Small businesses are in for a perfect storm in 2019, which could push scores of them off the cliff.
The first part of this storm is payroll, and it’s a tsunami. Many cities and states began hiking up minimum wage a few years ago, and this push for a higher minimum wage continues in 2019.
Some states will increase the minimum wage to match the cost of living, such as Ohio and New Jersey. Other states will raise it in response to legislation created to establish a “living wage.” New York passed their own legislation to increase minimum wage to $15 an hour in New York City by 2018, for example. Washington D.C has also introduced legislation that aims to raise the minimum wage to $15, which will come into effect by July 2020.
“The problem isn’t just the minimum wage hikes,” says Themis Rizos, a franchisee of two Mikel Coffee Community Stores and Kaptain Jimmy’s Restaurant in South Massachusetts. “It’s the difficulty to find workers. And the hike in the prices of all the materials we buy for our businesses.”
That’s why he’s pessimistic for the future. “For small businesses, things begin to look like the pre-crisis Greek economy,” he adds. “With all these costs rising, it’s hard to earn a good living. It’s better to become a government employee.” And he isn’t alone. Small business optimism has plunged in the last three months.
The second part of the storm is the receding of free money. This is thanks to increases in interest rates and quantitative tightening, which has led to less liquidity and increased the cost of money for businesses already in debt.
This drop in “free money” is also expected to impact the economy of the United States. The Gross Domestic Product for the US (a measure of how much the economy produces in a year) is expected to fall from 3% in 2018 to 2% in 2019 according to Goldman Sachs.
This is terrible news for businesses across America and their bottom line.
To put it simply, this perfect storm is set to put the squeeze on American small businesses at both ends of their operation. It’s going to lead to higher costs while also reducing revenue through a slowed-down economy.
There’s a difference between small and big businesses though, which is why it won’t be so bad for the big players who have the market presence and resources necessary to weather the storm.
Large retailers such as Target and Walmart are able to replace their minimum wage employees with automatic solutions such as self-checkouts. Food establishments such as Panera Bread and McDonald’s can introduce more ordering kiosks to replace cashiers.
These companies also have the market power to pass on the increased costs to their consumers, which they do through increasing their prices.
This isn’t something that an independent small business can do. They lack both the necessary resources and market power to make it out unscathed. Small businesses compete with their services rather than their price, which is why labor is indispensable to them. They can’t sacrifice workers the way a big business can.
This’s why some small businesses might find themselves pushed off a cliff.
It’s already happened before — back in 2008-2009 when the Federal Reserve increased interest rates and the US economy entered a recession. US business failures jumped up to a massive 6,000 per quarter.