As small businesses raise prices, some customers are drawn away

Inflation isn’t just costing small businesses money. This is also costing customers.

At the Bushwick Grind coffee shop in Brooklyn, New York, Kymme Williams-Davis has raised prices and diversified merchandise to keep up with the rising costs of milk, coffee, paper goods and plastics, as well as shortages of items such as sh. paper cups and plastic lids. It has not experienced anything like this since opening in 2015.

Williams-Davis says she has lost nearly half of her regular customers. Some have traded down and are buying coffee for $1 at McDonald’s or the bodega on either side of the cafe instead of paying the $3 she charges.

“If (customers) can get it for a dollar for a not-so-noticeable difference, they’ll go next door.”

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

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

Inflation has risen at nearly the fastest pace in 40 years, driven by strong consumer spending and higher costs for food, rent, medical care and other necessities.

On Tuesday, the government is expected to report that price increases slowed in August compared to a year ago, largely due to a continued decline in the cost of gas. Prices for other items, especially food, are likely to continue to rise rapidly. Overall, economists forecast consumer prices rose 8.1% in August from a year earlier, up from 8.5% in July, according to data provider FactSet.

For most of the pandemic, small business customers were largely tolerant of price increases and continued to spend. But now owners say they’re seeing a pushback.

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

Nicole Miskelley, who manages PMR, an auto and oil repair shop in Marion, Illinois, said she’s seen customers delay repairs that aren’t urgent like scheduled maintenance or getting new tires.

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

Her customers have noticed.

“Typically, I’m able to joke about how much different things are now and most people agree with me,” she said. “On occasion, I deal with pushback,” including a rare bout of yelling or cursing from a customer.

“Among many of my older clients who are on limited incomes like Social Security, they say they have to cut back,” she said. “They say, ‘I know I need these tires, but I have to make a few more (Social Security) rounds to save up.’

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

“Right now, it’s kind of weird because the costs went up faster than I can keep up with. Over time, I hope people budget better and their incomes 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, are spending more on food and less on other items. Small business owners are seeing much the same thing.

Kim Shanahan runs the online store Gifts Fulfilled 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,” she said. “All prices across the board have gone up.” Everything from the cardboard, the containers and the food she includes in the baskets have become more expensive.

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

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

“We are a ‘want to’ not a ‘must have’ item in our main 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 at all, they don’t have the discretionary funds.”

Schuyler Northstrom of Uinta Mattress, a mattress maker in Salt Lake City, Utah, says it has raised its prices by 15% since 2020. A mattress that once sold for $289 wholesale is now $330.

The increase doesn’t fully cover Uinta’s higher costs. Raw materials such as springs and foam have increased by 40%. But Northstrom fears the price hike could cause its customers to drop it.

“The result from retailers is quite strong there,” he said. Its retail partners include mattress stores John Paras and 2Brothers Mattress, both in Utah. “Sometimes we get displaced by some of the bigger guys with a lower-cost product because of their volume.”

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

“We’re feeling that, we’re not a necessary purchase, people buy food and gas,” he said.

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