Maria Giulia Pace

Whether we’re avoiding to speak about the elephant in the room or not, one cannot deny the influence of the current world affairs as we already started to experience an increase in prices amongst a range of products. We reached out to Maria Giulia Pace, Economist by profession, to ask about some of these shared concerns.

How might consumers feel the impact of war?

It is already being witnessed that a rise in prices of certain items (especially items imported from either Russia and/or Ukraine) will rise, as the supply of such items falls due to the conflict in the area. This will impact customers gravely especially when speaking about food prices which are already on a hike. Apart from a rise in prices, it is expected that certain items will be in shortage, as EU countries struggle to find substitute goods / alternatives to still serve the markets from elsewhere. Delays in terms of logistics is also already being experienced and is expected to increase, as couriers find it harder to navigate the zones.

Moreover, the increasing sanctions on Russia and the need to reduce the dependency on the Russian fuels, will be putting EU countries under strain to find alternative fuel sources – which most probably will again increase the prices of fuel, power and other commodities dependant on fuel. The uncertainty from this energy security will also mean that governments will be investing more in securing power supplies, changing their budgetary priorities. Following the pandemic and now this conflict, the global world economy has been forecasted to experience a growth of 3.6% (down by 0.8% from January forecasts).

How can retailers prepare ahead or adapt to these new circumstances in the market?

Ideally retailers should first assess their supply chain and identify which parts of it are most likely to be hit materially by the conflict. Is a raw material being used sourced from the conflict areas? Is the product served highly dependent on energy prices? Are food prices an important part of the costings of the company? Once the areas most vulnerable to the conflict are identified, retailers should try and find mitigating ways to try and minimise the risk or at least diversify. This could include:

• Starting to source items from another area

• Hedge prices of important raw material in anticipation of price hikes

• Find alternative/ substitute raw materials, imported goods

• Ideally try and source more local items where possible

• If the products / services are highly dependent on materials sourced in areas of conflict, it would be ideal to diversify and and start shifting the risk into other industries

• Setting quotas for clients to avoid panic-buying.

Besides the turmoil the war can bring about, it also emerged in the midst of pandemic and it feels like we’re living through a series of subsequent unprecedented events happening over a relatively short span of time. How do you think this influences purchase and consumption behaviour?

Just like we have seen during the pandemic, there is a tendency for panic purchasing, with people stocking up, so as to be prepared in case of i) exuberant prices, ii) shortage of items. This is a typical behaviour which has already been witnessed and it being currently controlled by suppliers through quotas.

What are the prospects envisaged in the near future?

In the near future, greater price hikes, greater shortages and more logistical issues are to be expected. However, it is difficult to forecast such issues, as the conflict is still ongoing and every day we are witnessing new developments of this human tragedy. In the long run (hopefully sooner than later) we expect the EU to also shift away from its dependency on Russian fuel which could also positively mean an accelerated shift to renewable energy sources. Yet specific forecasts are difficult to come by.

What is the implication of the current conflict in relation to Environmental, Social and Corporate Governance (ESG)?

In these past few years – ESG has been gaining importance and even stock markets have started rating companies in relation to the non-financial performance in relation to the environment, social and governance. This conflict has brought about some confusion in this regard. This is because ESG metrics have been set up without the idea of Europe possibly facing conflict.

For instance, the financing of armaments by any company has been considered as a negative policy in the past years, with companies producing or financing such products being penalised with negative ESG ratings. Now that we are in the midst of the Ukrainian conflict and that there are talks in the EU to increase the army defences as well as assist Ukraine through military equipment, companies producing or financing such goods are still being penalised on the markets, possibly finding it more difficult to get financing.

Similarly, power generated through coal or heavy fuels oils have long been frowned upon and considered as an environmentally bad choice. Ideally now that Europe has to decrease its dependency on Russian fuel, it will move to renewable sources, but this will take time and hence one of the most easy and fast solutions in the short-term is that of stalling the phasing out of oil, coal and gas power stations. This is seen as an economic need in the face of Russian fuel having quadrupled in price, so as to safeguard businesses and individuals alike from facing exuberant energy bills, which would most definitely push more people into poverty. Hence, even though coal usually leads to a negative rating in terms of ESG, the conflict in Ukraine begs the question of whether the ESG matrices having been developed over the past month – should be adapted, changed and revisited.