Rising commodity prices are the bane of many a small business. Commodities like oil, wheat, rice, gold, and others have been seeing a steady increase since the beginning of the sub-prime mortgage crisis and look set to rise steadily as 2008 carries on. Historically, rising commodity prices have been detrimental to many small business owners. How does a small business weather both a potential recession and an increase in the cost of raw materials?
Some businesses, like larger bakeries are moving into previously niche markets hungry to tap into the potential for growth in health-conscious food; commodity prices are rising rapidly (wheat prices, for example, have risen 100% since January of this year, as domestic wheat production is down 1/3 from 1981), and many smaller bakeries are starting to feel it. It's not just bakers who are at risk - nationally, everything from coffee to dairy has increased in price since the beginning of this year, and while I'm using bakeries as the model for strategies to counteract rising commodity prices, the strategies are applicable to many other small businesses, as well.
Maintain Standards
Continue to meet your own high standards. Consumers are aware of the increase in commodity prices, and will be more forgiving of a price increase in a specialty product that they already pay a premium for, than they would be of declining quality. Something like good bread or pastries are small luxuries. Consumers are more likely to cut their overall spending on large or medium ticket items, such as high-thread count Egyptian cotton sheets.
Even during difficult economics times certain sectors, such as health food, will see continuous growth. If you can convey the quality of your brand and the promise that it will not decrease, you can keep customers and earn new ones.
Compromising quality is often the first tactic that a business owner will turn, too. Avoiding it will save you from the fate of many of your competition, as dropping prices are an indication of desperation, and send a subliminal message to your customers that not only have you compromised your quality, but you're hurting as a business, too.
Bargain hunters might show up in droves, but they make an unreliable and disloyal customer base.
Win New Clients & Satisfy Your Base
Free samples or trials (if you're supplying restaurants or other retailers, for example) can do a lot to encourage new business. If you're confident in the quality of your product, people will respond positively to your confidence and your product. Tying in free samples or trials with a new and aggressive marketing campaign can be a one-two punch that allows you to win business.
Where and When to Cut
There are areas where you can cut without a reduction in quality, and you should take advantage of that. If you have unnecessary warehouse space, or leased space that's lying in wait, reduce that. Re-negotiating a lease might be possible, too.
With new manufacturing technologies available now, even smaller businesses might be able to mechanize certain processes, which will minimize the impact of a high staff turnover rate, and also allow you to pay your remaining staff more.
Wait It Out
A lot of smart bakeries bought larger quantities of flour in anticipation of rising wheat prices, which allowed them to either stave off of price increases or gave them the luxury to increase them slowly without a decrease in profit. Keep an eye on market forecasts.
Commodity prices are expected to gradually decrease throughout 2008, and if you can leverage existing capital or use lines of credit to maintain prices, you'll be able to weather the storm, as well as pick up shortfall from competitors who fall by the wayside. But as commodity prices are by their very nature stochastic, it's best to bank on the reliability of your business model and efficiency, rather than on miracle recoveries.
