Inflation and interest rates push small businesses to raise prices as the holiday season approaches

With the arrival of the holiday season, it’s a critical time of year for small businesses.

But for retailers like Calgary’s UTB Fashions – facing inflationary pressures, higher interest rates and a possible recession on the horizon – the walls seem to be closing at the wrong time.

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Ursula Wegen, who owns and runs the shop with her daughter Kris Scholes, says they are now being forced to make impossible pricing decisions to compete with big retailers while leaving enough on the table to make it through 2023.

Next year will mark two decades in business for UTB, which began as a general draper Under The Bridge but has evolved to sell gifts made by local Calgary artisans and “one-of-a-kind” clothing for women and children.

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« Timeless, good quality for a fair price. That’s what we’ve always been,” says Wegen.

Women’s and children’s apparel and handmade gifts on display at UTB Fashion in Calgary, Alta.


Provided


But while the store has been able to keep prices steady for much of 2022, the pressure is mounting this fall, with vendor costs rising by up to 25%, she says.

UTB’s other operating costs have also increased.

“Everything from insurance to security to the cost of getting here, like your gas tank. It costs me $10 a day just to get to work where before it was minimal,” Wegen says.

What is hitting UTB the hardest right now, she says, are higher inflation rates.

In an effort to rein in runaway inflation, the Bank of Canada has raised its key rate by 3.5 percentage points so far this year, raising the cost of borrowing on a number of loans such as mortgages, lines of credit and some credit cards.

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This hits smaller companies like UTB particularly hard, as many have had to take on more debt to get through the COVID-19 pandemic.

The Canadian Federation of Independent Business (CFIB) estimates that 64% of small businesses have an average pandemic debt of $144,000. The Canada Emergency Business Account (CEBA) provided some applicants with $40,000 to $60,000 in interest-free loans, some of which would be canceled upon repayment.


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Wegen says she continues to pay many vendors on credit just to ensure she is able to obtain products, but she is nearing her limit.

“Interest rates have risen phenomenally. So that means my monthly costs have gone up by about $1,000,” she says.

Between inflated commodity prices and higher debt costs, the 19-year-old retail veteran says something is going to have to give.

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“My other expenses have increased. I’m going to have to start shaking things up a bit. Otherwise, we cannot pay the rent.

Most Small Businesses Plan Price Increases

Data kept by CFIB shows that UTB Fashion is not the only company feeling pressure to raise prices.

The organization’s latest Business Barometer report for October showed that, overall, member companies surveyed expect to raise prices by 4.2% over the next 12 months.

Although this is down from the peak of 4.9% seen in May, more than half of companies said they planned to raise prices by 5% or more in the coming year.

Over the next 12 months, more than half of CFIB members surveyed expect price increases of 5% or more.


CFIB / Global News


“What we’re seeing right now is unprecedented inflation and price challenges for small business owners,” says Simon Gaudreault, CFIB’s chief economist and research vice-president.

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“They are hit from all sides right now. It’s kind of the perfect storm for a lot of businesses.

Gaudreault says that in addition to higher prices for goods, ongoing supply chain issues and fuel costs, many businesses in Canada feel pinched by an ongoing labor shortage.

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CFIB’s latest data shows that member companies currently have more than 600,000 vacancies, and those trying to fill positions will likely pay more for new hires as well, Gaudreault says.

Statistics Canada’s inflation report released Wednesday showed average hourly wages rose 5.6% in October, accelerating from September.

“The labor shortage puts pressure on the payroll of small businesses,” says Gaudreault.


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Tight Holiday Contest

While businesses are feeling more pressure than ever to raise prices, it comes at a time of stiff competition as the holidays approach.

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While UTB often lowers its prices on Black Friday and throughout the rest of the year, Wegen says the store offered deeper discounts on some of its products as early as October when other competitors – big box stores and giants online – put their merchandise on sale early this year.

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“We have to do it too. Otherwise, people don’t come, and I don’t blame them. They also look for the best value for money,” says Wegen.

“I think unless you’re on sale, you’re not going to get people through the door.”

An Ipsos poll conducted exclusively for Global News last month shows that 30% of Canadians are looking to spend less on holiday shopping this year, and nearly half (45%) worry they won’t be able to give gifts to loved ones this year. year season.

Mega-retailer Walmart said on Tuesday it was seeing an increase in business as households sought to stretch their dollars. Chief Financial Officer David Rainey said the company expects consumer spending to slow as high food prices affect general merchandise spending.

But he also told investors that Walmart was “well equipped” to gain market share during this time of “macroeconomic uncertainty.”

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Gaudreault says that with inflation eating away at consumers’ wallets and big names flexing their pricing power over small businesses, retailers are limited by the kinds of price increases they can realistically build into their holiday projects.

“They can’t raise prices up,” he says.

Recession fears reinforce importance of holidays for businesses

The holiday season is especially important this year for small businesses that desperately need a “cushion” before a possible recession in 2023, Gaudreault says.

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In more normal economic cycles, companies would have had many consecutive years of strong earnings that they could have saved and prepared for tougher days, he explains.

But some 58% of CFIB members say they still haven’t seen their sales fully recover from the COVID-19 pandemic, making their “ability to weather a recession…limited,” says Gaudreault.

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“A lot of small businesses are just coming out of two years of hell, and they’re still in that hell,” he says.

Wegen says it will still be years before UTB recovers from its COVID-19 impacts.

The pandemic has gifted the store with silver linings – it has prompted Wegen and her daughter to source new products and they have been looking into stocking more products from local artisans, which has recently led to a to avoid high shipping costs.

The store has started to branch out a bit recently and batten down the hatches ahead of the holidays and the looming economic uncertainty.

Wegen says UTB visits Christmas markets more often and lures customers into the store with incentives such as gifts.

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She also used all the cash available today to pay suppliers and advance on rent to ensure UTB can keep the lights on in the first quarter of next year – still slow in trading from detail, she notes.

Wegen is also adjusting her expectations of how much business UTB can realistically bring in during the typically busy holiday season, and says other stores around her in the neighborhood are taking the same approach.

“There will be no profit this season. So it’s just hold on, stay alive and hope next season is better,” she said.

– with files from Anne Gaviola of Global News, Saba Aziz and Reuters


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