Small Companies Note Pricing Pressures

New survey also finds that 29 percent of respondents cite labor costs, rather than commodities, as the greatest threat to operating margins during the next 12 months.

The biggest concern among small-company senior executives is the difficulty of passing on rising costs to customers, according to a new survey by Merrill Lynch.

Merrill polled CEOs, CFOs, and COOs at 168 companies with market capitalizations between $88 million and $2.4 billion (as of December 2004). About 21 percent of respondents — nearly twice as many as in the first quarter of 2005 — said that pricing pressures would be a major issue for their businesses during the next 12 months. And 40 percent cited pricing as their primary tool for addressing competition in 2006, compared with 35 percent a year earlier.

The survey also found that 29 percent of respondents cited labor costs, rather than commodities, as the greatest threat to operating margins during the next 12 months, an increase of 7 percentage points compared with the first quarter of 2005. Commodity prices remain a concern, but the number of executives who identified them as a major worry rose only slightly. Merrill also reported that participants are worried about rises in benefit and health-insurance costs, indicating that “margins may come under further pressure as we progress through 2006.”

When leaders of small companies are not worrying about costs, increasing market share remains a key goal; in fact, it is the primary goal of 59 percent, compared with 50 percent in the first quarter of last year. A majority of survey participants expect to achieve this growth organically rather than through M&A, Merrill reported.

Despite the surge in short-term rates over the past year-and-a-half or so, 40 percent of respondents said they believe credit terms have improved. Only 7 percent cited funding availability as a primary challenge for growth in the next 12 months.

As for what these companies plan to do with borrowed money, 38 percent expect that M&A will be the biggest driver of their financing needs in 2006, especially in the capital-goods and financial sectors.

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