Record trade costs driving up prices, eroding operator and consumer confidence

Small businesses are grappling with record costs while trying to stay competitive, as consumer confidence plummets in response to rising inflation and interest rates.

Data from NAB’s Monthly Business Survey shows that the cost of doing business is at record highs and these prices are being passed on to consumers.

Labor costs (staff), input costs (goods and overhead such as electricity bills, gasoline) and end prices (what consumers pay) are all at their highest levels since NAB business survey data began in 1997.

“They sort of peaked in April, May of this year, significantly above previous peaks during or before the GFC (global financial crisis) as well,” said Gareth Spence, senior economist at NAB.

Mr Spence said supply chain and personnel issues related to COVID-19 were mainly to blame.

“We’ve really seen input costs increase at a faster rate, coming out of the first phase of the pandemic,” Spence said.

“Input costs have risen quite sharply, especially in sectors like retail, but at the same time we’ve also seen that retailers have been able to kind of raise their prices as well.”

In Melbourne’s western suburb of Sunshine, the cost of every input to Ngoc Nguyen’s hotel business has increased.

“It’s a little intimidating,” Ms Nguyen said.

The price of meat, fruit and vegetables doubled, energy bills rose 3% and goods like coffee and alcohol rose 10%, she said.

Ngoc Nguyen has reduced the opening hours of his coffee shop to reduce labor costs. (ABC News: Rhiana Whitson )

“We are modifying our menus to adapt to the changing market,” Ms Nguyen said.

This means giving up lettuce and using less of other more expensive vegetables, like broccoli.

She also had to raise prices for customers twice in the past year.

“You have to do it slowly and gradually,” she said.

“They are [customers] very understanding…I think people are aware of what’s going on.”

To save on labor costs, Ms. Nguyen reduced opening hours by opening later and closing on Mondays.

This means that its full-time staff can cover most opening hours in a regular shift, and the company can focus on serving lunch and dinner, i.e. when customers generally spend more.

“It makes more sense than opening to early risers who might only spend $4 for a coffee,” Ms Nguyen said.

On July 1, the minimum wage increased by 5.1% and the pension guarantee increased from 10% to 10.5%.

Adult staff earning less than $450 must also receive a retirement pension, as well as employees under 18 who work more than 30 hours.

Australian Retailers Association chief executive Paul Zahra said some businesses also face rent increases often while paying previous rent that was deferred during COVID-19 lockdowns.

“On top of all that, there are 40,000 vacancies in the retail industry alone, which means many retailers will have to pay more just to recruit talent,” Zahra said.

“And of course there is real price sensitivity around the pass-through of prices to consumers, because consumers are under equal pressure.

“So companies are in this really difficult position right now.”

Mr Zahra also worries about a hit to consumer confidence as interest rates rise.

He said that while May was a record month for retail sales, at $34.2 billion, figures from the Australian Bureau of Statistics did not tell the whole story.

“What this hides is the fact that the industry has been fueled primarily by price increases,” he said.

“With the cost of doing business also occurring at the moment, this means that profits and margins will be under significant strain.

“And that may mean for small businesses that some of them might not survive.”

Zahra said the federal government could ease some of the pressure on businesses by allowing retirees to work more and speeding up access to childcare.

John Buchanan of the University of Sydney Center for Workplace Research said raising the minimum wage and higher wages for workers in general was not a bad thing.

“From a raw economic perspective, you have to recognize that workers’ wages are not just a cost to employers, they are a source of demand in the economy,” Prof Buchanan said.

John Buchanan
Professor John Buchanan of the University of Sydney says paying workers more is good for the economy. (ABC News: Dan Irvine )

In other words, workers with a little extra money in their pockets are more likely to spend it on a small business like a retail store or coffee shop.

“Cutting wages when the economy is sick often makes the situation worse,” Professor Buchanan said.

“So raising wages responsibly isn’t just good for living standards, it’s actually good for the economy as a whole.”

Absorb some costs

Kerrie Dickens, who runs a women’s clothing store in the regional town of Gosford in New South Wales, agrees the extra money in workers’ pockets is a good thing for a business like hers at the moment.

Ms. Dickens has already noticed that her clients with mortgages are tightening their belts.

“I think a lot of people are a little nervous right now – they’re cautious,” Ms Dickens said.

“I noticed a bit of a slowdown.”

Kerry, Victoria Black
Kerry Dickens owns a women’s clothing store in the town of Gosford, New South Wales. (ABC News: Keith )

It also tries to balance the rising cost of business while remaining competitive.

One of its suppliers has recently increased its prices because its shipping costs have quadrupled.

“Prices for my next orders will clearly increase…I try to stay relevant in the market by absorbing price increases,” Ms Dickens said.

Council of Small Business Organizations Australia chief executive Alexi Boyd said small businesses needed a break from any new changes or compliance requirements.

“So they have the opportunity to get a sense of what’s needed now, and maybe a six to 12 month break from drastic changes, so they can really start focusing on growing their business.” , Ms Boyd said.

Spence said business owners who haven’t yet passed on input costs to customers probably can’t hold on much longer.

“What are consumers doing based on the prospects? ” she asked.

“We’ve seen consumer confidence fall to quite low levels, the lowest levels since the peak of the pandemic in 2020.”

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