Still reeling from pandemic, small businesses face new nemesis — inflation

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Kim Shanahan has seen an increase in prices nearly across the board at Gifts Fulfilled, her Berlin gift basket business. Fuel, packaging, cardboard and shipping — all on the rise. To keep up, Shanahan has had to raise her prices.

“It is like when you buy a house and you have to sink $15,000 into wiring,” she said. “You don’t get to see anything pretty out of that. That is our situation. The costs are all up on this back end and there is nothing the customer sees that is different other than a rise in price.”

Shanahan, who said her sales were down in the first quarter, has noticed certain spending trends among customers.

“The customer that maybe would have bought the $25 product, which is now $27.50, they are just not even buying,” Shanahan said. “They are squeezed. They are like, ‘I don’t have discretionary income right now,’ so they are not buying. And then the customer that maybe would have bought the $35 to $50 gift, they are like, ‘Well, I will buy the $27 gift.’”

For months, small businesses like Shanahan’s in Maryland and across the country have had to grapple with pandemic-induced supply chain problems or worker shortages. Now, they are confronting a new nemesis: inflation.

Recently, 10,000 Small Businesses Voices, a Goldman Sachs initiative to help small business owners advocate for policy changes, released the results of a member survey.

Just over 90% of small business owners said broad economic trends such as supply chain issues, inflation and workforce shortages were hurting their companies. Nearly 75% reported a negative impact on their bottom line due to increased energy costs.

The survey report noted that 56% of small business owners believe the economy has worsened since January, with 88% stating that inflationary pressures have increased. Eighty percent said supply chain challenges have worsened or remained the same, while 88% said hiring challenges stayed the same or worsened.

Eighty percent of small business owners surveyed saw their business’ financial health negatively affected by inflation over the last six months, with 67% of that group reporting that they increased wages to retain employees and 61% saying they raised wages to attract new employees. To pay for these increases, 60% of the businesses raised the price of their goods and services.

Many of the actual baskets Gifts Fulfilled uses are made in China, Shanahan said, adding that suppliers are tacking on a fuel surcharge and a new import fee.

“I feel like I spend all of my time lately just readjusting products,” Shanahan said. “I am trying to figure out how do I still make this work (and) stay in the same price point for the customers?”

Her inflation concerns come on the heels of supply chain problems.

One of the bestselling products at Gifts Fulfilled is the One Tough Cookie Get Well gift package, a cornucopia of sweet snacks plus a balloon that looks like a chocolate chip cookie wearing a Band-Aid.
Due to supply chain issues, the cookie balloon was out of stock for nearly a year, so Gifts Fulfilled had to use a smiley-face balloon instead.

“The message isn’t quite as strong with a different balloon and we saw sales of that go down like 30% just because we had to substitute the one item,” owner Kim Shanahan said.

The cookie balloon recently came back in stock, so Shanahan and her staff have been making more get-well packages. But the episode left Shanahan wondering if she should stockpile the cookie balloons against another shortage. She recently received a COVID-19 Economic Injury Disaster Loan from the U.S. Small Business Administration that has provided a cushion and allowed her to make decisions about inventory and cash flow.

Shanahan also had supply chain problems involving holiday inventory. Many of the items she ordered for the 2021 season did not come in until January.

“You have a cash outlay for products that now you are going to have to carry until next season,” Shanahan said. “As a small business, I don’t have the cash flow to carry inventory for a full year, but you had no choice. Then you also had to buy packaging for 2021 Christmas to make up for the packaging you didn’t get in, so you (had) a double outlay of cash — and (for) small businesses that is really hard to handle.”

Shanahan said she refused to go into credit card debt to pay the bills. And here’s where inflation kicks in to provide a double whammy.

“I don’t want to go down that road, especially since interest rates are rising,” she said. “I can imagine credit card interest rates are going to be hitting 25-30% and that is not a debt load small businesses can afford to carry.”

On the bright side, Shanahan said, she has had no trouble finding employees and even has a waitlist of potential workers. Gifts Fulfilled employs people with disabilities.

Shanahan said her biggest cause of worry is uncertainty: Will inflation or fuel costs rise even more? Will supply chain issues improve? Is the country headed for a recession similar to the one in 2008?

“It’s like, ‘It can’t get worse’ and you are like, ‘Yes it can,’” Shanahan said. “We are just surviving right now, just trying to get through all this.”