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What’s the price?

Who hasn’t gone to fill up their car recently and found that yet again the fuel price has gone up? However, how many people have

gone to the cashier, stated that they are not prepared to accept it and demand to be allowed to pay what last time? Well it’s a silly question because the situation is unrealistic. After all, everyone knows that oil prices have increased as a result of the unrest in the Middle East and HM Revenue and Customs have also played a part.

Why is it then, that when unprecedented, equally well-publicised increases occur in key raw materials, along with currency fluctuations as a result of the same market uncertainties which are driving the petrol price, any attempt by a supplier to increase the price of effected products it is met with horror, a blank refusal or even a demand to decrease the price?

So what is really going on? Is all we are getting merely ‘crocodile tears’ from ‘fat cat’ suppliers? Well let’s take a look at what is actually happening out there.

Coconut Oil (CNO) and Palm Kernel Oil (PKO), lauric oils, which are the basic building blocks of detergents such as washing up liquids, are up 55% since July 2010. The resulting Oleo chemicals, for example, fatty acids, alcohols and amines saw an increase of c26% in Q1 2011 as a direct result of the continuing upward trend of CNO and PKO.

These price increases have been driven by a number of combing forces; including global economic conditions, crude oil increases and

reduced crop yield following poor weather conditions.

Fortunately for the cotton market, poor harvests, soaring demand from China and market speculation have caused the industry to explode, with the main demand for cotton being for clothing. However, the raw material usually only represents around 20-30% of the total cost of a garment and this is because the labour involved to turn the material into clothing is a higher percentage of the overall cost. So, doubling the cost of the cotton does not double the cost of the resultant clothing. Not so with mops! There is not so much labour involved in making a mop. So, 50% - 60% of the cost of a mop is the raw material. The impact of the increase in the price of cotton therefore dramatically hits the cost finished mop.

Whilst it would be reasonable to assume everybody could just grow a bit more cotton and the problem would be solved, unfortunately it is not that simple. If you are a farmer there are other crops such as Soya, which are also providing big profits and consequently might attract you. In addition cotton requires an infrastructure to process and spin the yarn. Simply growing cotton in an area which does not have this infrastructure will not help. As a result, it would appear that prices are set to continue to rise.

Similar stories can be told for materials, which impact upon the cost of manufacturing soft tissue products and plastics such as refuse sacks.

How can these price pressures be accommodated in a marketplace, which not only resists price increases but very often, through the mechanism of fixed price

FEATURE 60 | TOMORROW’S CLEANING | The future of our cleaning industry

Graham Fletcher, General Secretary of the CHSA, shares his thoughts on the recent price increases and explains why we’re all in this together.

contracts, actually legislates against such increases? A fixed price contract places minimum administrative burden on the contracting parties, but subjects the supplier to the maximum risk arising from full responsibility for all cost escalations. In today’s environment there is no longer a risk of price escalation. It is now a certainty. Surely it is time for common sense to prevail and the unreasonable demand for fixed price contracts, which do not recognise the very real trading conditions, to end.

The alternative is to pressure suppliers into ‘engineering’ cost out of their products in order to survive. The consumer will maintain or reduce their unit price and feel good in having met their objective. However, behind the scenes the supplier will reduce their service levels and product development programmes as they can no longer afford to support them. This will ultimately be to the detriment of the consumer whose spend on cleaning materials will increase in the longer term as they will need to buy more product to do the same job. Everyone loses!

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