as optimistic as they were last year, with nearly a third (32%) feeling more optimistic than in 2022.

Financially speaking, half of businesses (50%) anticipated that revenue would grow during the next 12 months – a figure most attributed to larger businesses (66%) and those operating for eight years or more (57%).

As highlighted in the study, costs and government come through as leading contributors to “unfairness” with tax notably top of mind.

When asked what is the most “unfair” aspect about being in business, highlighted verbatim survey responses include:

• “Taxes! GST, Provisional tax – having to increase wage costs but keeping the services reasonably priced”
• “Being overly taxed as a micro business. Compliance costs & Insurance”
• “Paying taxes other than income tax, for example fringe benefit tax and entertainment tax (non-deductible items)”
• “Taxes and tax administration are onerous, coupled with increased costs of wages and increased costs of health and safety awareness in the workplace, staff training, increased days off due to health and well-being, and ever-changing goalposts in yearly regulatory checks (fire safety and location certificates for example)”

Delving deeper, businesses believe central government can help support organisations by offering tax breaks (48%), addressing inflationary policy (45%) and providing more support to handle global supply chain issues (19%).

People become “deciding factor”

Unsurprisingly, most Kiwi business leaders consider staff as the key factor which will help them sink or swim in the months ahead.

When asked about the biggest driver of increased productivity, executives overwhelmingly cited employees, with one saying “skilled staff with the supporting resources to do their job well” was the key.

Building on that theme, business leaders who prioritise productivity cited motivating staff and employing more highly skilled people as the two top ways to achieve higher levels of productivity.

Despite knowing that staff are key to getting ahead, business leaders who are looking to cut costs are focusing on their people spending with 24% looking to reduce training, learning and development, and a further 24% seeking to reduce the number of staff.

“In this inflationary environment, the best way for businesses to move the dial is to increase their productivity and deliver more value with the resources they have,” Fairgray added.

“Attracting and holding onto the best staff will be top of the list for most businesses, and making sure that modern technology tools are reducing friction and adding value shouldn’t be far behind. The combination of these two factors will be how businesses can set themselves apart and thrive long-term.”