2023 Will Be a Year of Uncertainty for Family Businesses
Complicating factors include inflation, interest rates and midterm election fallout.
Over the past two years, the virus on everyone’s mind was COVID. Today, the virus is inflation.
As the cost of goods and wages rise, the country’s biggest private employer segment — family-owned businesses — is hoping for the medicine to cure cost-wary customers, staff layoffs and the inevitable, painful downward business spiral that comes with inflation.
One year ago, inflation was a blip on family business monitors. According to 2021 research by Family Enterprise USA, just 11% of family businesses believed inflation was a risk. And, in 2020, inflation registered a mere 2% of worry among family business owners.
How fast things have changed. Today, 50% of voters in the midterm elections said inflation (or the economy) influenced their vote. Simply put, inflation is top of mind. When our next Family Enterprise USA survey is finalized in February 2023, it will be a pretty good bet that inflation will rank near the top of any list of worries facing family businesses.
Inflation affects everything from shelter costs to gas prices to daily purchase decisions to mortgage payments. In 2021, some economists and the Federal Reserve said inflation was “transitory”. They now believe 8% per-year inflation will be with us for a year or more. But economist predictions have been faulty at best. The general sentiment among family business executives is “Buckle up.”
So, how do family businesses prepare for this new burden?
Family businesses represent 59% of the America’s private workforce, or some 83.3 million U.S. jobs. Family businesses in America consist of 23.7% manufacturing, 10.4% construction/facilities and 9.75% in real estate, according to early-2022 family business research conducted by Family Enterprise USA.
As part of my work, I speak with multigenerational family business executives every day. What they tell me does not paint a pretty picture.
“Inflation is bad. It’s bad for our customers and bad for our business,” says Steve Wells, co-chief executive officer at family-run American Food & Vending in Woburn, Mass. “Think about it: If all we do is raise prices by the 8% inflation rate, they will just stay even and our customer pays for that increase for the same exact product. The result is, as inflation takes off, we have an upset customer and our family company does not make one penny more,” said Wells.
Wells believes a far worse result is customers will slow and ultimately stop spending on discretionary items, like the items his company sells: coffee and lunch-at-work food products.
“Inflationary impact on the economy is tremendously negative and, in the end, everyone loses,” says Wells.
Inflation Fighting Strategies
As Wells outlines, one simple proactive option for family businesses (or any business) is to raise prices with inflation. But with a twist.
The strategy goes like this: Raise prices with inflation, but, if it cools, offer discounts. This approach, the thinking goes, maintains margins and makes it easier to be flexible in navigating inflation’s ups and downs.
Of course, this remedy doesn’t stop the underlying issue of controlling inflation. According to the most recent U.S. Bureau of Labor Statistics’ Consumer Price Index data, over the last year, all items indexed increased 8.% before seasonal adjustment. Increases in shelter, food and medical care were the biggest contributors to the increase.
“Family businesses have to know how to change with the economy,” says Russ Sullivan, Capitol Hill tax expert and partner at law firm Brownstein Hyatt Farber Schreck. “The midterms showed us things are changing fast and there are some critical economic and tax policies family businesses need to face right now. Do you just pass along higher costs? What effect do these short-term pricing strategies have on the business long-term? And what about leaving a strong business for the next generation?”
Will the Federal Reserve tame inflation in 2023? It’s not like The Fed hasn’t blundered in the past or had to make some hard calls, such as the Paul Volker moves in the early 1980s. There was also 2009 and The Great Recession, which was fueled by the collapse of complex global mortgage securities the Fed didn’t see coming. And just last year, there was the misreading of labor shortages, logistics jam-ups and the long-term effects of the gusher of free government pandemic money?
The Fed’s slow-walking policy errors, critics say, paved the way to make 2022 the worst year in the financial markets since the 1930s. To be fair, a series of unforeseen events sparked by the global COVID pandemic, supply chain disruptions, emergency government stimulus payments and the war in Ukraine did not help.
The final chapter in putting the inflation genie back in the bottle is a long way from being written, but there is universal agreement that the next year will be pivotal for The Fed in threading the needle between killing the economy and cooling off inflation rates to around 2% per year.
Balancing Costs and Demand
Like all businesses, family businesses want to source materials at the lowest possible cost. This can create shortages of low-cost raw materials. This, in turn, leads to production delays, declines in revenue and price-hike temptations, which again all leads to inflation.
“The dairy industry and, in particular, the butter market have seen unprecedented price increases,” says Mark Peters, chief executive officer of multigenerational family-owned Butterball Farms in Grand Rapids, Mich.
It’s true: The increased cost of butter on retail shelves has made headlines and even spurred jokes from late-night comedians.
“My concern is how our government is going to respond to it,” Peters says. “When you stimulate the demand side of the economic equation and simultaneously choke the supply side, you end up with massive system disruptions that will take years to clear out. We’ve invested in additional capacity and one concern is that with higher prices the market demand will be lower than we forecasted, which means our new capacity could be unused. We have to eat those costs, maybe increase prices, and wait and see.”
When things get too expensive, Peters offers, consumers stop buying or they wait. This downward spiral adds fuel to the machinery that makes the situation worse and longer-term. And as Peters has found out, it makes it harder for businesses to invest in themselves with confidence.
In the short term, inflation can lead to increased wages for employees as they seek to maintain their buying power while prices rise. But over the long haul, this puts pressure on businesses and leads to those same higher prices, as well as a predictable decline in sales and profitability. This cycle is particularly hurtful for some industries, like healthcare, hospitality and food, where consumers can easily stop spending on health-related items, vacations, dining out.
The cure for inflation is not easy, but family businesses are on the front lines of taming it.
What’s important is to not sit idly by. Make the right decisions long-term for your business, employees and customers. Watch your government leaders carefully. Let them know you are watching, and let Congress — and the new Family Business Congressional Caucus — know what you like and don’t like about their inflation policies.
If we don’t let our voices be heard, inflation’s effect on family businesses will be permanent, and that’s not a good prognosis for our economy.
Pat Soldano is president of Family Enterprise USA and Policy and Taxation Group, Washington, D.C.