The corrosive effects of inflation have caused the NZ SME manufacturing industry to face a brutal 25% profitability plunge, though certain industries are leading a fightback - according to a new report released by inventory management software provider Unleashed.

The Unleashed Manufacturing Report showed a difficult outlook across New Zealand manufacturing industries, where an overall decrease in sales revenues has gone hand-in-hand with a 25.5% YoY drop in margins (July 1, 2023 to June 31 2024)

Unleashed Head of Product Jarrod Adam said slowing economic activity was taking a toll – and that the inflationary environment had eroded some of the benefit to businesses of the sales they were able to make.

“Inflation can really be a silent killer. Businesses are working hard to build sales pipelines, but if you feel you’re unable to pass your higher costs on to your customers for fear of putting them off, the effect on your business health can be corrosive. These are genuinely challenging conditions for manufacturers, with the squeeze coming in from both ends” Adam said.

Unleashed’s report analyses businesses across 12 manufacturing sub-sectors in Australia, NZ, and the UK, to assess the overall health of the sector.

The grim inflationary environment saw the average business make a return of $2.16 per dollar invested in inventory (measured as Gross Margin Return on Inventory, or GMROI) between July 1, 2023 to June 31 2024.

This is a significant fall from the $2.90 average recorded between July 1 2022, and June 31 2023.

Certain industries leading a fight back:

While the overall picture for NZ manufacturers is challenging, certain industries are making a comeback.

Island Stone, a Kiwi company making premium natural stone products for high end residential homes is finding success despite the broader economic backdrop.

“We had our best year in the history of the business last year - we grew about 10% on the previous year, and it was a similar number the year before that,” says Island Stone owner Peter Flint.

“Interest rates have come back 25 basis points - there are some glimmers of greenshoots - it does feel like there's been a wee bit of energy crept back into the market in the last few weeks.”

“Our forward order book is strong – we’ve got about a year’s manufacturing ahead of us right now – and we’re spending a bit of money on marketing and branding, investing in business development – investing in growth and the performance of the business. We feel cautiously optimistic, but not complacent”.

The Personal Care sector lifted Gross Margin Return on Inventory by 48% for a healthy average of $4.51, while margins in the Health & Medical Supplies sector rallied 32% albeit to a modest average of $1.37.

Margins amongst Electrical and Electronic Components manufacturers were up 65% to $1.76.

Slowing sales also raise concern

While average sales revenues in the last 12 months dropped -6.7% for New Zealand manufacturers, the most recent quarter had seen a more pronounced fall-off. Average sales revenues were 36.5% lower in Q2 2024 versus Q1 2024.

Decreasing excess stock levels show businesses streamlining

One positive element found in the report was the decrease in overstock levels (the amount of stock held over and above optimum levels for each business).

New Zealand manufacturing businesses overall saw overstock decrease by -27% over the past year, indicating NZ businesses are taking a better handle on their stock control. By comparison, across the Tasman overstock has swelled over the same period, up  20.47%.

This shows that New Zealand businesses are successfully scaling back in response to the difficult environment Adam said.

“SME operators are making tactical adjustments in order to weather this difficult environment. As sales decrease in an environment of rising costs, it makes sense for businesses to shed overstock and run as lean as possible,” Adam said.

Beverage sector embattled

On the other side of the coin, the long-suffering Beverage industry is barely holding on in New Zealand with an industry average profitability figure below break-even at $0.68, their lowest figure since Unleashed records began.

The Beverage industry has seen a steep decline from average margins of $2.09 in the 2023 financial year, one of the most drastic drops in profitability of any industry. With the collapse of several high-profile beverage businesses in the media, the industry in general is seeking some kind of reprieve.