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Inflation, interest rates push small businesses to hike prices as holiday season hits

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WATCH: New inflation numbers are out, and Canada's rate is holding steady at 6.9%. Personal finance expert Rubina Ahmed-Haq has a full roundup of the latest financial headlines – Nov 16, 2022

With the holiday season ramping up, it’s a critical time of year for small businesses.

But for retailers like Calgary’s UTB Fashions — facing the pressures of inflation, higher interest rates and a possible recession on the horizon — the walls seem to be closing in at just the wrong time.

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Ursula Wegen, who owns and runs the shop with daughter Kris Scholes, says they’re now being forced to make impossible decisions on pricing to compete with big-name retailers while leaving enough on the table to make it to 2023.

Next year will mark two decades in business for UTB, which started as general clothier Under The Bridge, but has evolved to sell gifts made by local Calgary artisans and “unique” fashions for women and children.

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“Timeless, good quality for a decent price. That’s what we’ve always been about,” Wegen says.

Women and children’s clothing and artisan gifts on display at UTB Fashion in Calgary, Alta. Provided

But while the store has been able to keep its prices steady for much of 2022, the pressure is ramping up this fall with costs from suppliers rising as much as 25 per cent, she says.

Other operating costs for UTB have gone up as well.

“Everything from the insurance to the security to the cost of us even getting here like, your gas tank. It costs me $10 a day just to get to work where before, that was minimal,” Wegen says.

What’s hitting UTB the hardest right now, she says, are higher inflation rates.

In an effort to tamp down on rampant inflation, the Bank of Canada has increased its policy rate 3.5 percentage points so far this year, raising the cost of borrowing on a number of loans such as mortgages, lines of credit and some credit cards.

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That’s hitting small businesses like UTB particularly hard, as many had to go into heavier debt to get through the COVID-19 pandemic.

The Canadian Federation of Independent Business (CFIB) estimates that 64 per cent of small businesses are carrying an average of $144,000 in pandemic debt. The Canada Emergency Business Account (CEBA) provided some applicants with $40,000-$60,000 in loans interest-free, a portion of which would be forgiven at repayment.

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Wegen says she’s still paying many suppliers with credit just to make sure she’s able to secure products, but she’s nearing her limit.

“Interest rates have gone up phenomenally. So that means my monthly costs have gone up about $1,000,” she says.

Between inflated product prices and higher debt costs, the 19-year retail veteran says something is going to have to give.

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“My other costs have gone up. I’m going to have to start bumping things up a little bit. Otherwise, we can’t pay the rent.”

Most small businesses planning price hikes

Data kept by the CFIB shows UTB Fashion isn’t the only business feeling pressure to raise prices.

The organization’s latest Business Barometer report for October showed that, on aggregate, member businesses surveyed plan to raise prices 4.2 per cent in the next 12 months.

While that’s down from the peak of 4.9 per cent seen in May, more than half of businesses said they expect to raise prices by five per cent or more in the year to come.

In the next 12 months, more than half of CFIB members surveyed are planning price hikes of five per cent or more. CFIB / Global News

“What we’re seeing right now is unprecedented inflation and price pains for small business owners,” says Simon Gaudreault, CFIB’s chief economist and vice-president of research.

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“They’re being hit from all sides at the moment. It’s sort of a perfect storm for a lot of businesses.”

Gaudreault says that in addition to higher prices on goods, lingering supply chain issues and fuel costs, many businesses in Canada are feeling pinched by an ongoing labour shortage.

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The latest CFIB data shows member businesses have more than 600,000 vacant positions at the moment, and those trying to fill positions are likely to be paying more for new hires as well, Gaudreault says.

Statistics Canada’s inflation report on Wednesday showed that average hourly wages were up 5.6 per cent in October, accelerating from September.

“The labour shortage is applying pressure on the small business payroll,” Gaudreault says.

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Holiday competition tight

While businesses are feeling more pressure than ever to raise prices, it comes at a time when competition is tight heading into the holidays.

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While UTB often drops its prices on Black Friday and through the rest of the year, Wegen says the shop has been offering steeper discounts on some of its products as early as October as other competitors — big box stores and online giants — put their merchandise on sale early this year.

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“We have to do it, too. Otherwise, people don’t come, and I don’t blame them. They’re looking for the best value for their dollar, too,” Wegen says.

“I think unless you go on sale, you’re not going to get people through the door.”

Ipsos polling conducted exclusively for Global News last month shows that 30 per cent of Canadians are looking to spend less on holiday shopping this year, with nearly half (45 per cent) worried they won’t be able to afford gifts for their loved ones this season.

Mega retailer Walmart reported Tuesday that it’s seeing an uptick in business as households look to stretch their dollars. Chief Financial Officer David Rainey said the company expects consumer spending to slow as high prices on food affect general merchandise spending.

But he also told investors that Walmart is “well-equipped” to gain market share through this period of “macroeconomic uncertainty.”

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Gaudreault says that with inflation eating away at consumers’ pocketbooks and big names flexing their pricing power over small businesses, retailers are constrained by what kinds of price hikes they can realistically bake into their holiday plans.

“They cannot raise prices sky-high,” he says.

Recession fears reinforce holiday importance for businesses

The holiday season is especially important to small businesses this year who are in dire need of a “cushion” ahead of a possible recession in 2023, Gaudreault says.

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In more normal economic cycles, businesses would have had many years in a row of strong earnings that they could squirrel away and prepare for leaner days, he explains.

But some 58 per cent CFIB members say they still have not seen sales recover fully from the COVID-19 pandemic, making their “capacity to withstand a recession … limited,” Gaudreault says.

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“A lot of small businesses are just out of two years of hell, and they’re still very much into that hell,” he says.

Wegen says it will still take years before UTB has bounced back from its COVID-19 impacts.

The pandemic did offer the shop some silver linings — it pushed Wegen and her daughter to source new products and they leaned into stocking more products from local artisans, which has helped lately to avoid hefty freight fees.

The shop has started branching out a bit recently and battening down the hatches ahead of the holidays and the looming economic uncertainty.

Wegen says UTB is heading out to Christmas markets more often and luring customers to the shop with incentives like giveaways.

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She’s also been using whatever cash is on hand today to pay suppliers and get ahead on rent to ensure UTB can keep the lights on in the first quarter of next year — always a slow one in retail, she notes.

Wegen is also adapting her expectations about how much business UTB can realistically bring in during the typically busy holiday season, and says other stores around her in the neighbourhood are taking the same approach.

“There’s not going to be profit this season. So it’s just, maintain, stay alive and hope next season’s better,” she says.

— with files from Global News’ Anne Gaviola, Saba Aziz and Reuters

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