Small businesses struggle to absorb soaring costs

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Stuart Hignell, who runs Bristol Gas Supplies, has known many of his customers in the English city of Bristol for years — he has a Polaroid photo of one of his elderly clients on the corkboard behind his desk — and is conscious that many are on fixed incomes.

But as petrol prices rise and the costs of delivering gas canisters around the city grow, Hignell is being forced to make a difficult choice: put up the prices for his customers or protect them by absorbing ever increasing costs.

“How can I turn around to these people and tell them their prices are going up?” he asked. “But something’s got to give — you can’t just keep sucking it in and sucking it in”.

Many small business owners are, like Hignell, struggling to absorb the impact of spiralling prices as UK inflation hits a 40 year high. Rising costs for energy and goods and services have become the top two concerns of businesses throughout the UK.

In June last year, only 30 per cent of UK businesses with 10-49 employees reported above normal input prices to the Office for National Statistics. By March of this year, the proportion had jumped to 57 per cent.

Bar chart of Proportion of businesses (%) showing The proportion of small businesses reporting above normal input prices has grown

Many can no longer hold off passing these increases on to customers. Aleksis Gailans, who runs a costume hire company on the outskirts of Bristol, struggled to think of any product or service that his business uses which hasn’t gone up in price. While his company has “tried to hold off for as long as we can”, he said, it has had to begin passing on costs.

Gailans is not alone: around 41 per cent of UK businesses with between 10 and 50 employees indicated in late April that they have already begun increasing prices.

Aleksis Gailans
Aleksis Gailans, who runs a costume hire company, has had to begin passing on costs. © Charlie Bibby/FT

Matt Griffith, director of policy at Business West, the chamber of commerce for England’s western region, is in close contact with many enterprises in the area and is clear that they need to start recouping costs. Increasing prices is “the only route left” for many, he said. “Financially they have nowhere else to go.”

Vicky Lee, who heads the Bristol City Centre Business Improvement District, agreed. Many of the companies that she works with in the city centre cannot keep their costs down. They don’t have “the buying power, the strength to reduce cost per unit by purchasing on a larger scale”, she said.

Line chart of YoY change in CPI index (%) showing UK consumer price inflation hits its highest level in 40 years

She added that the shadow of the pandemic continues to affect many small businesses in the area. While they have managed to “bounce back quickly”, they had to borrow to keep going during the crisis. Debt repayments on these loans have further tightened margins and pushed businesses to raise prices.

Passing the increased costs on to customers has not been an easy decision for many small business owners, despite the challenges of the current environment, said Chris Jenkins, who has worked in Bristol’s wholesale fruit market for most of his life. In the face of steep transport costs, his company tried to become more efficient.

Vicky Lee
Vicky Lee, who heads the Bristol City Centre Business Improvement District, said companies don’t have ‘the buying power, the strength to reduce cost per unit by purchasing on a larger scale.’ © Charlie Bibby/FT

“We’ve got no excess staff whatsoever. All of us are working flat out all the time. And, we’ve just got no fat. It’s just been cut, cut, cut everywhere we can go to try and minimise costs”, he said, adding that there was “nothing else they can do” to keep prices down.

The knock-on effect of rising prices on consumer spending is another worry. Jeremy Kynaston managing director of No1 Harbourside, a bar, restaurant and live music venue situated on Bristol’s historic harbour, and two other venues in the city, acknowledged that people are just beginning to feel the increase in prices, but is hoping that they will continue to eat out.

Chris Jenkins
Chris Jenkins, who works in Bristol’s wholesale fruit market, said the outlook was bleaker than ever before © Charlie Bibby/FT

“When people go out, they know it’s going to cost a little bit more, and it’s up to us to make sure we’re clever about our quality and standards”, he said.

However, Kynaston is worried about the impact the increase in the energy price cap in the autumn will have on his business. Ofgem predicts that household energy prices will increase by around 42 per cent in October, after a 54 per cent rise in April.

“It’s daunting — the October price rises. But we do have a plan at least. It’s better than having no plan at all,” said Kynaston.

To address the impact of spiralling energy prices on the cost of living, UK chancellor Rishi Sunak last week introduced a £15bn package of support. It included a one-off payment of £650 to around 8mn households in receipt of welfare payments.

Jeremy Kynaston
Jeremy Kynaston, managing director of No1 Harbourside, is worried about the impact the increase in the energy price cap in the autumn will have © Charlie Bibby/FT

But those further up the supply chain, such as Jenkins, are nervous that even with the extra government support, increasing energy prices will suck demand out of the local economy.

“Come November, December, they’re [households] really going to feel it,” he said. He added that the pressure on household budgets in the coming months may see the fruit he sells to retailers become “more of a luxury”. 

Most economists acknowledge that price pressures may get worse before they get better, but predict that the energy shock, pandemic supply chain impacts and higher interest rates will taper off quite rapidly from the start of next year onwards.

However, for Jenkins hope that a brighter period may lie ahead is hard to find.

“I’ve been in the job for all my life. I was born into it,” he said. “In all that time, you’ve always been able to see the light at the end of the tunnel. You can’t seem to see it now.”



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