See below article from CNBC regarding small business challenges regarding macroeconomic impact of higher inflation combined with rising borrowing costs:
Top of Mind Thoughts
-National retailers have an economies-of-scale “pricing power” advantage over small business operators
-Companies with digital distribution strategies should weather supply chain challenges better than non-digital competitors
-Companies that use technology to grow revenue relative to full time equivalent labor cost will navigate high inflationary pressure well.
-Companies the have strong RME (Revenue, Marging and Earnings) Factors will be clear winners as we emerge from high inflation and rising borrowing costs.
Inflation’s shock to economy complete as small business tipping point reached
PUBLISHED MON, FEB 14 20228:48 AM ESTUPDATED AN HOUR AGO
Eric Rosenbaum
@ERPROSE
Inflation has taken hold of Main Street, with an increasing number of small business owners saying it will not relent over the next six months and raising prices to offset increases in the costs of supplies, according to the latest CNBC|SurveyMonkey Small Business Survey.
The latest Consumer Price Index reading, the highest in four decades, isn’t the only sign that inflation is extending rather than giving up its hold over the U.S. economy in 2022. An increasing number of American small businesses say they are now passing on higher costs to customers, or soon will be forced to make that decision.
While the 74% of small business owners who say they are experiencing rising costs of supplies is virtually unchanged from Q4 2021, according to a new CNBC/SurveyMonkey Small Business Survey, the number of businesses passing on costs to customers has risen to 47% in the first quarter, up from 39% in Q4 2021. And another 32% indicate they will have to raise prices soon if inflation persists. Sticky inflation is their expectation. Over eighty percent of small business owners expect inflation to still be a problem six months from now (55% say that is “very likely”), according to the CNBC|SurveyMonkey data.
The Main Street concerns about inflation are connected to the small business outlook on the supply chain, with 75% saying these issues are likely to be a problem six months from now. And there is a lack of faith in policymakers, with 71% of small business owners not confident in the Federal Reserve’s ability to control inflation.
The CNBC/SurveyMonkey online poll was conducted January 24-30, 2022 among a national sample of 2,227 self-identified small business owners.
“The underlying problem with inflation is that there’s no end in sight,” said Laura Wronski, senior manager of research science at Momentive, which conducts the survey for CNBC. “We’ve become accustomed to rising and falling Covid waves, and businesses have had the time to rewrite their playbooks to accommodate. But no one knows how quickly or to what degree inflation will continue to rise, so that unpredictability is inducing some unease,” she said, with the lack of faith in the Fed adding to the uncertainty.
All of the headlines about inflation will make it easier for small business owners to increase costs and not have customers react as negatively as they might expect, but while over 50% of businesses are passing along the cost increases to customers, only 9% tell Alignable they can do this at a level where it is above breakeven for them.
“Costs have gone up more than their ability to pass it on down, and that’s what is critical to recovery,” Groves said. “That’s where the feeling of stress is coming from. It’s the squeezing of margins, not just revenue … what’s going in their pocket,” he added.
It is a fraught situation for small businesses trying to figure out how much they can afford to charge without risking a decline in customer numbers and loss of recurring revenue, with many small businesses still not all the way back from Covid’s shock. Alignable’s data finds roughly 35%-37% of businesses saying that 90% or more of their customers from the pre-Covid period have returned.
Small business owners tend to be optimistic by nature, but Alignable’s data shows them more pessimistic now about their own recovery timelines. Last June, small business owners expected revenue to be back at pre-Covid levels midway through 2022. Now that has been pushed back by a full year to mid-2023.
Small business says ‘stuck with inflation’
NFIB’s most recent quarterly survey found the percentage of small business owners having to increase prices rising to over 60%, the highest reading in the NFIB data since Q4 1974.
“They are getting squeezed by supply chain disruptions and inflation and workforce shortages and already had to reinvent themselves a few times over in the past few years, and are running out of options,” said Kevin Kuhlmann, who leads the NFIB’s government relations team. “They are continuing to adapt … but you can only increase prices so much before you might see a loss,” he said.
Small business does tend to be a lagging rather than a leading indicator for the economy, but the growing worries on Main Street are “a worrisome indication that inflation will be more persistent,” said Mark Zandi, chief economist of Moody’s Analytics.
“Their pricing decisions tend to lag their bigger competitors, so if small businesses are raising prices more aggressively it could signal inflation becoming more endemic,” Zandi said. And since small businesses do not tend to think of themselves as having pricing power over the long-term, if they are “becoming more emboldened” it is an indication that inflationary pressures are broader-based, he added.
Main Street confidence and support for Biden
The CNBC/SurveyMonkey Small Business Confidence Index score continues to hover around all-time lows, holding at 44 out of 100, which was unchanged from Q4 2021 and nearly identical to the all-time low score of 43 from a year ago. Overall, the business outlook is mixed, with 46% of Main Street businesses saying they expect revenue to increase in the next 12 months, according to the CNBC|SurveyMonkey data.
Two policy experts debate how the Biden administration should battle inflation
Certain sectors within the small business community that are more exposed to the global supply chain are facing greater pressures, and there are positive indicators across the business landscape.
As a whole, companies are doing a good job of passing through costs to customers with corporate profit margins as wide as they’ve ever been back to World War II, but the benefits of pricing power are accruing more to the largest corporations.
Small businesses do not typically have high cash reserve levels — according to Alignable it is on average 34 days of cash on hand — leading to a situation in which any kind of financial hit is very difficult to recover from. “So as they are trying to build back to recovery from Covid, every little bit of extra margin they can eke out is critical, and with cost increases and the inability to pass along, we will see more and more businesses struggling with that,” Groves said.
A key measure of business health, business-to-business payment transactions, isn’t showing any signs of stress, with even companies of 500 employees or less paying bills on time. “At least so far, they are managing,” Zandi said.
Small businesses sentiment, similar to consumer sentiment, tends to be reactive and based on the most recent information or anecdote rather than longer-term forecasting, which means that current gas and fuel prices, which can be major inputs for small businesses, can lead to a sharper shift in sentiment in the short-term. But Zandi said if nothing else, the latest data from Main
Street is “proof positive we have a problem.”
Nana Joes Granola went from 135% profit growth during the packaged foods boom to currently operating at less than breakeven in a pricing environment hitting it from all sides. In addition to the supply issues, wage inflation and lack of leverage as a buyer, freight charges across the country have risen and the company has had to change its free shipping policy for its direct consumer business. “We’re getting steamrolled over. Everywhere I look getting price increases,” Pusateri said.
The financial market and economists including Zandi expect inflation will moderate later in 2022, but if it doesn’t happen soon, he said, “the small business owners will be right.”
“I don’t think inflation is going away any time soon,” Pusateri said. “We will be stuck in this.”