Tell ‘em they’re dreaming!

June 4, 2013
The Age

Tony Featherstone is a specialist writer on small companies and entrepreneurs

There’s a story doing the rounds about some cafés in parts of Western Australia and Queensland charging more than $5 for a cup of coffee. It’s a powerful anecdote about a huge looming problem for small business: a rapid readjustment in prices as the resources investment boom slows. As the boom has faded, businesses have had to charge more to maintain profits.

The music has not stopped but it is getting quieter by the day as China slows, commodity prices fall and more projects are postponed or pulled.

Do not think a fading resources boom only affects small businesses that directly service minerals and energy industries. In one way or another, the boom has affected all businesses and the adjustment will be widespread as Australia’s two-speed economy is left with one gear this year: modest growth.

Small businesses seeking price increases in 2013-14 will have to work harder than ever to get paid more as consumer demand remains sluggish and economic uncertainty rises. A falling Australian dollar, which lifts import prices, and the lead-up to the September election, compounds the problem as customers and businesses spend less.

That reality is at odds with this week’s Dun & Bradstreet National Business Expectations Survey for the September quarter. D&B found that more businesses plan to raise prices in the next quarter and that pricing expectations have turned noticeably higher – albeit off their lowest level in a quarter of a century.

Are these expectations realistic? My sense is that many small businesses are facing price deflation in various forms, from the small retailer having to discount more than ever to make a sale, to the home-based consultant having to spend more hours on a project to earn the same pay.
Every second small business owner I know says they are working harder than ever to maintain revenue, amid flat demand and lower pricing power. Some have not lifted prices for years, despite ever-rising costs.

I can’t see Woolworths, Coles or too many other giant chains allowing small suppliers to lift prices amid weak demand. Just maintaining prices would be a big win for many small suppliers that have next to no power with large distributors and are price takers.

The big problem, of course, is when small businesses have to make up several years of no price rises in a single increase. Rising labour costs or other expenses force them to lift prices sharply, and customers resist. The D&B survey shows price growth expectations have mostly trended lower since 2010, suggesting many small businesses have not lifted prices for a few years.

Others have conditioned customers to expect hefty price discounts. Why buy goods in May when department stores begin their big sales a month later? We have all seen more people haggling with retailers over the cost of small-ticket items and refusing to pay an already discounted price.

So we have more business wanting to lift in the next 12 months at a time when demand is weak, labour and input costs in many industries remain painfully high, and the fading resources investment boom will force thousands of businesses to adjust their prices.
Something has to give.

Of course, another interest rate cut this year, a lower Australian dollar, and firmer property prices could lift consumer and business demand in 2013-14 and create scope for price increases. But lower-than-expected growth in retail sales in April, falling job advertisements and weak manufacturing data, suggest demand is patchy and that further interest rate cuts are needed to stimulate the economy.

I suspect small businesses will need to plan for no or low price increases in 2013-14, and the possibility of price falls. Will the café that sold coffee for $5 survive when prices are slashed, and how will businesses that have boomed by servicing cashed-up miners fare when there are fewer customers?

As the price adjustment in resources flows through to other sectors, small businesses should revisit their pricing strategy. Those banking on much-needed increases could easily come unstuck. The key is having a cost base that adjusts quickly to price falls, which is not easy for many small businesses burdened with unrealistic labour costs and are at the mercy of large distributors.

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