Jarrod Adam from Unleashed explains how manufacturers are taking cautious approaches to replenishment as Middle East conflict disruption creates uncertainty in global supply chains.
What’s happening: Australian SMB manufacturers face sharp revenue and profitability declines in Q1 2026, according to Unleashed’s Manufacturing Health Index.
Why this matters: The data reveals how quickly global disruption ripples through Australian manufacturing. Energy price increases, with Brent Crude trading over $100 US per barrel, are eroding margins whilst manufacturers adopt cautious approaches to spending.
Australian SMB manufacturers are facing plummeting revenue and profits as disruption from the Middle East conflict ripples through markets, with the worst likely yet to come.
According to the latest Manufacturing Health Index from inventory management software provider Unleashed, revenue for the average Australian SMB manufacturer was down 42% in the first quarter of this year at $356k, from $619,183 in Q4 2025 and down 44% versus the same quarter last year.
The figures appear in Unleashed’s latest manufacturing report, based on data from more than 600 Australian firms across manufacturing categories such as food and beverage, clothing and fashion, and construction.
Revenue plummets across sectors
This drop in revenue was matched by sharp decline in Gross Margins, the percentage of revenue left over after a company’s direct costs have been subtracted, with the average manufacturer netting 32.8% in Q1 2026, down from 38.47% in Q4 2025. This represents the lowest average profitability since Unleashed records began in 2018.
In the lead up to 2026, manufacturers had been cautiously optimistic with strong revenues and healthy profit margins coupled with a lean, just-in-time approach to stock management, ordering as needed instead of building up large stockpiles.
Stock on Hand (SOH) in Q1 2026 dropped to an average of $200,500 AUD as manufacturers ran down the warehouses, continuing the trend from Q4 2025 but in a starkly different global climate.
“The manufacturing base was heading toward a leaner model in 2025,” explains Unleashed’s Head of Product Jarrod Adam.
“With recent events, manufacturers will now be taking a particularly cautious approach to replenishment and overall spending. If the disruptions continue into the weeks ahead further belt tightening could be expected.”
Peter Turner, Managing Director of Australian manufacturer ThinTanks, whose slimline rainwater tanks are exported to markets around the world, says sales have risen in recent months, but margins are coming under increasing pressure.
“In the past few months, sales have been increasing, but so have costs. As an oil-based product that we freight across Australia, our margins are under real pressure. That has meant pushing through price increases, but despite that, demand has held up well,” said Turner.
“It is difficult to know where things go from here. Our business runs on six to eight week lead times, so there is a lag before the numbers fully reflect what is happening. Any shift in the global outlook could have a significant impact, but we have also seen how quickly things can swing the other way. During Covid, we had our best year on record, as spending shifted from travel into home renovations.”
Margins hit eight-year low
The summer period is usually a standout for multiple sectors, particularly in recreation and hospitality, as Australian consumers raise their discretionary spend, but the handbrake has been pulled up following last year’s spending spree.
Beverage manufacturers finished 2025 strong with average revenue of $627,422 but that momentum stalled in Q1, down to $341,851, a drop of 45% quarter-on-quarter and a marked decline from the same period last year where revenue sat at $664,992.
The trend continued elsewhere in retail spend, with Clothing, Footwear and Accessories manufacturers seeing a marked drop in revenue to $173,320 from $414,065 in the previous quarter, and $436,348 in Q1 of last year.
One relative bright spot in the results came from Food manufacturers, who despite seeing a similar drop in revenue numbers quarter-on-quarter (down from $709,831 to $452,846) saw an increase in margin. Gross Margin in Q1 2026 was up over 10%, from 23.47% at the end of last year to 35.66%.
“It’s good to see manufacturers focus on what they can control and food manufacturers are ensuring they aren’t sitting on mountains of cash tied up in inventory which is helping their margin resilience,” says Adam.
Construction Manufacturing, which often closely tracks the wider economy, had its worst revenue results since 2020, a drop in average revenue from $716,237 in Q4 2025 to $391,941. Compared to the same quarter last year, revenue is down 54%.
The Electrical and Electronic Components sector, which has been a standout in previous reports, netted averaged revenue of $493,912 in Q1 2026, down from $626,185 in Q4 2025 and down over 50% year-on-year.
“Industries with high input costs are where we would expect to see the sting of rising energy costs early and that seems to be borne out by the survey,” says Adam.
Manufacturers reduce raw purchases
Whilst supply chain disruption is widely expected, it has yet to show up in the period covered by the data.
Lead times were significantly down, to an average of two weeks, down from 17 days in the previous quarter. However supply chains may grow volatile in coming months and this number is likely to increase.
Reflecting widespread uncertainty, manufacturers were ordering significantly less raw materials. Australian manufacturers ordered $240,182 of raw materials, down from $415,212 in Q4 2025 and $495,297 in the same quarter last year.
The conflict in the Middle East complicates forecasts and how quickly the conflict resolves will be the deciding factor but a certain amount of disruption is now baked in.
Energy price increases, with Brent Crude trading consistently over $100 US a barrel, are eating into material input and supply chain costs, and eroding margins.
Shocks are being most acutely felt in major suppliers across Asia which produce component inputs to multiple sectors, particularly electrical components. The trend towards stable and low lead times could also be affected as shipping firms respond.
Interest rates will continue to play a central role in manufacturing across all sectors. The Reserve Bank of Australia raised the cash rate by 25 basis points to 4.1% at their March 2026 meeting to combat high inflation.
This decision follows a previous hike in February, driven by concerns that inflation is too high, with rates likely to remain elevated due to potential revisions to inflation forecasts, with rate rises on May 7 and more forecast throughout the calendar year.
Whereas previously the RBA expected inflation to peak in mid-2026 (potentially reaching 4.2% headline) before finally moderating back toward the 2.5% midpoint by mid-2028, inflation is now expected to stay higher for longer.
Renewed pressure on energy and supply costs are likely to accelerate an existing imperative for firms to evolve beyond surviving high costs towards scaling efficient operations.
Central to this new growth phase is the use of real-time data to navigate increasingly tight purchasing cycles.
As Adam notes, the challenge for 2026 is uncertainty. “Manufacturers must leverage technology to manage rising costs and mitigate the challenges which are out of their control.”
The data paints a picture of an Australian manufacturing sector caught between multiple pressures. Energy costs driven by global conflict, interest rate increases to combat inflation, and widespread uncertainty about future conditions are combining to squeeze revenues and margins simultaneously.
The cautious approach manufacturers are taking, evidenced by reduced raw material purchases and lower stock holdings, reflects rational responses to uncertainty but also creates risks if conditions improve unexpectedly or supply chains become constrained.
For Turner and other manufacturers navigating these conditions, the lag between current decisions and their impact on results creates additional complexity. With lead times of six to eight weeks, the full effects of recent disruptions may not yet be visible in the data.
The food manufacturing sector’s margin improvement despite revenue declines offers a potential model for other sectors, demonstrating that focus on inventory management and operational efficiency can provide some resilience even as top-line numbers deteriorate.
However, the breadth of the revenue declines across sectors, from beverages to construction to electrical components, suggests systemic rather than isolated challenges. The 54% construction manufacturing revenue decline and 50% drop in electrical components particularly stand out as indicators of widespread economic pressure.
As manufacturers navigate the remainder of 2026, the interplay between energy costs, interest rates, consumer demand and supply chain stability will determine whether conditions stabilise or deteriorate further from the already challenging Q1 baseline.
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