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The narrative of the retail battle over the past decades cited one of two wars: Amazon and e-commerce against the big brick-and-mortar retailers, and all the big against the small Main Street entrepreneurs. . But in today’s confusing economic environment – marked by inflation, supply chain bottlenecks and a volatility in consumer consumption patterns due to post-Covid high prices – small business experts say Main Street should be more optimistic about the benefits of being small.
Inventory builds and subsequent markdowns from top retailers, including Walmart and Target, show that even the best can be wrong about this consumer economy. In fact, small business owners, being closer to both supply-side and customer-side relationships, may be able to navigate a rapidly changing environment more quickly.
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 on Wednesday that she’s been “beautiful and abysmal” in the past, but is now optimistic about Main Street’s chances in the current economy.
“I actually see this as a tremendous opportunity. I really see it. Especially for small businesses,” Sanders said.
She cites three areas that entrepreneurs should focus on, and the first relates directly to the woes of big-box retailers: forecasting.
“Big companies really struggle with this,” said Sanders, who is an academic forecasting expert. “We see it, obviously, with retailers. Walmart, Target.”
Speak directly to customers to understand changing consumer demand
His opinion is that the biggest companies have become too dependent on inventory algorithms to predict data, but in today’s economy, which has challenged many historical models, “historical data in this space right now is not really good data. It’s not clean data, it doesn’t indicate the future which is very volatile,” she said.
This gives small business owners who can connect directly with customers, to understand what their needs are, a potential advantage that cannot be calculated by an algorithm.
Whether a small business is B2B or B2C, Sanders said direct communication is a “real answer” for them right now to deal with changing consumer behavior.
“What I see with big companies is that they try to hire futurists and find ways to predict demand. But every time we look at the numbers, the consumer price index, all of that, we’re looking back,” Sanders said. “The fact is we’re in a very rapidly changing landscape and I think we have to look forward. Small business owners really need to connect and use their judgment to predict 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 gains with really simple solutions,” Sanders said, “When you’re a small business, you have end-to-end control that a big business doesn’t. a very big opportunity,” she added.
Main Street already thinks it’s operating in a recession
It will be a leap forward for many entrepreneurs to come around to this view. The data shows that the current sentiment on Main Street is pessimistic. The latest CNBC|SurveyMonkey survey of small businesses 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 biggest risk.
In the third quarter survey, a growing percentage of small businesses expect sales to decline over the next 12 months as the economy they believe is already in a recession. The pessimistic sales outlook was the main contributor to the all-time low in confidence. And as small businesses face higher input, labor, transportation and energy costs, few (just 13%) say now is the time to pass price increases on to customers, according to the investigation.
How to Fix 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 of Rutgers Business School and co-founder of the Center for Urban Entrepreneurship and Economic Development, told the Virtual Small Business Playbook Summit that a big mistake business owners make company is not to determine the prices of new products until it is too late. In a time of high inflation, entrepreneurs must base any pricing of new items on a detailed analysis of the costs that go into producing them. The traditional way companies set prices – decide on the product, then once it’s available, watch what competitors are charging – is not the way to operate in this economy. Inflation requires small business owners to set the price, first and foremost, by understanding their costs.
“All of those prices along the supply chain have gone up,” Robinson said. “Shipping costs…anything that has an element of transportation involved, those costs have gone up. So evaluating and valuing your product or service that you provide with those costs, before setting the price, allows you to define 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 seen as an advantage.
“We have relationships. Talk,” he said. “Explore. You have to explain to them that the costs have gone up for these components. ‘In order for me to do this, I have to change some prices,'” he said.
Helping customers understand where a business is in with supply chain inflation will help set prices appropriately, he said. Ultimately, Robinson said, it was really no different than a restaurant that always listed the price of a fish on the menu as “market price”. This may be a simplified example, but it has affected the current situation.
Some restaurants have put up signs out front during the current inflationary period to be transparent with customers about price changes. Robinson didn’t weigh in on that method specifically, but said every business needs to have some form of conversation with customers and potential customers about how prices from two years ago won’t be prices from now. today. Although survey data shows small business owners are wary of this conversation, Robinson said they shouldn’t be.
“I think a lot of consumers understand that, especially if you’re a business-to-consumer type of business,” he said. “It’s about being transparent…helping people understand that prices are changing.”
Map the supply chain with major suppliers
No less important is the conversation with suppliers, and Sanders said data shows that on average, 80% of a company’s spend goes to about 6% of its suppliers. These are the business partners to focus on, and where to pick up the phone, call and build a relationship. “As a small business, that’s really what it’s going to be about,” Sanders said. “What I think you need to do as a small business is really be able to map out your supply chain for your key items, talk to your suppliers, really build partnerships,” he said. she stated.
Most large companies don’t have much visibility below their first-tier suppliers, according to Sanders, so many items become harder to track that are farther down the supply chain, “tier four, tier five,” she said.
A small business can map its supply chain and work with partners to visualize the entire chain and identify risks. Currently, 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 is a firm believer in running a “lean” operation, but in today’s economy, “we have to implement some caveats about what lean means.”
In some cases, small businesses will need to stock additional items, critical items with longer lead times and where price increases are expected. All businesses should also examine their production processes and determine if there are alternatives that could lead to more profitable operations. Keeping extra inventory “goes against lean,” she said, but added that “the benefit for a small business is really being able to manage at the same time, upstream and downstream , and to coordinate them”.
The biggest problem in today’s economy is the mismatch between demand and supply, and this is where Sanders goes back to the problems that Walmart and Target have faced and why small businesses should take an opportunistic view of the situation and be proactive in conversations about the offer. side and end customer side of their operations.
“Big businesses are dinosaurs. … They’re very cumbersome, bureaucratic. As a small business, you’re very flexible,” she said.
The key for small business owners is not to look only one way, either downstream (customer) or upstream (supplier). “But watch them 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’re stuck because they have huge silos. As a small business, you don’t have that, so take advantage of it now.”
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