Rising product demand muted by pressures around cost of doing business

• Rising business costs offsetting increased demand, creating spectre of cost of doing business crisis
• Shift from short-term to long-term concerns, with leadership vision and adaptability now major barriers
• Decisive leadership with clear vision crucial for middle market success amid high costs and rising demand

A cost of doing business crisis could offset increased demand for Australian products and services, with increased operating costs and higher labour costs emerging as the top concerns for middle market businesses across the country.

Pitcher Partners’ first Business Radar report for 2024 showed confidence among middle market businesses is declining across industries, although levels of optimism in the Australian economy remained higher than pre-2023 levels.

Independently commissioned, the Radar research gathered opinions and insights from 152 of Australia’s middle market business leaders.

Most respondents to the survey focused on three things: the rising cost of doing business, rapid advancements in technology and – perhaps not unrelated to these two factors – shifting consumer expectations.

Higher operating costs and increased labour costs emerged to rank among the top five factors affecting business confidence in 2024, offsetting the positivity gleaned from increased demand for Australian products and services.

Chris Hanna, Partner at Pitcher Partners Adelaide, said the survey revealed a fluid environment for the factors influencing business confidence.

“Last year, we saw business leaders stop seeing the pandemic as a significant factor affecting business confidence, moving more towards the impact of the global response to the pandemic, being inflation and higher interest rates,” Mr Hanna said.

“Now, business leaders have their focus more squarely on local factors impacting their businesses – managing increased demand along with the increased cost to do business.”

The survey showed larger businesses were particularly concerned about the labour market, with 43 per cent of firms of more than 200 employees saying the rising cost of employing workers was having a negative impact on their outlook.

Nearly a third (32%) of respondents from larger firms with more than 200 employees said increased operating costs were among their top three concerns, while 38 per cent of those surveyed said inflation remained a concern.

On the positive side, 43% of respondents said rising demand for products and services was a cause for optimism, more than double the 21% recorded in the previous survey in September 2023.

Mr Hanna said the confidence boost from the jump in demand was clearly being tempered by the fact that it is more expensive to do business.

“The business landscape remains challenging, with cost pressures emerging as the predominant factor eroding confidence across our client base,” Mr Hanna said.

“The top four factors negatively impacting business confidence are all cost-related – escalating operating expenses, rising labour costs, persistent inflation, and increasing interest rates have created a perfect storm for many enterprises.

“Operating costs, in particular, have witnessed a substantial surge, with 32% of respondents ranking them as a top-three negative influencer, a stark contrast to merely 18% in our previous survey.

“This sharp uptick reflects the multitude of challenges businesses are grappling with, from soaring input prices and supply chain disruptions to heightened regulatory compliance costs.”

While previous survey respondents underscored short-term impediments such as cash flow constraints and business continuity challenges, the latest findings revealed a distinct shift towards longer-term considerations in 2024, with an emphasis on leadership excellence.

Alarmingly, poor financial management, lack of strategic vision, and leadership’s inability to adapt swiftly to the evolving business landscape have emerged as three of the top six barriers to success, garnering 26%, 26%, and 24% of responses, respectively.

Conversely, a remarkable 26% of participants affirmed that a clear vision from leadership serves as a powerful driver of success.

“This paradigm shift could be attributed to a post-pandemic recalibration – a transition from crisis mode, where leaders were preoccupied with extinguishing immediate fires, to a more strategic mindset,” Mr Hanna said.

“In the current business climate, characterised by robust demand and elevated costs, the value of long-term planning has become abundantly clear.

“Middle market leaders are on notice – they must deliver strong, decisive leadership with a well-defined vision that resonates with their teams and fosters unwavering commitment.”