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The story of the retail battle of the past few decades cites one of two wars: Amazon and e-commerce against the big brick-and-mortar retailers, and everyone big against small Main Street entrepreneurs. But in today’s confusing economic environment — marked by inflation, supply chain bottlenecks and a volatile shifting consumer spending pattern due to the high prices that followed Covid — small business experts say Main Street should be more optimistic about the benefits. of being small.
The stock build-up and subsequent price cuts from the largest retailers, including Walmart and Target, show that even the best can get this consumer economy wrong. In fact, closer to the relationships on both the supply and customer sides, small business owners may be able to manage a rapidly changing environment more nimbly.
That is the advice of Nada Sanders, professor of supply chain management at Northeastern University. She told the virtual summit of TNZT’s Small Business Playbook on Wednesday that she was “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 great opportunity. Really. Especially for small businesses,” Sanders said.
She lists three areas that entrepreneurs should focus on, and the first is directly related to the problems of big box retailers: forecasting.
“The big companies are really struggling with that,” said Sanders, an academic expert on forecasting. “We’re seeing it at the retailers, of course. Walmart, Target.”
Talk directly to customers to understand changing consumer demand
Her view is that the largest companies have become too reliant on inventory algorithms to predict data, but in today’s economy, which has defied many historical patterns, “historical data isn’t really good data right now. It’s not clean data. does not indicate the future that is very volatile,” she said.
This gives small business owners who can interact 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, Sanders said instant communication is a “real answer” for them right now when dealing with changing consumer behavior.
“What I see with the big companies, they’re trying to hire futurists and figure out ways to actually forecast demand. But every time we look at the numbers, the consumer price index, everything, we’re looking back,” said Sanders. “The fact is, we’re in a very rapidly changing landscape and I think we need to look ahead. Small business owners really need to connect and use 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 really make a lot of profit with really simple solutions,” said Sanders, “When you’re a small business, you have an end-to-end control that a large company doesn’t. I see this as a really big opportunity,” she added.
Main Street already thinks it’s in recession
It will be a leap of faith for many entrepreneurs to arrive at this vision. Data shows that current sentiment on Main Street is pessimistic. The latest TNZT|SurveyMonkey Small Business Survey for the third quarter of 2022 found that small business confidence hit an all-time low, with the largest percentage of small businesses citing inflation as their biggest risk.
In the Q3 survey, an increasing percentage of small businesses predict a decline in revenue over the next 12 months, as the economy they believe is already in recession. The bleak sales outlook was the biggest contributor to the confidence low ever reached. And since small businesses face higher costs in inputs, labor, transportation and energy, few (just 13%) say now is a good time to pass on price increases to customers, according to the survey.
Setting Prices During Inflation
But pricing is also an area where small businesses can communicate and find solutions effectively and directly with their customers.
Jeffrey Robinson, Rutgers Business School provost and executive vice chancellor, and co-founder of the Center for Urban Entrepreneurship and Economic Development, said at the virtual Summit Small Business Playbook that a big mistake entrepreneurs make is not charging a price for new ones. products until it is too late. At a time of high inflation, entrepreneurs must base the pricing of new items on a detailed analysis of the costs involved in producing them. A traditional way companies set their prices – decide on the product and once it is available look at what competitors are charging – is not the way to operate in this economy. Inflation requires small business owners to set their price by understanding their costs first and foremost.
“All those prices in the supply chain have gone up,” Robinson said. “The shipping costs… anything related to transportation, those costs have gone up. So by reviewing and valuing your product or service you provide along with those costs, before setting the price, you can set the price on the right level,” he said.
And then comes the hardest 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 for these components have increased. ‘In order to do this, I have to change some prices,'” he said.
Helping customers understand a company’s situation regarding supply chain inflation will help set prices appropriately, he said. In the end, Robinson said it’s really no different from a restaurant that has always shown the price of a fish on the menu to be “market price.” That may be a simplified example, but in the current situation it has reverberated.
Some restaurants have put up signs up front during the current inflation period to be transparent with customers about price changes. Robinson didn’t specifically consider that method, but did say that every company should have some form of conversation with customers and potential customers about the fact that prices two years ago won’t be today’s prices. While the survey data shows that small business owners are wary of this conversation, Robinson said they shouldn’t be.
“I believe a lot of consumers understand that, especially if you’re a business-to-consumer company,” he said. “It’s about being transparent… to help people understand that prices are changing.”
Map the supply chain with key suppliers
The conversation with suppliers is no less important, and Sanders said the data shows that, on average, 80% of a company’s spending goes to about 6% of their suppliers. Those are the business partners you should focus on and where you can pick up the phone and call to build a relationship. “As a small business, this is really what it’s all about,” says Sanders. “What I think as a small business you need to do is really be able to map your supply chain for your most important items, talk to your suppliers and really build partnerships,” she said.
Most big companies don’t have a good view among their first-tier suppliers, Sanders said, so many items become harder to track that are way back in 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 the risks. Right now, retail inventory issues may make small business owners more reluctant to stock – even if it’s the start of peak season, with back to school and then the holidays. Sanders said she strongly believes in running a “lean” operation, but in today’s economy “we have to make some caveats about the meaning of lean.”
In certain cases, small businesses will need to stock additional items, critical items with longer lead times and where price increases are expected. All companies should also look at their production processes and whether there are alternatives that can lead to more cost-effective operations. Carrying extra inventory “flies in the face of lean,” she said, but added, “the benefit for a small business is really being able to manage and coordinate upstream and downstream at the same time.”
The biggest problem in today’s economy is the supply-demand mismatch, and that’s where Sanders gets back to the issues Walmart and Target have faced and why small businesses need to take an opportunistic view of the situation and be proactive in conversations. on both the supply side and the end customer side of their operations.
“Big companies are dinosaurs. … They are very heavy, bureaucratic. As a small company you are very nimble,” she said.
The key for small business owners is to not only look in one direction, either downstream (customer) or upstream (supplier). “But at the same time, look at them, marry them, watch them and connect with customers, connect with all the suppliers,” Sanders said. “Big companies can’t do that. They’re stuck because they have huge silos. As a small company you don’t have that, so take advantage of that now.”