Companies may have to take difficult decisions to cut costs - EY

RIGA - Companies may have to make unpleasant decisions on cost-cutting, because although inflation is no longer rising significantly, the level of costs has not fallen and it is becoming increasingly difficult to compete, Guntars Krols, Partner and Head of Strategy and Transactions in the Baltic States at consulting firm EY, told LETA in an interview.

He pointed out that although inflation has stabilized and no one expects energy prices to rise several times, many components have not seen a drop in prices and costs.

"This is the biggest challenge for businesses, because companies have remained at high cost levels and it is much harder to compete with other European and global companies, for which cost levels had also jumped, but maybe now they are not as high. Also, by mentioning the productivity factor, which has not been outstanding for Latvia in the past, there is a risk that we will be less competitive with particular products or services if we stay at this high cost level," Krols said.

He warned that this could lead to situations where, as sales fall, companies will have to make unpleasant decisions to cut costs because they will no longer be able to pass on higher prices to their customers. Instead, more emphasis will have to be placed on reducing the cost base.

Moreover, if businesses fail to do this by rethinking their business strategy, realigning working principles and processes, or streamlining operations, then many existing business models may become unprofitable or insufficiently profitable to recoup their investments as time moves forward, the EY partner predicted.

Asked about sectors that are most impacted by this, Krols said that difficulties are already evident in manufacturing sectors such as timber. On the other hand, companies with higher value-added products or services, such as the IT sector, have an easier time with the possibility to increase final prices and thus cover costs.