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Inflation poses new challenge for small businesses

Victoria Staten

General contractor Victoria Staten poses for a portrait at her home June 17 in Chicago. Small business owners like Staten have endured shutdowns and revenue drops during the COVID-19 outbreak, now must contend with another crisis: spiking prices for goods and services that squeeze profits and force many owners to pass the increases along to customers. (AP Photo: Charles Rex Arbogast)

Small businesses that endured shutdowns and lower revenue during the COVID-19 outbreak now must contend with another crisis: spiking prices for goods and services that squeeze profits and force many owners to pass the increases along to customers.

Mickey Luongo’s company, Total Home Supply, is paying as much as 15% more than it paid pre-pandemic for the air conditioning and heating equipment it sells to other businesses and consumers. His suppliers have raised their prices because they’re paying more for raw materials, components and shipping. Luongo says some of his customers have pushed back on higher prices.

“We had one contractor who totally understood the price increase and was OK with it while other consumers get mad at us and think the increases are our fault,” says Luongo, co-owner of the Fairfield, New Jersey-based company.

Surging demand from consumers for a wide range of products during the pandemic has driven up prices for finished goods as well as raw materials, supplies and equipment. Product shortages and bottlenecks in supply chains have added to the costs.

Prices for materials and components used in construction spiked 4% in May from April and were up over 17% from a year earlier, according to the Labor Department. Manufacturers paid 2% more last month for materials than they did in April and 21% more than in May 2020. Also in the mix: intense competition for workers that has some companies paying more to attract new hires and retain current staffers.

While inflation affects all companies, small businesses struggle more than their larger counterparts. Big corporations have greater negotiating power because they buy goods and services in bulk and have much larger revenue streams to absorb higher costs. These factors make it easier for big companies to avoid passing increases along to their customers.

Barry Levine is holding off for the time being on price increases for the security and body temperature cameras his company makes although his expenses are up 12%, largely because of higher rates for air freight. Levine doesn’t want to lose business to his competitors.

“We feel that it is a difficult market right now and we do not want to do anything to hurt sales of our products,” says Levine, whose company, Sperry West, is located in San Diego.

So Levine is finding ways to cut overhead. He schedules employees according to how many orders the company has from its distributors; they’ve been able to get unemployment benefits to make up for the time they’ve lost.

Still, Levine says, at some point he expects he’ll need to pass along some of his added costs.

“I would like to say, we’re going to hold our prices forever, but that’s not going to happen,” he says.

Some of the price increases may roll back, economist Ray Keating says.

“The best case scenario on the recent move up in inflation is that it is temporary, as the recovering economy struggles to get production, operations, supply chains and employees back to something close to normal,” says Keating, chief economist with the advocacy group Small Business & Entrepreneurship Council.

Costs that are most likely to come down are energy-related, as the price of gasoline and other fuels tends to fluctuate. And if supply chain bottlenecks ease, shippers are likely to lower their rates.

But, Keating says, “the second scenario is that inflation takes hold, and as the old saying goes, once the inflation genie is let out of the bottle, it’s not easy to get back in.”

Luongo has found that just about everything that goes into making and shipping an air conditioner or heating unit costs more.

“Copper prices gone through the roof — there’s copper in every air conditioning product and lots of it,” he says. And Luongo’s suppliers are paying more for shipping containers that are in high demand; one manufacturer told Luongo that it only finds out how much it has to pay for a container on the day the ship carrying its products sets sail.

Total Home Supply is more likely to pass along an increase to a general contractor building homes than to consumers who can go to chain stores for air conditioners. “We very carefully weigh pricing decisions for each item and do our best to stay competitive while trying to maintain a profit margin we can live on,” Luongo says.

Service providers are equally pinched by higher inflation. With more homeowners remodeling since the start of the pandemic, supplies of paint, lumber and other materials have fallen and their prices have soared, forcing general contractor Victoria Staten to change her pricing policies.

“We’ve gone from guaranteeing estimates for 30 days to just five days,” says Staten, owner of The Upside Chicago. Staten is also pricing labor and materials separately, rather than providing an all-inclusive estimate as she did pre-pandemic.

The scarcity of materials is also adding to Staten’s costs — it can take several days to find items like crown moldings that used to be found easily. She’s been absorbing the labor costs involved in these shopping trips but is considering adding staffers’ extra time to her invoices.

Manny Balani’s vitamin and supplement business is paying dramatically higher prices for shipping, packaging and ingredients. Miami-based A1 Supplements can pay $10,000 for space on a container ship, compared with $2,000 before the pandemic, and $400 for a kilogram of protein or other ingredients, up from $50.

Balani has to pass increases along to customers, but instead of raising prices across the board, he’s taking a product-by-product approach. He’s boosted prices on some items as much as 30%, matching the manufacturers’ price hikes. Now he’s watching to see if customers keep buying at the higher price tags.

“We take it day by day,” Balani says. “The market will dictate whether those numbers are bearable.”

 

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