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

Small businesses are struggling with record costs as they try to remain competitive as consumer confidence falls in response to rising inflation and interest rates.

Data from NAB’s monthly business survey shows the cost of doing business is at record levels and those prices are being passed on to consumers.

Labor costs (personnel), input costs (goods and general expenses such as electricity bills, gasoline) and final prices (what consumers pay) are at their highest levels since the business survey data began from NAB in 1997.

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

Spence said COVID-19-related supply chain and staffing issues are the main culprit.

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

“Input costs have gone up quite a bit, particularly in sectors like retail, but at the same time, we’ve also seen that retailers have been able to increase their prices as well.”

In Melbourne’s outer western suburb of Sunshine, all input costs for Ngoc Nguyen’s hospitality business have increased.

“It’s a bit daunting,” Nguyen said.

The price of meat, fruit and vegetables has doubled, energy bills are up 3 percent and goods such as coffee and alcohol are up 10 percent, it said.

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

“We are changing our menus to accommodate the change in the market,” said Ms. Nguyen.

That means ditching the lettuce and using less of other more expensive greens, like broccoli.

It also had to raise prices for customers twice last year.

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

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

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

It means your full-time staff can cover most of the opening hours on a regular shift, and the business can focus on serving lunch and dinner, which is when customers typically spend the most.

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

On July 1, the minimum wage increased 5.1 percent and the retirement guarantee increased from 10 to 10.5 percent.

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

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

“On top of all that, there are 40,000 openings in the retail industry alone, which means a lot of retailers are going to have to pay more just to secure talent,” Zahra said.

“And of course there is real price sensitivity around passing prices on to consumers, because consumers are under the same pressure.

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

Zahra is also concerned about a hit to consumer confidence as interest rates rise.

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

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

“As the cost of doing business also happens right now, this means profits and margins will be under significant pressure.

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

Zahra said the federal government could ease some of the pressure on businesses by letting retirees work harder and speeding up access to child care.

John Buchanan, from the Center for Workplace Research at the University of Sydney, said the increase in the minimum wage and higher wages for workers in general were not a bad thing.

“From a raw economics point of view, you have to recognize that workers’ wages are not just a cost to employers, they are a source of demand in the economy,” Professor 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 at 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 is not only good for living standards, it’s actually good for the economy as a whole.”

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