Oil: Small Biz Takes a Big Hit

Less able to pass along higher costs from pricey energy, proprietors are eating the increase and trying to boost their efficiency

Rising energy prices are taking their toll on everyone from individual consumers to international conglomerates. But for the nation's 22 million small businesses, soaring fuel costs have been especially painful.

Allen Kryscynski, president of Builders Carpet Outlet in Ann Arbor, Mich., says pricey oil resulted in an aggregate 10% decline in profits during the last two years. "Over the past 24 months, carpet prices have gone up about 5% every two to three months," he says. "It's all based on the cost of oil and raw materials. The manufacturers pass along the increase to us, and we're getting killed at the supply level."


  Like many small-business owners dependent upon transportation of goods and services, Kryscynski says his suppliers have added fuel surcharges to their deliveries, sharply raising his business cost. Kryscynski calculates that he's paying 44% more for carpet deliveries than he did just a year ago. "Last year, I budgeted approximately $35,000 a year for fuel. But I ended up paying $55,000 based on a very similar volume [this year]."

Kryscynski's plight is a common one throughout the small-business sector. While record energy prices have hit large corporations as well, small concerns feel a much greater impact. The latter, with their slim profit margins, have less flexibility to absorb price hikes -- or pass them along.

Airlines, for example, can get away with charging $3 extra per ticket to cover fuel expenses, but the local florist, plumber, or restaurant proprietor, who may use cost as a competitive advantage, has far more trouble raising prices. Small-business owners must decide between charging more -- which could mean losing customers -- and eating the extra costs while trying to ramp up efficiency to cushion the blow.


  "Small businesses are price-takers, not price-setters," says Bruce Phillips, senior economist at the National Federation of Independent Business, a Washington (D.C.)-based advocacy group. "They can't lose millions or even thousands of dollars and stay in business. When there's an increase in prices, it comes out of a small-business owner's bottom line. This is a very serious problem for them."

It's no secret that costlier oil has hurt consumer spending. According to the Commerce Dept., U.S. factory orders for big-ticket manufactured goods fell 2.8% last month, the single biggest drop in two-and-a-half years. And retail sales rose only 0.3%, falling short of Wall Street's 0.7% expectations.

Customers at Builders Carpet Outlet, which earns about $3 million in yearly revenues, are changing their buying habits. "A carpet that sold for $10 a square yard 12 months ago is now $12 a square yard," says Kryscynski. "People are buying lesser grade carpets because their budgets don't allow them to handle the increased cost."


  In turn, Kryscynski has recently added per-delivery fees to his customers' bills. "We charge a rate of $25," he says. "We never did that before." And because he's paying $37 to $38 per delivery from his own suppliers, Kryscynski says, "I'm still losing $10 per delivery, so I have to raise my own price now." Next month, he'll increase the gas surcharge to $35 per delivery.

With energy prices expected to remain in record territory, small outfits are looking for ways to boost efficiency as much as possible. Kenny Crenshaw, the president of Herbi-Systems, a lawn-care and weed-control company based in Memphis, says fuel prices have had a "double negative effect" on his business.

Herbi-Systems depends on a fleet of 17 trucks to service its 6,000 clients, and much of the fertilizer it uses comes, directly or indirectly, from petroleum products. His coping strategy is a careful combination of price hikes and operational changes.


  For starters, Crenshaw has reduced the firm's service area from within a 60-minute drive from the shop to within 35 minutes, saving on fuel and reducing the nonproductive time employees spend driving to a work site. "Every minute and mile costs the company money," he says.

Fertilizer prices have gone up to $9.50 a bag, from $5.50 three years ago, and Crenshaw is selectively passing along the increase. While maintaining prices for existing customers and those with small yards, he charges new clients with large yards about 30% more for his service. Now the cost of taking care of a one-acre yard is $221, up from $153.

But Crenshaw doesn't know what else he can do before rising costs force him to take more drastic measures. "We've just about pushed our efficiencies to the final level. In our business, no technology is going to make us any more efficient," he says. "It puts pressure on everyone to raise prices for everything. If there's a 20% price increase and 10% of our customers leave us, we will have to lay someone off."

Crenshaw's story is a typical one. If gas prices continue to climb, small businesses might have to start running on fumes.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE