How Inflation Has Impacted Local Chain Businesses

As if local businesses hadn’t already been dealt with enough challenges in the last few years, inflation has enjoyed a steady run of raising operating costs, shrinking profit margins and putting pressure on consumers to spend less.

Even as economic experts start to see signs that inflation in the U.S. is cooling, today’s businesses must find a way to deal with the ugly aftermath. While no business has been immune to the effects of inflation, small businesses have been disproportionately affected by the increasing cost of materials and labor, as well as the increased economic anxiety that has prompted many consumers to tighten up their spending.

To preserve their business model, retain customers and preserve a path to profit, local chain businesses must find creative, cost-effective solutions to many of the business disruptions that have been brought by rapid inflation.

Here’s a look at the most persistent of these disruptions—and how local businesses have been forced to adapt.

Unreliable Supply Chains Have Forced Local Businesses to Scramble

Supply chain disruptions are hardly a new challenge for businesses, which have been navigating unreliable materials and product availability since the start of the pandemic in 2020.

But inflation is now disrupting these supply chains in new, frustrating ways. As high fuel prices and economic uncertainty increase supply chain costs and force some suppliers out of business, longer supply chains now present increased risk and expense for small businesses.

In response, some local chains are attempting to shorten their own supply chains by working with local suppliers and distributors. While this approach can insulate them from certain disruptions, it also typically leads to higher supply costs—although the rise of shipping costs is helping offset some of this expense.

Profit Margins Have Narrowed

One of the benefits of building a local chain business is creating an opportunity to achieve economies of scale. Unfortunately for those businesses, inflation has wiped out some of those gains in efficiency.

Increased operating costs, from labor expenses to supply chain costs, are compounding the loss of revenue caused by reduced consumer purchasing power. When inflation is squeezing both businesses and consumers, small business profits get caught in the middle—and for a local chain business, this hardship is multiplied across every location.

Business Expansion Has Become More Difficult to Fund

The long-term growth goals targeted by local chain businesses have been compromised, if not completely upended, by the impact of inflation. Rising interest rates on small business loans have made lending more costly while reducing the borrowing power of local businesses.

Meanwhile, businesses are facing a need to maintain more cash-on-hand to weather unexpected new expenses and/or dips in revenue. And, with new business locations struggling to match the profit margins achieved prior to this latest wave of inflation, businesses have less incentive to increase their overhead—which will change the risk/reward balance for businesses eager to expand their footprint.

The Customer Experience Has Suffered

One bit of good news for local businesses is that customers largely recognize the hardship that inflation places on small businesses: 81 percent of consumers are more empathetic toward small businesses raising their prices due to inflation than larger businesses.

At the same time, though, those increased prices are also met by increased expectations: 62 to 68 percent of consumers expect the customer experience to improve as prices rise. That can be a slippery slope as local chain businesses navigate the landscape of obstacles brought by inflation.

When you add together reduced business staffing, ongoing inventory shortages and more limited business cash flows, you create a perfect storm where the customer experience is ultimately neglected. Even businesses that want to prioritize strong customer service and customer satisfaction can find themselves pinched by the realities of economic hardship.

In the end, businesses must walk a fine line between finding creative solutions to improve that customer experience while making sure their spending is sustainable.

As your local chain business confronts the challenges of inflation head-on, a localized advertising strategy can help you address labor shortages, grow your customer base, and cultivate a more satisfying brand experience.

Contact Cox Media today to see how we can help.