Surviving a Cost Crunch

Like many businesses these days, Summer Fresh Supermarkets is grappling with rising costs of food, fuel, shipping and petroleum-based plastic packaging materials - but the six-store grocery chain won't face the mounting expenses alone.

"Those are things that we factor in to the overall cost of the product, and often have to pass on to the customers," said Summer Fresh President and CEO Brent Brown.

Given current economic conditions, businesses have to decide how to make necessary price increases without alienating clients and customers, which would further cut into profits.

Finding the cause

When debating whether to raise prices, businesses should first take a hard look at what's pushing up the costs of doing business, according to Rayanna Anderson, director of the Missouri State University Small Business Development Center.

"If it's a temporary increase in costs, most businesses try to absorb that," Anderson said. "When it becomes a permanent increase in costs, most businesses need to evaluate their price, and probably raise it."

It's also important to make sure that budget pressures are resulting from increased operations costs and not from excess spending in other areas, according to Alan Nippes, partner with Springfield-based accounting firm Samek Fritz & Co.

Nippes recommends taking a hard look at the company's overall budget to make that distinction.

"If you could do that, you could get a good feel for why you're having a cash shortfall," Nippes said. "Is it because you're not getting as much revenue as you thought (you would), or is it because you had more expenses than you counted on?"

If expenditures are the culprit, Nippes pointed out, it would behoove the company to try to decrease those expenses before raising prices for their customers.

"Maybe there are some inefficiencies in there that you can approach line item by line item and say, 'We're spending more on advertising than we need to be, or we're spending more on fuel and there's nothing we can do about that,'" Nippes said.

"If you can compare expenses to a budget, you can pretty quickly tell if variances are something you have control over or not."

If, however, the budget says that the higher costs aren't due to excess spending, companies have to make a choice.

"If you can afford to absorb it and you think that losing some customers may be a consequence of raising your price, that's the judgment call you have to make," Nippes added.

"If you feel you can't make the operating margin you need to survive, that's when you find a way to raise prices."

Softening the blow

When a company comes to the decision to raise prices, the problem then becomes doing so without alienating customers. Experts say it can be done successfully.

Paul Wannenmacher, president of Wannenmacher Advertising Co., said most companies are fearful of raising their prices, realizing that most customers are getting hit economically from all sides and have little tolerance for another price hike.

"If the price goes up, it's noted - specifically if it's a regular user of that product," Wannenmacher said. "Will the customer stop buying? Maybe yes, maybe no. But it doesn't take many people dropping out for a price increase to not really net out."

Summer Fresh's Brown said the grocery chain has tried to avoid raising prices on "commodity" items such as bread, milk and eggs, even if it means taking a loss on those items, because those products drive customer traffic into the stores.

Summer Fresh has, however, raised prices on other goods such as soda and canned goods as those individual products dictate.

"We have to have certain margins in certain departments to stay in business. If (costs) go up 5 percent, we just pass that along to the customers," Brown said.

SBDC Director Anderson said that with price increases, as with many other things, honesty is the best policy.

"I would promote being upfront - usually a little explanation that allows you to empathize with the customer helps," she said. "Addressing it is more positive than just raising the price, especially if you're selling to people who have the option of shopping at other businesses for the same product."

Wannenmacher, however, said it's difficult to approach each customer and explain the reasons behind every price bump.

"If you're a restaurant running through 1,500 people a day ... you're not going to run an ad that says, 'We're so sorry; we had to raise the price of our French fries,'" he said. "But if someone asks, you have people prepared to say, 'Costs have increased dramatically, and in order for us to survive, this is what we need to charge.'"

Despite efforts to make the impact of price increases as minimal as possible, Nippes reminded businesses that the idea of a price hike should not be taken lightly.

"There are some people out there who'd say, 'If I'm paying more for something, it must be higher quality.' They wear it like a badge of honor, like people who buy high-dollar automobiles or services," Nippes said. "But for the lion's share of us, an increase in price is something we take pretty seriously," he added.[[In-content Ad]]