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The narrative of the retail battles of the last few decades has pitted one of two wars: Amazon and e-commerce against the big brick-and-mortar retailers, and all the big ones against small Main Street entrepreneurs. But in the current confusing economic environment – marked by inflation, supply chain shortages and a volatile consumer changing spending patterns due to post-Covid high prices – small business experts say Main Street may be more optimistic about the benefits of smallness should.
The inventory build-up and subsequent discounts at the biggest retailers, including Walmart and Target, show that even the best can get this consumer economy wrong. Indeed, small business owners who are closer to relationships on both the supplier and customer sides may be able to manage a rapidly changing environment more adeptly.
That’s the advice of Nada Sanders, distinguished professor of supply chain management at Northeastern University. She told CNBC’s Small Business Playbook virtual summit Wednesday that she’s been “gloomy and doomed” in the past but is now optimistic about Main Street’s opportunities in the current economy.
“I actually see this as a tremendous opportunity. I really do. Especially for small businesses,” Sanders said.
She cites three areas entrepreneurs should focus on, and the first is directly related to the problems facing big retailers: forecasting.
“Big companies are really struggling with this,” said Sanders, an academic forecasting expert. “We see it in the retailers, of course. Walmart, Target.”
Speak directly to customers to understand changing consumer demand
In her opinion, the largest companies rely too heavily on inventory algorithms to forecast dates, but in the current economy, which has defied many historical patterns, “historical data in this area isn’t really good data right now. It’s not clean data, it doesn’t show the future, which is very volatile,” she said.
This gives small business owners, who can connect directly with customers to understand their needs, a potential advantage that cannot be calculated by an algorithm.
Whether a small business is B2B or B2C, direct communication is a “real answer” for them right now in dealing with changing consumer behavior, Sanders said.
“What I’m seeing with the big companies is that they’re trying to hire futurists and find ways to actually predict demand. But every time we look at the numbers, the CPI, all of that, we’re looking backwards,” Sanders said. “The fact is we’re in a very rapidly changing landscape and I think we have to reflect “Look ahead. Small business owners really need to connect and use their judgment to forecast and understand what their customers need.”
“As a small business owner on a tight budget…you don’t even need the really heavy AI, which I think a lot of small business owners get a little nervous about…You can actually make a lot of profits with really simple solutions,” said Sanders, ” When you’re a small business, you have end-to-end control that a large business doesn’t have. I see this as a really big opportunity,” she added.
Main Street already believes it is operating in a recession
It will be a leap for many entrepreneurs to come to this view. The data shows that current sentiment on Main Street is bearish. The most recent CNBC|SurveyMonkey Small Business Survey for Q3 2022 showed that small business confidence has hit an all-time low, with the largest percentage of small businesses citing inflation as their top risk.
In the Q3 survey, an increasing percentage of small businesses are forecasting sales to decline over the next 12 months as they believe the economy is already in recession. The bleak selling outlook was the biggest contributor to confidence reaching all-time lows. And as small businesses face higher costs for inputs, labour, transportation and energy, few (just 13%) say now is a good time to pass price increases on to customers, according to the survey.
How to set prices during inflation
But pricing is also an area where small businesses can communicate effectively and directly with their customers and find solutions.
Jeffrey Robinson, provost and executive vice-chancellor at Rutgers Business School and co-founder of the Center for Urban Entrepreneurship and Economic Development, said at the Small Business Playbook Virtual Summit that a big mistake business owners make is pricing new businesses don’t find out products until it’s too late. In times of high inflation, entrepreneurs must base the pricing of new items on a detailed analysis of the cost of production. A traditional way companies set prices – decide on the product and then, once it’s available, see what competitors are charging – isn’t the way to operate in this economy. Inflation requires small business owners to set the price by first understanding their costs.
“All of these prices along the supply chain have gone up,” Robinson said. “Shipping costs…anything that involves a transportation component, that cost has gone up. So if you evaluate and evaluate your product or service that you offer along with that cost before you set the price, you can set the price at the right level,” he said.
And then comes the hard part: explaining it to the customer. Robinson says the direct relationship small businesses have with their customers should also be viewed as an advantage.
“We have relationships. talk,” he said. “Explore. You have to explain to them that the cost of these components has increased. ‘In order for me to do that, I need to change some prices,'” he said.
Helping customers understand the situation a company is in related to supply chain inflation will help set prices appropriately, he said. In the end, Robinson said it was really nothing more than a restaurant that always stated the price of a fish on the menu as “market price”. That may be a simplified example, but it has resonated in the current situation.
Some restaurants have put up signs during the current inflationary period to be transparent to customers about price changes. Robinson hasn’t commented specifically on this method, but said every company needs to have some form of conversation with customers and potential customers that the prices of two years ago won’t be the prices of today. While survey data shows small business owners are cautious about this conversation, Robinson said they shouldn’t be.
“I think a lot of consumers understand that, especially if you’re a business-to-consumer store,” he said. “It’s about being transparent … helping people understand that pricing is changing.”
Plan the supply chain with key vendors
Talking to suppliers is no less important, and according to Sanders, the data shows that on average, 80% of a company’s spend is on about 6% of its suppliers. These are the business partners to focus on and where to pick up the phone and call and build a relationship. “As a small company, that’s really going to be about it,” Sanders said. “I think as a small business you really need to be able to map your supply chain for your most important items, talk to your suppliers and really build partnerships,” she said.
Most large companies don’t have much visibility below their Tier 1 suppliers, according to Sanders, so many items that are far down the supply chain, “Tier four, Tier five,” are harder to track, she said.
A small business can map its supply chain and work with partners to visualize the entire chain and identify the risks. Right now, retail inventory issues could make small business owners more reluctant to stock up — even though it’s the start of peak shopping season, with back to school and then the holidays. Sanders said she firmly believes in running a “lean” operation, but in the current economy “we have to introduce some caveats about the importance of lean.”
In certain cases, small businesses need to stock additional items, critical items with longer lead times and when price increases are anticipated. All companies should also take a look at their production processes and see if there are any alternatives that could lead to more cost-effective operations. Carrying extra inventory “goes against lean,” she said, but she added, “The benefit for a small business is really being able to manage upstream and downstream at the same time and coordinate them.”
The biggest problem in the current economy is the demand/supply mismatch, and this is where Sanders comes back to the issues that Walmart and Target have faced and why small businesses should be opportunistic about the situation and proactively have supply side conversations and end customer side of their companies.
“Big companies are dinosaurs. … They are very cumbersome, bureaucratic. As a small company, you’re very flexible,” she said.
The key for small business owners is not to just look one way, either downstream (customer) or upstream (supplier). “But look at these at the same time, really marry them, watch them and connect with customers, connect with all the vendors,” Sanders said. “Big companies can’t do that. They are stuck because they have huge silos. As a small business, you don’t have that, so take advantage of that now.”