What is Margin Pressure
Margin pressure is the impact of internal or external forces on a company's gross, operating or net margins. Anything that makes a company's costs rise or revenues fall, will compress margins and reduce net income. While margins naturally fluctuate, sustained margin pressure will hurt a company’s profitability and its stock price.
BREAKING DOWN Margin Pressure
Margin pressure can be related to macroeconomic events, such as rising oil prices, changes in legislation or regulation. Or margins might be squeezed by company-specific events, such as the loss of market share or production issues or delays. For example, when the Japanese tsunami disrupted supply chains throughout Asia in 2011, many manufacturing companies saw their profits temporarily squeezed – or had to put up prices.
Businesses typically experience margin pressure during cyclical downturns or recessions – unless they have a competitive advantage that allows them to increase market share. The global financial crisis in 2008 and the eurozone crisis severely hurt companies’ pricing power and put margins under pressure. To the extent that quantitative easing has led to excess capacity in some sectors, this has also impacted margins, globally.
Businesses around the world have also faced sustained margin pressure for some time because the global economy has become extremely competitive, thanks to competition from China and other developing markets. Online commerce has made price comparisons easy for both consumers and businesses. Retail margins have been severely constrained by competition from Amazon and low-cost foreign competition.
Margin pressure is responsible for phenomena like shrinkflation in the food and beverage industries, where the size of a product is reduced while maintaining its sticker price – thereby effectively raising the price of the product and increasing margins.
A business will experience margin pressure if:
- A new competitor enters the industry and increases its product offering or competes on price
- Competitors copy, imitate or steal its intellectual property
- Input costs rise, either because commodity prices are rising, or other costs within the supply chain are rising
- The company or industry faces increased regulation
- New legislation fundamentally changes the markets in which the company competes
- Internal production problems or delays arise
- Selling, general and administrative expenses (SG&A) are rising, without a proportional rise in revenue. For example, wages might be increasing in a tight labor market.