Inflation Price Increases: Small Businesses See Customer Pushback

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For much of the pandemic, small business customers largely tolerated price increases and kept spending. That may be changing.

NEW YORK — Inflation isn’t just costing small businesses money. It’s costing them customers too.

At the Bushwick Grind Cafe in Brooklyn, New York, Kymme Williams-Davis raised prices and switched to different types of products to keep up with the rising costs of milk, coffee, paper and plastic items, as well as with a shortage of items like paper cups and plastic lids. She hasn’t experienced anything like this since she opened in 2015.

Williams-Davis says he has lost almost half of his regular customers. Some have gone downstairs and are buying $1 coffee at McDonald’s or from the cellar on either side of the cafeteria instead of paying the $3 she charges.

“If (customers) can get it for a dollar without such a noticeable difference, they’ll go next door.”

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A customer who had been coming for years stopped by to tell Williams-Davis that he had bought a coffeemaker.

“He said I’m going to start making coffee at home, I need a budget, so I won’t come here every day,” she said. “I feel like I’ve been in a farewell campaign.”

Inflation has been rising at nearly the fastest pace in 40 years, fueled by strong consumer spending and higher costs for food, rent, health care and other necessities.

The government is expected to report on Tuesday that price increases slowed in August compared to a year ago, largely due to a steady drop in the cost of gas. The prices of other items, particularly food, are likely to continue to rise rapidly. Overall, economists forecast consumer prices rose 8.1% in August, compared with a year earlier, down from 8.5% in July, according to data provider FactSet.

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For much of the pandemic, small business customers largely tolerated price increases and kept spending. But now the owners say they are seeing a push back.

Ninety-seven percent of small business owners say inflation pressure is the same or worse than it was three months ago, according to a Goldman Sachs 10,000 Small Business Voices survey of more than 1,500 small businesses. Sixty-five percent have raised prices to offset higher costs. And 38% say they have seen a decrease in customer demand due to price increases.

Nicole Miskelley, who runs PMR, a diesel and auto repair shop in Marion, Illinois, said she has seen customers delay non-urgent repairs like scheduled maintenance or buying new tires.

At the beginning of the year, Miskelley’s labor costs increased 12% and the cost of towing cars to the shop increased due to higher gas prices. Parts are also more expensive. Last year an air conditioner processor would cost you $200, but this year you can’t find one for less than $400. Therefore, he had to increase the average price of a repair by 30% to 40%.

Your customers have noticed.

“Usually I can joke about how drastically different things are now and most agree with me,” he said. “Sometimes I face rejection,” including the rare fit of yelling or cursing from a client.

“Among many of my older clients, who have restricted income like Social Security, they say they have to cut back,” he said. “They say, ‘I know I need these tires, but I need to do a couple more rounds (of Social Security) to save up.’”

She says she is a little worried, but hopes people can adjust to inflation.

“Right now, it sucks because the costs went up faster than I could catch up. Over time, I hope that people will budget better and their income will change to reflect the economy.”

The pullback is most dramatic among consumers with less discretionary income. Walmart says its customers, who tend to have lower incomes, spend more on food and less on other items. Small business owners are seeing much of the same.

Kim Shanahan operates the Gifts Fulfilled online store in Berlin, Maryland, which sells gift baskets and care packages and employs people with disabilities.

“The past year has been challenging, to say the least,” he said. “All prices in general have gone up.” Everything, from cardboard, packaging and the food included in the baskets has become more expensive.

She implemented a 5% increase to cover some costs. After she increased the price of her most popular gift basket called “One Tough Cookie,” from $27.50 to $28.95, sales dipped, she said.

Less expensive baskets, such as those with gifts and candy that sell for $25 or less, have been hit the hardest, with unit sales down about 50% in 2022 compared to last year. “The entire market segment is gone for us,” he said.

“We’re a ‘want’ item, not a ‘have to’ item in our core categories,” Shanahan said. “What we see is people maybe buying a $50 gift going down to $35. And the whole bottom tier isn’t even buying anything, they don’t have the discretionary funds.”

Schuyler Northstrom of Uinta Mattress, a mattress manufacturer in Salt Lake City, Utah, says it has increased its prices by 15% since 2020. A mattress that used to sell for $289 wholesale is now $330.

The increase does not fully cover Uinta’s higher costs. Raw materials such as springs and foams have increased by 40%. But Northstrom fears raising prices higher could drive customers away.

“Retail pushback is pretty strong there,” he said. His retail partners include mattress stores John Paras and 2Brothers Mattress, both in Utah. “Sometimes we get crowded out by some of the bigger guys with a lower cost product because of their volume.”

To adapt, Northstrom is redesigning the mattress to cut costs and make less profit, which isn’t sustainable long-term, he said. He’s also focusing more on the higher end, mattresses costing up to $1,200, which haven’t been hit as hard.

“We are feeling it, we are not a necessary purchase, people buy food and gasoline,” he said.

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