Main menu


How inflation is hurting small businesses in Minnesota

featured image

Shawn Nelson has worked in the homebuilding and remodeling industry for over 25 years.

At the time, he had never seen his business so severely affected by inflation.

He said the cost of lumber, windows, cabinets and other materials has risen by as much as 15% this year, squeezing the company’s profits.

In the past eight months, Anchor Fish & Chips’ $15 potato box has risen to $60, according to owner Kathryn Hayes. So $110 per box. For fish, the price per pound increased by $2 over the period, Hayes added.

Minneapolis restaurants have raised prices twice this year.

“That’s something we didn’t have to do,” she said.

Nelson also passes some costs on to its customers.

But it also bit the profit margin. The reality is that larger competitors have larger lines of credit or can take lower profit margins, so they can afford to temporarily reduce their profit margins.

And for many small businesses, profit margins were already very thin.

“They don’t have the liquidity and resources large businesses need to weather adverse effects like inflation and weather disasters like floods,” said Geri Aglipay, Great Lakes Regional Administrator for the American Small Business Association.

Aglipay says most small business owners have enough cash to keep their businesses running for at most a month, even if their profit margins are low. Inflation is particularly troublesome for minority-owned small businesses, she added.

Large companies also tend to have purchasing power with suppliers that smaller companies do not. Large businesses can buy the goods and services they need at the negotiated price, assuming that the more they buy, the higher the price.

This is especially difficult when goods are in short supply. Inflation and supply chain disruptions therefore leave small businesses in a do-or-die situation. Ron Werts, his director of regional outreach for the Minneapolis Federal Reserve, said earnings would not be boosted.

According to a recent Minneapolis Federal Reserve report, businesses across the region, primarily the Twin Cities and Greater Minnesota, are seeing lower profit margins due to inflation and rising labor wages. More than a third of his business owners reported a 5% or more decline in revenue in the last three months compared to the same period last year, and nearly half of them compared to his same three months in 2021. He said profits were down.

Among the biggest challenges facing businesses are rising prices for equipment and materials, as well as rising interest rates and financing costs on loans.

Nelson is a board member and former president of Housing First, the state’s homebuilding industry advocacy group, and hears from members how inflation continues to affect homebuilding and renovation. Low-end new construction has been hit hardest, forcing builders to spend more on materials while trying to keep home prices reasonably low.

Timber prices have fallen somewhat to pre-pandemic levels, but what hasn’t fallen is the price of products, which remain fairly high, Nelson said.

Some of these costs are passed on to customers, Nelson said. Nelson owns two of his businesses in the home renovation division, New Spaces and Blue Sky Skylights, both based in Burnsville.

“This is the biggest inflation we have seen,” he said. “The other issue we face is the supply chain.

Price unpredictability has hampered Nelson’s ability to predict project costs. he said.

“It hit our bottom line,” Nelson said.

Luckily, for now, demand is still high despite rising prices, and his company is growing significantly.

Margins are particularly tight in the state’s hospitality sector, 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 his services, restaurants and resort operators in the state’s hotels, food, and restaurants saw prices jump between 5% and 10% this year. I said I was saying.

Less than half pass the rate on to their customers.

For Hayes and Anchor Fish, basic staples on restaurant menus account for 90% of sales. For her, buying cheap food is not the solution, so price increases are helping for now.

“We are not making these changes because they could compromise the quality of the food,” she said.

One is Tammy Wong, owner and chef of Rainbow Chinese Restaurant and Bar on Eat Street, aka Nicollette Avenue. But she’s also not passing on the increased costs to her customers.

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

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

But it complicates running the business when price increases are the highest she’s seen in nearly 40 years in her restaurant business, she admits.

To stay within budget, Wong removed some unpopular items from the menu. In the meantime, she hopes to see more customer traffic.

“We don’t have [sales] “We would like to be profitable, but right now we are not.”

Lisa Smith, CEO of Twin Cities consulting firm Smith Co., sees the consequences of inflation indirectly. The less money her clients make, the less she spends on her services.

“What I can offer them affects them, and what affects them affects me,” Smith said. Inflation was huge because some of our clients were in software as a service, or information technology, architecture and engineering, their industries being hit hard by supply chain and material costs. rises and is lifted by the gas.”

According to a Hospitality Minnesota report, 57% of restaurant owners and 59% of hotel operators in the state say they don’t expect revenues to return to pre-pandemic levels until after 2023.

“Given that many hospitality businesses operate on very thin profit margins, absorbing these additional costs without It encourages stress,” the report said.

This is because businesses are responding to changes in consumer spending habits, and people continue to eat out and travel less amid budget cuts.

Hayes has witnessed this frequently at her restaurant in recent months, where sales are below pre-pandemic figures. She attributes this to more people eating at home.

To refrain from cutting salaries to make up for lost revenue, Hayes wants to charge customers a 3% credit card fee. “It’s a small thing, but it will make a difference,” she said.

Hays, meanwhile, is trying to adapt to its composting and recycling service, which is up $150 a month. She begins to suspect that some companies are taking advantage of small businesses that rely on their products and services.

“I think some people are ‘chancers,'” she said. “I’m sad because I don’t want to raise the price any more. I don’t want to do that.”