Jenny is a small business owner who makes shoes. She sells them for 14 and the cost to make them was 10. For the past several years, there has been inflation. The cost to make them is now 14. She has been unable to increase prices. Her customer, a major global retailer, keeps telling her that there are many other businesses that can make the shoes for 14.
Jenny is not profitable anymore and thus has been unable to increase wages to Wendy, one of her workers. She has reduced costs as much as possible. What else could Jenny do?
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Small businesses and inflation
Jenny could try to sell her shoes directly to consumers vs selling through a third party/global retailer. Over the last two years I have noticed how people are looking to support more small business owners vs conglomerates. By taking this approach it would give Jenny the chance to sell her shoes at a higher price (maybe even offer customizations at a higher rate) and keep Wendy employed at a fair rate.
Jenny should lower the quality of the product in order to minimize cost. The supply chain will then be cheaper for Jenny to produce her shoes while gaining the same if not more since she won’t be able to increase her prices.
If I remember it correctly from macroeconomics classes, when the inflation is high, the interest rate is often low. It means Jenny could borrow money from banks at a low rate. Normally, inflation is caused by too many money flowing in the market, for example, the massive print of money. Therefore, it would be easy for Jenny to apply for loans from banks.
Jenny could find other business options or sub-lines that help her get better margins and profits. By staying only with Walmart throughout the years she put all of her eggs in one basket. Key for small business is controlled diversification so if any external force impacts her business she is able to have more options, i.e: companies who only sell formal wear during the pandemic.
Jenny has two ways to fend off inflation. 1) Use debt to increase the assets of her business by borrowing from the bank. At the same time as the currency depreciates, the debt also depreciates. A debt depreciation would help Jenny make a potential profit. 2) Jenny can use the remaining money to buy more machines and factories that produce shoes, increasing profits by increasing the scale of production. Most importantly, although the price of the machine will be depreciated, it will also be affected by inflation, and to a certain extent, it can be more valuable. Real estate, on the other hand, is the most common investment against inflation. Wendy’s salary can be appropriately increased according to the annual inflation rate, which will also increase the motivation of employees to work to improve work efficiency. As long as the amount of salary is less than the amount of assets from debt, jenny’s business’s inflation risk passes to the banks. In short, in the face of inflating and unable to raise the unit price of goods, Jenny needs to increase loans and spend the cash of the company in order to maximize profits.
Jenny should first try to sell the shoes using social media channels like Instagram, Facebook shops. Sell fewer shoes to a selected few and create novelty. Which will lead to people demanding and waiting to finally buy a pair. This way Jenny can test waters and sell only the most profitable line with retail. This is a good start for small business and enter the retail space and bargain with the retail companies.
Jenny should focus on quality and the value she delivers on her products, if she proves the value for what she is charging, she can increase the price. she don’t need to lower her prices and don’t go in the route of price war. During inflation period the interest rate is lower she should invest to increase her capacity which help her to reduce cost.
So in summary – prove the value and lower lost.
I think it is an unfavorable situation for the small business. The price of raw material costs is getting higher with the inflation, but the sale price remain the same. It is also hard to produce the products with cheaper raw materials to keep the same product quality. In this case, switching to other profitable products is a better choice. It might cost some time and money to learn to make new products, but in long term, it will be better than being in a non profitable situation. Another way could be, instead of producing new products, having some innovations of the current products. For example, the trendy color of the season will be green, then Jenny could import more green materials and make various green color shoes. Using this unique selling point to negotiate with the retailers to increase her price.
I believe Jenny should attempt to create 1-2 new SKUs and sell them at a higher price. This allows her to offset the loss of the first product against the new SKUs, hence resulting in an overall profit
1: Maybe, jenny can try to find new retailers, it may be difficult, but try
2: Jenny can also go to other cities or countries to find cheaper raw materials to reduce costs.
3: jenny can try to sell her own products online for $15, many factories have already started to do so.
4: Or try to introduce machines or new technologies to reduce labor costs and increase work efficiency, but some of her employees will lose their jobs.
5: Moving is also a possibility. After all, the lease of a factory is often a big expense. And jenny can move to a place that saves shipping costs, or is closer to the raw materials.
Jenny could find new retailers, and quit the contract(may be fined but better for a long term salary), find another retailer for higher salary. Besides, she could produce more high value added products than just shoes, and also lower the cost per product by finding new suppliers.
I think Jenny could try to find new raw materials that cheaper to make the cost minimum.
Jenny could try to export her goods to other countries, which might have a greater average market price and these markets could pay for her increased price. Or Jenny could consider expanding the product line and differentiating her product, which might be helpful to seek a price increase. Also, she might be able to cut the manufacturing cost by decreasing the rent or labor costs, such as moving to rural areas and cutting the headcount.
Increase the bargaining power when signing contracts with large companies. Try not to sign long-term contracts. Long-term purchase contracts should be signed with suppliers to reduce losses caused by rising prices. If she cannot meet the requirements of large enterprises and is facing a loss, she can choose to cooperate with smaller local enterprises.
There are two ways in which such a small business might help Jenny get through this difficult time. The first is to find other potential partners and work less with Wal-Mart. You can’t put your eggs in the same basket, and neither can business partnerships. This way Jenny can also regain the bargaining power of selling price because it is very difficult to have bargaining power in front of a giant like Wal-Mart. The second is that Jenny can stockpile raw materials in advance to cope with the price increase brought by the increasing inflation, thus reducing the cost expenditure.
I think what Jenny can do is to reduce the size of the business and the cost of labor, she can try to put the machine into production, and in a short time, she may invest more money. However, in the long run, one person can operate a machine to do the work of 10 people.
One of the things Jenny could do is to find ways to retain her employees since losing employees during a high inflation period will cause a larger loss. Given that it may be difficult to raise wages, she could offer other benefits like holidays. She might also try to adjust the timing of business operations, such as concentrating production over a shorter period of time to save on operation expenses. Revisiting the choice of supplies would also be a viable way. Jenny could go over the past sales of her products to find out which goods sell well, therefore focusing her workforce and expenses on these products and eliminating those spending on the products that are not so competitive in past selling experience.
Jenny could change retailer to be able to sell her shoes outside of Walmart, so she could be able to sell her shoes in a higher price and to people who want it, and also maybe lower her costs for the product, or launch an alternative price.
Jenny could try to increase the amount of shoes she is selling per month in order to combat inflation. Or find a buyer who will buy them in bulk allowing her to better allocate her spending.