Inflation angst: Businesses face higher labor, vendor costs

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In this Tuesday, Nov. 27, 2018 photo, Chef Jacinto Guadarrama, left, prepares dishes with the help of the kitchen staff at Gotham Bar and Grill in New York. Some small businesses are making hard choices as labor and other costs keep rising. Gotham’s hourly wages have gone up along with the city’s minimum wage, which rose $2 an hour to $13 last December and will reach $15 this Dec. 31. The restaurant is also paying more for ingredients, especially eggs and other dairy items, key dessert components. (AP Photo/Mary Altaffer)

Diners are willing to pay more at Manhattan's upscale Gotham Bar and Grill, but price increases these days aren't about snob appeal — the restaurant is contending with higher costs, particularly from rising wages.

"We have been forced to raise our prices to offset this expense and our pricing still doesn't compensate fully for the increase," says Bret Csencsitz, managing partner in the restaurant located in the Greenwich Village section.

Gotham's hourly wages have gone up along with the city's minimum wage, which rose $2 an hour to $13 last December and will reach $15 this Dec. 31. The restaurant is also paying more for ingredients, especially eggs and other dairy items that are key dessert components.

Higher labor costs due to a tight employment market and rising minimum wages in states like New York are a key factor as some small businesses struggle with inflation and consider whether to pass higher expenses along to customers. Wholesale prices, which reflect what businesses pay for goods and services, rose 0.6 percent in October, the largest increase in six years. Consumer prices, which the Federal Reserve considers as it determines whether to raise interest rates, were up 2.5 percent from October 2017. Economists consider U.S. inflation to currently be mostly in check, but individual businesses can feel the impact of higher prices in differing ways, depending on where they're located, whether they have employees, are in tight real estate markets and face the Trump administration's tariffs on imports.

Owners have varying strategies for coping with inflation. Where possible, they try to negotiate lower prices with suppliers or search for new vendors. They may change products or services to avoid raising prices or keep the increases to a minimum. Others understand when they're forced to charge more that they may lose some business.

Gotham won't downscale its menu, and while it has raised prices, it's also absorbing costs rather than lose customers, Csencsitz says.

"There is a limit to what the consumer is willing to accept to dine out. We'd rather take a hit on the bottom line," he says.

Just a few years ago, Tom Malesic was able to pay a website developer at his Lancaster, Pennsylvania, internet marketing company $35,000. Now, he says, "we're lucky to get one at $60,000."

"Our biggest business expense is labor. Our salaries have had to go up substantially to stay competitive and attract the people that we need to be successful," says Malesic, owner of EZSolution. He also has other rising expenses, including software that's upgraded yearly and costs more with each enhancement.

Malesic has had to raise prices, but rather than implementing an across-the-board increase, he's created a tiered system, packaging services and pricing them according to what each package offers. Customer response has been positive, he says.

"In the last year, we've done a better job at repositioning and being transparent about what they get," Malesic says. "That's definitely been helpful."

Raising prices is difficult in the printing industry, where many companies have shut down in the past decade, not only because of the recession, but because their business customers no longer send printed documents through the mail.

"I had to keep my prices decently low just not to go out of business," says Joy Gendusa, owner of Postcardmania in Clearwater, Florida. She absorbed the increases by resigning herself to lower profit margins. Now, however, with labor costs up $22,000 a week this year including what she pays for staffers' health insurance, she's passing some increases to customers.

"We've had to raise our prices to afford the creme de la creme of personnel," says Gendusa, who has 235 employees. She's also finding ways to diversify; she's added electronic mailing services that bring in more revenue and are more profitable than printing.

When inflation manifests itself in the form of soaring rents, some companies shut down, forcing their small business customers to find new suppliers. When some of Haldora Bjornsson's fabric vendors in New York's Garment District closed, she had fewer resources for the silk she uses in custom-made women's clothes.

"Now, there aren't so many choices, and we are paying a higher cost," says Bjornsson, owner of Haldora, a store in Rhinebeck, New York.

Bjornsson also pays more for thread and buttons and is concerned that Trump administration tariffs could exacerbate the increases. While customers expect to pay more for her clothes — her signature shirt ranges from $258 to $649 — Bjornsson is hesitant to raise her own prices because she doesn't want to lose sales. The solution, she says, is to scale back the types of fabric she uses.

"I make less silk (shirts) than I used to. I'm still using linen and cotton," Bjornsson says.

Owners whose companies require frequent travel are getting hit hard, especially if they're not flying in and out of major hubs.

"I'm finding that coming out of Santa Fe and Albuquerque (New Mexico), the inexpensive flights I used to take are sold out," says Sarah Boisvert, who takes about five trips a month for her technology training company, Fab Lab Hub. She estimates her travel expenses are up by a third this year. Boisvert flies to cities like Chattanooga, Tennessee, and Tulsa, Oklahoma, and fares are higher than on more heavily traveled routes like New York-Los Angeles. Some tickets she used to pay $400 for now cost $900.

But Boisvert, whose company helps train people in skills like 3D printing, gets funding from grants and can't pass along cost increases. She has to take steps that are hard for a company focused on new technology.

"We have to cut elsewhere — delay new equipment purchases, for example," she says.

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Follow Joyce Rosenberg at www.twitter.com/JoyceMRosenberg . Her work can be found here: https://apnews.com/search/joyce%20rosenberg