Labor challenges, inflation stoke pessimism for small business

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Higher Grade co-owners Ian Hull, left, and Alex Ostrovksy say they pay above-market rate—beginning at $16 an hour—to battle the challenge of finding good workers. (IBJ photo/Eric Learned)

Inflation and staffing challenges are the twin villains in the small-business story of 2023.

According to a monthly survey of members of the National Federation of Independent Business, the dour duo is fueling pessimism related to future business conditions.

The NFIB’s “optimism index” in September was listed at 90.8, which is lower than the group’s 49-year average—98—for the 21st consecutive month.

The factors of inflation and quality of labor tied as the survey’s “single most important problem,” each selected by 23% of respondents.

Ty Spatta

Ty Spatta, owner of Bloomington-based Axis Painting, can relate. He said he relies on competitive pay to maintain his painting crew that ranges from four to seven employees.

“I try to pay my guys as much as I can just to keep them around,” Spatta said. “I hate turnover, so that’s a big thing to me.”

Spatta, an NFIB member who’s owned Axis Painting for 31 years, said he strives to accommodate young employees who request more flexibility in work schedules than did previous generations.

Meanwhile, rising cost of paint and supplies triggered increases in rates charged to Axis customers. The big picture of inflation, Spatta said, also includes compensation concerns.

“My guys are just like me, paying more out of pocket for a Big Mac and other services,” Spatta said. “I’m trying to raise their pay to keep up with that. In turn, I have to raise my prices to keep up with that. It becomes a vicious snowball effect.”

The U.S. Department of Commerce reported that prices rose 0.4% from August to September, an increase identical to the July-to-August increase. September’s consumer price index was 3.4% higher than a year prior, building on an average inflation rate of 8% in 2022.

Natalie Robinson

Still, the September report found that consumers have shown surprising resilience, willing to spend to power the economy in the face of persistent inflation and high interest rates, the AP reports. And that spending is a culprit in perpetuating inflation.

So is the cost of doing business becoming unsustainable for some companies?

Natalie Robinson, NFIB’s state director for Indiana, pointed to higher rates for financing and borrowing plus rising health insurance premiums, in addition to business owners paying more for supplies and wages.

“When all of that is elevated across the board, it makes absorbing those costs or trying to manage them extremely challenging,” said Robinson, who leads about 10,000 NFIB members in Indiana.

‘Not for the faint of heart’

Beyond being a place for personal updates and comedic memes, social media has become an online memorial of sorts for businesses that ceased operations.

“The tough days began to outnumber the good ones,” Wildwood Market co-owners Craig and Emily Sanders wrote in a Facebook post earlier this year before closing their Fountain Square boutique grocery store. “The hours are long. The margins are thin. Competing with national chains is a never-ending struggle.”

“The reasons are boring and the same as everyone else,” Three Carrots founder Ian Phillips wrote in a September Facebook post before closing his vegan restaurant in Fountain Square. “Eventually, the numbers stop adding up, the bills start stacking up and, no matter your best efforts, you can’t dig your way out of it.”

And Amanda Mauer, owner of now-closed boutique arts and crafts store Homespun: Modern Handmade, wrote on Facebook this summer that “armed with all the energy and passion in the world, you can get any idea off the ground. … But you don’t know what you don’t know until coming face to face with it.”

NFIB executive Robinson summarized small-business ownership as something “not for the faint of heart.”

Help is available, she said, through the Indiana Small Business Development Center, which is part of the Indiana Economic Development Corp. Robinson, a member of the Small Business Development Center advisory board, said the center offers entrepreneurs free resources “to make it a smoother process to get up and running.”

John Clarke

But John Clarke, hired this year to be DePauw University’s first dean of the institution’s School of Business and Leadership, said keeping a business running in the face of rising costs is tougher for small operators than for large businesses.

“Big businesses can do things really poorly and still make money, because big businesses have this massive efficiency of scale,” Clarke said. “If you were a very large company and you purchased 20% of a commodity, you would have leverage. Small businesses don’t, and you can’t do much about that.”

Agility, however, is an edge possessed by small businesses, Clarke said.

“You can be more innovative,” he said. “You may have to decide you’re going to look at different sources of supply or use something else. Or it could be that something you’re doing just isn’t as sustainable or as attractive as it was.

“Figure out how you adapt. How do you change? How do you move?” he said. “How do you leverage the fact that you as a small business are more agile than the large competitors in your space?”

In the realm of staffing—an environment where federal labor data published this summer showed nearly 10 million unfilled jobs in the United States but fewer than 6 million people seeking work—Clarke said small-business owners should accept that a new normal is here to stay.

“It might be as simple as shifting from a full-time workforce to a part-time workforce,” he said. “It might be that we have to do different work. Maybe it’s not effective for us to do certain things anymore, and we need to find a different solution.

“If we’re in a service industry, maybe we have to partner with somebody else to help deliver that service,” he said. “Maybe we have to adopt a technology to reduce the labor content when we deliver a service. I think there’s no single solution. But we can’t assume those shifts in the workforce are going to return.”

CBD optimists

The owners of CBD and vape retailer Higher Grade said they sidestep workforce woes by overpaying staff members.

“We pay above market for a retail job,” said Ian Hull, who co-owns Higher Grade with Alex Ostrovksy. “The people who work for us say, ‘Man, this is actually a pretty good-paying job.’ But I talk to other owners in the industry who are not paying what we’re paying. They always tell me, ‘I can’t find anyone to work.’”

Higher Grade opened a Fountain Square location in October, and the company plans to open a smoke shop—its eighth overall—in Anderson by the end of the year or early next year.

Hull said Higher Grade has 35 employees, and the starting wage is $16 per hour.

When discussing the gap between unfilled jobs and people seeking jobs, Hull said it’s common for 20-somethings to make ends meet through nontraditional “side hustles.”

“There are 10 different ways you can make money on the internet, especially if you’re popular and look good,” Hull said.

Therefore, companies must make their jobs more attracctive. Higher Grade, Hull said, offers an enjoyable work setting.

“We know what we’re going to get with the younger generation,” he said. “We build a culture and environment where you want to show up for work and have a good day and not have to take a lot of stress home with you.”

In 2018, Indiana legalized the sale of cannabidiol, also known as CBD, a substance derived from marijuana and hemp. Beyond CBD and vape products, Higher Grade sells pipes, papers, glass products, snacks and beverages.

Hull, a Covenant Christian High School alum, and Ostrovsky, a Carmel High School alum, opened their first Higher Grade store in Noblesville in 2018.

Hull and Ostrovsky own the buildings in Fountain Square and Anderson where Higher Grade opened and plans to open. Although Ostrovsky said higher interest rates might decrease the likelihood of another building purchase, he said he’s optimistic about future business conditions.

In the first three weeks at the Fountain Square store, 1126 Prospect St., Higher Grade primarily served new customers who didn’t shop at other locations, Ostrovsky said.

“Don’t slow down,” he said of the pair’s business philosophy. “Don’t worry about all the conversations out there. If the numbers are pointing in the direction of, ‘Things are working well,’ we don’t get caught up in the news cycle.”

By stocking products in eight stores, Higher Grade is big enough to take advantage of what DePauw’s Clarke referred to as “efficiency of scale.”

“We purchase a lot of volume,” Hull said. “People who really push volume aren’t getting prices raised on them by their longtime distributors. Mom-and-pop places that are just now popping up aren’t getting close to the pricing we’re getting.”

Help wanted

NFIB executive Robinson pinpointed construction, retail, manufacturing and services as sectors having the most problems in hiring workers.

Garry Brammer, who owns The Bank Restaurant in Pendleton with his wife, Robin Brammer, said he’s pessimistic about future business conditions because “the workers just aren’t coming out.”

The restaurant known for its tenderloin sandwiches has eight full-time employees and 15 part-time staffers. The restaurant interviews job applicants on a weekly basis, Brammer said.

“There have been times when we’ve had six or seven interviews scheduled for a day, half an hour apart, and nobody shows up,” said Brammer, a member of the NFIB. “I could have been doing something else for 3-1/2 hours.”

Some people go through the interview process and accept a job offer, he said, then don’t show up and can’t be reached.

Robinson said it’s difficult to grasp the non-work phenomenon.

“I don’t know how people can afford not to work in this day and age,” she said. “The cost of living and inflation are just astronomical. But I feel like things tend to work themselves out in the market. We’ll have dips and curves, but small businesses are very resilient.”

Regarding menu prices, Brammer said he’s resisted opportunities to hike what’s listed.

“I only have one item that’s market price: 12-ounce ribeye,” he said. “Everything else is on the menu, and I have to honor that. You just can’t nickel and dime your customers.”

Brammer had retired from a General Motors career before he and his wife purchased The Bank Restaurant in 2015.

“The stress will kill me,” Brammer said of restaurant ownership. “But it’s the smartest thing I’ve ever done in my life. I meet new friends every day. I consider them friends, not customers. I’m here every day, almost all day long. My attitude is, if you’re kind enough to visit my establishment, I should be here to thank you for it.”•

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