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Can You Protect Your Franchise From Inflation?

The supply chain squeeze and high demand for goods have converged to create a perfect storm of rising prices. So, what can business owners do to protect their bottom-line from the erosive effects of high prices?

February 28, 2022

Inflation is up 7.5% and consumer confidence has taken a serious hit. That’s bad news for consumers and businesses, especially small companies. And many economists predict that this inflationary force will continue to threaten the liquidity of small businesses for at least the next year or two. So, what can business owners do to protect their bottom-line from the erosive effects of high prices?

Secure Materials Now

The supply chain squeeze and high demand for goods have converged to create a perfect storm of rising prices. As of this month, oil prices are nearly $100 a barrel and the price of lumber shot up a whopping 25.4% in January. Right now there is a shortage of everything from car parts to glass. And these shortages are impacting businesses’ ability to meet consumer demand.

Superfit Hero, a maker of plus-size activewear, has been sold out of most sizes of its popular black leggings since late November because it couldn’t secure the fabric it needs until this month. “We are literally losing thousands of dollars by not having this,” chief executive and founder Micki Krimmel said. (source)

To avoid losing money because you can’t meet consumer demand due to supply-side bottlenecks, get strategic about securing your materials BEFORE you need them. Consider the following:

  • Long-term vendor contracts. Ask your vendors if they’re willing to sign long-term contracts. If you can consistently purchase materials in bulk over the course of a year or two, they’re more likely to prioritize your business when materials are scarce.
  • Use debt to make bulk purchases. Even as the Federal Reserve promises to raise interest rates as much as a half-point this spring, low-interest debt is still available. Use your credit line to purchase materials, especially while interest rates are lower than inflation.
  • Find storage solutions. If you’ve been operating on a “Just-in-Time” system, now is the moment to invest in storage for your inventory. Consider keeping a reserve of materials on hand so you can mitigate the impact of supply chain delays and shortages.
  • Consider cooperative purchasing groups. Purchasing cooperatives are groups of businesses in the same industry who collectively buy supplies and materials in large quantities at bargain prices. There are 250 cooperative purchasing groups in the United States. Joining a cooperative could position you to compete with big-box stores when competing for limited supplies.

Some small businesses such as Ethel’s Baking Co. learned the hard way that failing to secure critical materials could prove dangerous, even for a successful business.

Ethel’s Baking Co., a wholesale bakery in Metro Detroit, struggled last year to get deliveries of chocolate, butter and other ingredients when supplies ran short. In its first 10 years of operation, the 27-person company usually placed orders weekly or monthly. After the pandemic hit, that way of operating put it behind larger food manufacturers with annual contracts. (source)

Lock In Low-Interest Rates

The Federal Reserve has promised to raise interest rates in March (as much as a half-point), and some economists predict the Fed will continue to raise interest rates up to six times over the course of this year. (source) To get ahead of the interest rate hikes consider the following:

  • Refinance high interest debt.
  • Extend your credit limit.
  • Take out a low-interest line of business credit.
  • Protect your cash — avoid spending it if possible.
  • Pay all your bills on time and keep a low credit utilization rate.

Make Your Workplace Desirable

Not only is the cost of materials going up so is the cost of labor. On top of that, there is currently a labor shortage. Many businesses can’t find the people they need to keep their businesses open and fully operational.

There’s a really interesting article in Business Insider that features Zazie, a French restaurant in San Francisco that says it hasn’t suffered from the labor shortage because of the benefits they offer employees. Servers and other employees get health insurance, a 401(k) employer match, and paid family leave. They even share profits with their employees.

Ethel’s Baking Co., a wholesale bakery in Metro Detroit, struggled last year to get deliveries of chocolate, butter and other ingredients when supplies ran short. In its first 10 years of operation, the 27-person company usually placed orders weekly or monthly. After the pandemic hit, that way of operating put it behind larger food manufacturers with annual contracts. (source)

Zazie has 40 employees and nearly half of them have been with the company for at least 10 years. During the “great resignation” Zazie said they only lost one employee and that’s because they changed careers.

While this profit-sharing model will not work for every business, it is an example of the type of creativity required to survive this wave of inflation that probably won’t end anytime soon.

West Coast Franchise Law

If you have any questions about franchising, please contact the experienced franchise and business law attorneys at West Coast Franchise Law today at (206) 903-0401 to discuss your situation. Nate Riordan is a 2023 Franchise and Bankruptcy Super Lawyer with over 20 years expertise helping clients achieve their business goals.