How Inflation Is Hurting Minnesota Small Businesses

Shawn Nelson has worked in the home construction and renovation industry for over 25 years.

In those years, he never saw his business hit so hard by inflation.

The cost of lumber, windows, cabinets and other materials has risen 15% this year, he said, tapping into the company’s profits.

In the past eight months, a $15 box of potatoes for Anchor Fish & Chips has gone to $60, owner Kathryn Hayes said. What used to be a $49 can of beef tallow, an animal fat often used as cooking oil, is now $110 a can. For fish, the price per pound has increased by $2 over that period, Hayes added.

The Minneapolis restaurant has raised its prices twice this year.

“It’s something we’ve never had to do,” she said.

Nelson also passed on some costs to customers.

But the profit margin also took a bite. The reality is that larger competitors can afford to temporarily reduce their profit margins, either because they have larger credit lines or because they can take a lower profit margin.

And for many small businesses, the profit margin was already very slim.

“They don’t have the liquid assets and resources that big business has to deal with negative effects like inflation or weather disasters like flooding,” said Geri Aglipay, Great Lakes regional administrator for the US. Small Business Association.

At best, most small business owners have enough money saved to keep them afloat for at least a month if profit margins are low, Aglipay said. Inflation has been particularly troublesome for minority-owned small businesses, she added.

Large companies also tend to have buying power with suppliers that smaller companies do not. Large companies can buy the goods and services they need at negotiated prices, assuming that the more they buy, the better the price will be.

This is particularly difficult when there is a shortage of goods – hence inflation and supply chain disruptions – leaving small businesses in a take-it-or-leave-it situation, or with nothing at all if Suppliers are unwilling to fulfill small orders that won’t increase their profits, said Ron Wirtz, regional director of outreach at the Minneapolis Federal Reserve.

A recent report from the Federal Reserve Bank of Minneapolis shows that area businesses, primarily those in the Twin Cities and Greater Minnesota, are seeing their profit margins shrink due to inflation and rising labor wages. ‘work. More than a third of business owners said they saw their revenue decline by 5% or more in the past three months compared to the same time last year, and nearly half said profits were lower when comparing the same three-month period in 2021.

Among the main challenges facing operations are price increases for equipment and materials and higher interest rates on loans and financing costs.

Nelson, a board member and former president of Housing First, an advocacy organization for the state’s homebuilding industry, heard from members how inflation continues to affect construction and renovation of houses. Low-cost new construction has been hardest hit, with builders having to spend more on materials while trying to keep home prices moderately low.

While lumber prices have fallen, even to pre-pandemic levels, what hasn’t come down are prices for manufactured goods, which remain significantly high, Nelson said.

Some of those costs have been passed on to customers, said Nelson, who owns two businesses in the home improvement business, New Spaces and Blue Sky Skylights, both based in Burnsville.

“It’s the highest inflation we’ve seen,” he said. “The other issue we’ve been facing that’s getting a bit better is the supply chain, which I think is causing some of the inflation, just the scarcity of things.”

Price unpredictability hampered Nelson’s ability to anticipate the cost of projects. Due to delays in the supply chain as his company secured permits and the preconstruction process, material prices went down, he said.

“It hurt our profits,” Nelson said.

Fortunately, for now, demand remains high despite higher prices, and his businesses have grown considerably.

In the state’s hospitality industry, profit margins are especially tight, said Ben Wogsland, executive vice president of Hospitality Minnesota, an association and advocacy group. Citing a recent report from Hospitality Minnesota, Wogsland said 77% of hotel, foodservice, restaurant and resort operators in the state say prices have jumped 5% to 10% this year. .

Less than half pass the tariffs on to customers.

For Hayes and Anchor Fish, restaurant menu staples account for 90% of sales. For her, buying cheaper food is not the solution, so for now the price increases have helped.

“We are not making any of these changes because it would jeopardize the quality of our food,” she said.

Consider Tammy Wong, owner and chef of Rainbow Chinese Restaurant and Bar on “Eat Street”, otherwise known as Nicollet Avenue. But it hasn’t passed on the increased costs to customers either.

A neighborhood staple for 35 years, Wong wants prices to reflect what loyal customers expect to pay.

“We have to make it affordable for everyone,” she said.

Still, it makes running a business complicated, she admits, when price increases are the highest she’s seen in nearly four decades in the restaurant business.

To stay within his budget, Wong eliminated some of the more unpopular dishes from the menu. In the meantime, she hopes customer traffic will increase.

“We don’t have the [sales] volume,” she said. “We want to make it profitable, but that’s not happening right now.”

Lisa Smith, chief executive of consulting firm Twin Cities Smith Co., indirectly sees the results of inflation. The less his clients earn, the less they spend on his services.

“What I’m able to provide them affects them, and what affects them affects me,” Smith said. “Everything is interrelated. The inflation was huge, especially because some of my early clients were in software as a service, or information technology, architecture and engineering, and their industries are affected by the supply chain, by rising material costs, rising labor and rising gas.”

According to the Hospitality Minnesota report, 57% of restaurateurs and 59% of hoteliers in the state say they don’t expect revenue to return to pre-pandemic levels until 2023 or later.

“Given the extremely thin margins on which many hotel businesses operate, absorbing these additional costs without compensation is not sustainable and adds to the economic pressure many face,” the report said.

That’s on top of companies navigating a shift in consumer spending habits, as people continue to cut back on dining out or traveling amid their own budget cuts.

Hayes has witnessed this all too often at his restaurant in recent months, where sales numbers are falling below pre-pandemic numbers. She attributes this to more people eating at home.

To refrain from cutting wages to make up for lost revenue, Hayes plans to pass customers the 3% credit card fee. It would make even a small difference, she said.

Meanwhile, Hayes is trying to fit in with composting and recycling services that climb to $150 a month. She begins to suspect that some companies are taking advantage of small businesses that depend on their products and services.

“I think some people are ‘lucky,'” she said. “It makes me sad, because I don’t want to raise our prices anymore. I don’t like to do that.”

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