Inflation keeps hitting American consumers, who have seen rising prices everywhere from the gas pump to the grocery store. But it’s weighing on small businesses, too. Mike Brey, the president of Hobby Works, a toy and hobby store with two locations in Maryland, raised the prices of over 10,000 products in his stores between July and October, from remote planes to 1,000-piece Lego sets. The average increases of 8–10% are meant to absorb Brey’s continually rising costs. “Many of the suppliers who did not hit us with price changes over the summer and early fall are coming back to us now,” he said.
Like many small business owners, Brey’s surging costs are directly related to supply chain woes. According to the most recent US Census Bureau Small Business Pulse Survey, 46% of American small businesses claim to have at least some level of domestic supplier delays, up from the 26.7% reported during the first full week of 2021. A direct effect of these kinds is that their cost of doing business increases dramatically. Many retailers like Brey have been able to pass the costs of supply chain disruptions onto customers due to high consumer demand for goods. According to the Bureau of Labor Statistics, consumer prices rocketed by 6.2% in October (much higher than the Fed’s annual 2% target), marking their fastest growth rate in more than 30 years.
Besides higher prices from suppliers, skyrocketing cargo container shipping costs have also posed an existential threat to small retailers. For example, in October 2020 Brey paid $5,500 to import a 45-foot container from Hong Kong to the port of Baltimore. In October 2021, he got a quote of $22,000 to import the same type of container. “And it was not guaranteed that that would be the price when it landed,” Brey said.
To withstand all these challenges, Brey’s strategy for this holiday season has been to get whatever supplies he can as quickly as possible. That meant buying a large amount of inventory at once, though under normal conditions he would prefer to place smaller orders over several months. In August Brey told his core suppliers, including Lego and Lionel, to send an entire season’s order in one go, and they fulfilled his requests. It’s risky—the slightest downturn could leave him with a ton of inventory and a greatly reduced cash flow, but having empty shelves during the holiday season would be even more costly. Brey rented a temporary warehouse near the Baltimore port to store all the merchandise, but finding that space was challenging. “We’re only spending a few hundred dollars a month; it’s very difficult for us to kind of defend our space when you know Home Depot is trying to rent 100,000 square feet,” Brey said.
Small businesses like Brey’s can’t compete with big-box retailers when it comes to supply chain snags. Lathan Austin, a marketing and logistics professor at Florida International University, said via email, “Target, Walmart, Home Depot, etc., can lease ships, pay more for shipping via air, and pay extra benefits, including higher wages, to their workers to keep them on payroll.” Toy giant Ty Warner, best known for its Ty Beanie Babies, spent over $200 million to dispatch more than 150 air-freight shipment flights of products from China.
Small businesses don’t have the leverage to get priority in the supply chain competition. Larry Giunipero, professor of supply chain management at Florida State University, offered the comparison of a restaurant: “If you show up earlier than me, you get service first, but in the supply chain, it’s not like that.” Brey’s order for his tstores got pushed to the back of the line because it was smaller than the average national retailer’s. Brey said this supply chain jockeying was the strongest headwind his stores had ever faced in his 25 years in business. Besides stocking up inventory, he can only pray that his competitors will run out of inventory sooner.
While toy stores like Brey’s can raise prices on their primary products, some retailers facing similar shipping constraints have to recoup costs indirectly, like booksellers. Pick up any book on a retailer’s shelf and you’ll likely see a suggested retail price set by the publisher near the barcode. That means bookstores don’t have the option of marking up prices. Jamie Fiocco, owner and general manager of Flyleaf Books, an independent bookstore in Chapel Hill, North Carolina, had to rely on stationery and gifts to make up the margin lost on shipping costs. Independent bookstores like Fiocco’s must compete against mass-merchandisers like Costo and Amazon that can place huge orders for national bestsellers like Michelle Obama’s Becoming and Sally Rooney’s popular novels, and discount them deeply for customers. “Books are often loss leaders for stores,” Fiocco said, but they can sell “flat-screen televisions or toasters” to offset the lost profit. Fiocco doesn’t operate in the same business model or have the capital to offer the same deals.
In a survey conducted by American Express in October, 78% of 523 small businesses said that their holiday sales will impact whether they can keep their doors open in 2022. In the wine industry, it’s all about “OND”—October, November, December—the time wineries sell the most because of the holiday (and party) season. But this year, Chrishon Lampley, founder of the Chicago-based wine and lifestyle brand Love Cork Screw, is scrambling for her cabernet sauvignons, which were supposed to be delivered by distributors and put on shelves in September. The popular reds have been bottled but not picked up due to the shortage of truck drivers. Lampley had to shift her marketing strategy to advertise other wines that were already on the market to offset the lost revenue.
Lampley said she is lucky because her wines are already produced and bottled, so there won’t be many disruptions this holiday season. But next year could be a different story. Besides shipping delays, a nationwide glass shortage will likely leave winemakers with wine but not enough bottles. “In Q1 2022, probably we’ll see a lot of increase in pricing for different wine brands,” Lampley added.
A silver lining for small business owners is that inflationary prices haven’t stopped shoppers from buying. “I think many people have the perception that this is somewhat temporary. Whether that’s true or not, I can’t answer,” Brey said. US retail sales rose at a more-than-expected rate of 1.7% in October amid the inflation concerns. The National Retail Federation expects holiday spending at both brick-and-mortar stores and online retailers to grow between 8.5% and 10.5% this year, compared to an average increase of 4.4% over the past five years.
Despite consumer interest, the fates of small businesses are ultimately subject to the supply chain. “People still go on to the notion that, ‘Oh, yeah, if you’re sold out, it’s a good thing.’ Not for small businesses,” Lampley said.
The good news is that supply chain woes might have peaked in the US, since the number of containers lingering for longer than nine days at the Port of Los Angeles, the largest container port in the country that handles 20% of all incoming cargo for the US, has dropped. The price of a 40-foot shipping container, one of the mostly commonly used in ocean freight, is drifting lower as well. Drewry’s World Container Index, which measures the average 40-foot container price for major routes on a weekly basis, has declined for 10 straight weeks, although the average price of $9,050.77 per container remains 234% higher than the 5-year average.
The already fractured system remains highly susceptible to the pandemic and it may not be completely fixed until the second half of 2022, according to US investment bank Jefferies. Brey plans to order extra inventory from his key suppliers to brace for the next year. Fiocco of Flyleaf Books will utilize her bookselling skills to match people with books to make sales. “I’m not worried,” Lampley, from Love Cork Screw said about her plans for 2022 before immediately admitting, “And I will contradict myself. You know, as a small business owner, you are always worried.”