Superfit Hero

Feb 22, 2022

11 min read . Updated: 22 Feb 2022, 07:28 PM IST Ruth Simon, The Wall Street Journal Larger companies have used their heft to turn higher demand into increased earnings, but smaller firms are adding debt and burning cash Share Via Small businesses are bearing the brunt of supply-chain pressures and rising prices, with many tapping their cash reserves or taking on debt just to compete with larger rivals. Most smaller firms don’t have the heft and sophistication to thrive in an environment of booming demand and short supply—the same forces that many of America’s biggest companies have been able to ride to higher earnings. High inflation, a tight labor market, stressed supply chains and dwindling liquidity are straining many small businesses, exacerbating the existing power imbalance between small and big firms. It all deepens the challenges that small companies have faced since the onset of the Covid-19 pandemic. And stresses will mount for those that take on more debt as the Federal Reserve raises interest rates. Ethel’s Baking Co., a wholesale bakery in Metro Detroit, struggled last year to get deliveries of chocolate, butter and other ingredients when supplies ran short. In its first 10 years of operation, the 27-person company usually placed orders weekly or monthly. After the pandemic hit, that way of operating put it behind larger food manufacturers with annual contracts. “When you don’t have a contract, you don’t have priority," said Jill Bommarito, founder and chief executive of the maker of gluten-free dessert bars sold at Wegmans, Whole Foods, Meijer, Kroger and other grocers. Sales are strong, Ms. Bommarito said, but she expects supply chain and inflationary pressures to persist. Many large corporations have used their scale to successfully navigate the twin threats of supply-chain disruptions and rising prices, with some reporting 2021 sales and profits exceeding 2019 levels. Small-business owners—those who serve consumers and those that sell to other businesses—say demand remains strong. But they face a longer-term impact on sales if their businesses cede customers to larger rivals with the resources to serve them. Two-thirds of small businesses impacted by supply-chain constraints said suppliers are favoring large businesses because of the volume of orders, according to a recent Goldman Sachs survey of more than 1,400 businesses. Eighty-four percent of small businesses said inflationary pressures had worsened since September, according to the Goldman survey, with more than three-quarters reporting that inflation had hurt their business’s financial health. “Larger firms have been able to weather rising costs and labor shortages better than smaller firms, which is likely a function of larger workforces, greater pricing power and stronger margins that have allowed them to absorb economic pressures more easily," said Mahir Rasheed, U.S. economist at Oxford Economics. Some small businesses are confronting their most precarious financial situation since the pandemic’s initial impact, as government aid has waned. Mr. Rasheed said he expects the squeeze on small firms to ease over the next year as sidelined workers return to the labor force and spending on services picks up, taking pressure off supply chains. But the longer it takes to return to normal, the harder it will be for small firms to compete for business and grow their workforces, he added. More than 12% of small companies surveyed from late November through mid-January said their business will never return to previous levels of output, according to the Census Bureau, the highest share since the survey began in April 2020 and up from 7.1% in June 2021. In late January, nearly 27% of small businesses tracked by Gusto, a payroll and benefits provider, had less than one month of payroll expenses in reserves, up from 21% a year earlier. The majority of those businesses were concentrated in services industries. “Today, [small] businesses have fewer reserves, and therefore less resilience to face new waves of the pandemic and other headwinds," said Gusto economist Luke Pardue. Superfit Hero, a maker of plus-size activewear, has been sold out of most sizes of its popular black leggings since late November because it couldn’t secure the fabric it needs until this month. “We are literally losing thousands of dollars by not having this," chief executive and founder Micki Krimmel said. In 2020, larger brands snapped up just about all of the specialty fabric coming from Taiwan, making it difficult for companies like Superfit, which is based in Riverside, Calif., and has four employees, to secure inventory, Ms. Krimmel said. Now, supply-chain snarls have stretched delivery times by six to eight weeks. Superfit has responded by adding new fabrics and developing a line of swimwear. Manufacturing challenges have complicated the math for Superfit, which sells online and through a partnership with Kohl’s Corp. When its factory shut down during the pandemic, Superfit reached out to a dozen manufacturers. Most of them wanted to produce thousands of a given item, not the 300 pieces of each style it needs. “The room to negotiate has definitely gotten much smaller," she said. Superfit now works with four factories but manufacturing costs have doubled. Large companies regularly use strategies that help cushion the impact of sudden price jumps, such as signing fixed-price contracts or putting a collar on price increases by tying them to the producer-price index or other measures, said Robert Handfield, a professor of supply-chain management at North Carolina State University. Small companies typically don’t have large, sophisticated purchasing teams. They often purchase on the spot market or from distributors who pass along cost increases from major suppliers. P & R Metals Inc., a fabricator of specialty industrial flooring, now holds daily meetings to dig into unexpected surcharges from transportation companies. James Robinson, owner of the Birmingham, Ala. company, said he now pays United Parcel Service Inc. by check instead of allowing it to automatically debit payments from his company’s bank account. That gives him more time to investigate the extra fees. “How can we do our job when we put down $2,000 for a shipment to New York and it costs $5,000?" said Mr. Robinson, whose company has 25 employees. In a call with analysts in early February, UPS said fuel and demand-related surcharges drove a 10.5% increase in revenue per package delivered in the U.S. in the fourth quarter. UPS reported its highest operating profit in its 114-year history in the fourth quarter. Small businesses account for nearly 26% of U.S. domestic volume, the company said. “Our pricing reflects the value we provide to shippers, and includes fees to cover increased fuel costs, and handling charges for heavy and oversize packages that are more expensive to process," a UPS spokesman said. Rates support network enhancements and high service levels, he added. In December, Honeywell International Inc. added an 8% inflation surcharge for existing and new orders from its U.S. Fire unit. In a call with analysts in early February, Honeywell chief executive and chairman Darius Adamczyk said that “swift pricing actions allowed us to stay ahead of the inflation curve," increase revenue and expand profit margins. Haig Service Corp., a 27-employee provider of fire, security and safety systems, has been waiting more than eight months for products from Honeywell. Richard Haig, chief executive of the Green Brook, N.J.-based company, said he can’t pass along the retroactive increases to his own clients who placed orders in 2021. “They are already bid projects and we can’t raise the price," he said. A Honeywell spokeswoman declined to comment. In July, Rockland Trust Bank said it wouldn’t renew Haig’s line of credit, which expired in November. Rockland granted the company three one-month extensions but said that later in February it will reduce the size of the credit line and increase the interest rate. Rockland told the company that it didn’t want to lend to anyone who needed a line of credit of less than $5 million, Mr. Haig said, and rejected the firm’s request to turn the outstanding balance into a term loan. “We have met all our covenants. We always have," Mr. Haig said. “It’s just because of the size," he added. “The timing is really terrible." Rockland Trust doesn’t comment on individual customers, a spokesman said. “Rockland Trust is a proud partner of small-business owners," he said, adding that the bank provides business loans ranging from $5,000 to $75 million. Sixty-two percent of small businesses said they had applied for a loan or considered doing so to fund additional expenses because of inflation, according to a survey of more than 2,000 small firms by Hello Alice, a software platform that provides resources for small-business owners. Colorado Yurt Co. in December asked its lender, Timberline Bank, to raise its credit line to $1 million from $300,000 so it can boost inventory. Since the end of last year, Timberline has seen an increase in requests for higher credit lines from existing borrowers and for new lines of credit from small businesses that previously financed operations using their own cash flow, said Jeff Taets, co-chief executive of the Grand Junction, Colo.-based community bank, which has $650 million in assets. Funds from the federal Paycheck Protection Program and other aid efforts initially helped cushion the economic blows, he said. “That liquidity is waning," said Mr. Taets. “That’s why we are starting to see these requests." Colorado Yurt received a $375,200 forgivable PPP loan in 2020. “That helped us get into 2021, and we’ve been crushed at the end of 2021," Mr. Gibson said. Supply chain challenges and pricing pressures have hit nearly every facet of the Montrose, Colo.-based yurt, tent and teepee maker’s operations. Still, it sees an opportunity to capture high demand. “We think we have the potential to be another 35% larger this year if we can survive the supply-chain issues and deliver on time," said owner John Gibson. “We can’t go smaller as a business and survive. We have to try and get bigger." Mr. Gibson and his wife, Kelly, bought the 46-year-old company in early 2020. A supplier delivered only two of a 200-roll order for tent fly fabric, used to keep the structures waterproof. Prices for most types of lumber used by the company more than doubled last year. Three of the company’s 64 employees now focus on sourcing and counter-sourcing, normally a job for one person. The director of product now runs the sourcing team instead of focusing on innovation. “We have come to the conclusion that we are not in control," said Mr. Gibson. “That is not a comfortable place to be." Some firms such as QualTech Technologies Inc., a manufacturer of custom electronics in Willoughby, Ohio, now regularly turn to brokers for semiconductors and other components in short supply, sometimes at five or 10 times the normal cost. “We might do it a couple of times a year in a very normalized market," said QualTech president David Vance. “Now, we do it every day." The 38-person company has been able to pass along about half of the cost increases, Mr. Vance estimates, but the company absorbs the rest. “It’s not the customers’ fault," he said. “It’s just the sheer inability for a small company to manage the velocity at which [prices] change." Some price increases can’t be passed along. At Su Casa Furniture, a furniture and home goods retailer, employees now spend as many as 40 hours a week changing prices. Pre-pandemic, Su Casa repriced items twice a year. Vendors now routinely add surcharges of as much as 21% to items ordered months earlier. “We have no other option but to eat that price increase," said Su Casa owner Nick Johnson, who has two stores in Maryland and two in Delaware. Businesses such as Su Casa have struggled to keep up with wages paid by McDonald’s Corp., Amazon.com Inc. and other big employers. “If somebody comes in to apply here and we tell them anything short of $15 [an hour], they don’t even take the application," said Mr. Johnson, who has 12 full-time and 26 part-time workers. Sixty-five percent of small-business owners surveyed in February said hiring challenges are impacting their ability to operate at full capacity, according to a survey of more than 590 small businesses for The Wall Street Journal by Vistage Worldwide Inc., a business coaching and peer advisory firm. Advanced Supply Chain International, a supply-chain consulting business, is struggling to predict the future direction of wages, complicating its efforts to bid on five-year contracts. “We don’t have the working capital to fund a year of inflationary wages and wait for everything to catch up," said Christine Hopkins, chief executive of the Anchorage-based company, which is focused on the oil and gas and other asset-intensive industries. It has 20 employees, down from 190 in early 2020. Ms. Hopkins’s company recently began going after higher-margin contracts that require it to lease and operate warehouse space, jobs it previously passed up because it deemed them too risky. “It feels like there are less small businesses, and the bigger companies just got bigger," she said. Ethel’s, the wholesale bakery outside of Detroit, last summer hired its first director of operations and purchasing, who spent much of his first few months negotiating contracts with important suppliers. The baker has increased inventory by 50% to help control pricing and minimize the risk of supply-chain disruptions, and set up a line of credit to cover the added expense. Sales have more than doubled in the past year. But the baker put off the introduction of an individually wrapped version of its popular Turtle Dandy bars because of rising chocolate prices. With profit margins squeezed, it will soon raise prices, a step its owner had hoped to avoid. “I don’t see any quick resolution," said Ms. Bommarito, the company’s founder. “This is not a temporary situation. We are in it for the long haul." Subscribe to Mint Newsletters