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ABC News
ABC News
business reporter Rhiana Whitson

Record high business costs pushing up prices, eroding operator and consumer confidence

Ngoc Nguyen is the owner of Cafe Mambo Bar & Lounge in the Melbourne suburb of Sunshine. (ABC News: Rhiana Whitson )

Small businesses are struggling with record high costs while trying to remain competitive, as consumer confidence falls in response to rising inflation and interest rates.

Data from NAB's monthly business survey shows the cost of doing business is at record highs, and those prices are being passed on to consumers.

Labour costs (staff), input costs (goods, and overheads such as electricity bills, petrol) and final prices (what consumers pay) have been at their highest levels since NAB's business survey data began in 1997. 

"They kind of peaked in April, May this year quite noticeably above previous peaks in or prior to the GFC (global financial crisis) as well," said Gareth Spence, senior economist at NAB.

Mr Spence said COVID-19 related supply chain and staffing issues are mostly to blame.

"We've really seen input costs increase at a faster rate, as we came out of the first phase of the pandemic," Mr Spence said.

"Input costs have risen quite strongly, particularly in sectors like retail, but at the same time, we've also observed that retailers have been able to kind of increase their prices as well."

In the outer-western suburb of Sunshine in Melbourne, every input cost for Ngoc Nguyen's hospitality business has gone up. 

"It's a bit daunting," Ms Nguyen said.

The price of meat, fruit and vegetables have doubled, energy bills have risen by 3 per cent and goods like coffee and alcohol have increased by 10 per cent, she said.

Ngoc Nguyen has reduced her cafe restaurant's operating hours to cut back on labour costs.  (ABC News: Rhiana Whitson )

"We're changing our menus to adapt to the change in the market," Ms Nguyen said.

That means ditching lettuce, and using less of other more expensive vegetables, like broccoli.

She's also had to increase prices for customers twice in the past year. 

"You have got to do it slowly and gradually," she said. 

"They're [customers] very understanding... I think people are aware of what's happening."

To save on labour costs, Ms Nguyen has cut operating hours by opening later and closing on Mondays.

It means her full-time staff can cover most of the opening hours in a regular shift, and the business can focus on lunch and dinner service, which is when customers generally spend more.

"It makes more sense than opening for the early birds who might just spend $4 on a coffee," Ms Nguyen said.

On July 1, the minimum wage rose 5.1 per cent, and the superannuation guarantee was increased from 10 per cent to 10.5 per cent.

Adult staff earning less than $450 must also be paid superannuation, as well as employees under 18 who work more than 30 hours.

Australian Retailers Association chief executive Paul Zahra said some businesses are also facing increased rent often while paying past rent that was deferred during COVID-19 lockdowns. 

"On top of all that there are 40,000 vacancies in the retail industry alone, which is meaning that many retailers will have to pay more just to secure talent," Mr Zahra said.

"And of course, there's a real price sensitivity around passing prices on to consumers, because consumers are under an equal amount of pressure.

"So businesses are in this really difficult position right now."

Mr Zahra is also concerned about a knock to consumer confidence as interest rates rise.

He said while May was a record month for retail sales, at $34.2 billion, the Australian Bureau of Statistics figures did not tell the full story. 

"What this does hide, is the fact that the industry has been fuelled predominantly from price increases," he said.

"With the cost of doing business also occurring at this time, this means that profits and margins will be under significant duress.

"And this may mean for small businesses, some of them may not survive."

Mr Zahra said the federal government could alleviate some of the pressure on businesses by allowing pensioners to work more, and fast-tracking access to childcare. 

John Buchanan from the Workplace Research Centre at the University of Sydney said the increase to the minimum wage and higher pay for workers in general was not a bad thing. 

“From a raw economics point of view, you've got to recognise that the wages of workers are not just a cost to employers, they're a source of demand in the economy," Professor Buchanan said.

Professor John Buchanan from the University of Sydney says paying workers more is good for the economy.  (ABC News: Dan Irvine )

In other words, workers with a bit of extra money in their pockets are more likely to spend it at a small business like a retail shop or cafe. 

“Cutting wages when the economy is sick often makes the situation worse," Professor Buchanan said. 

"So raising wages in a responsible fashion is not just good for living standards, it's actually good for the economy at large.”

Absorbing some costs 

Kerrie Dickens, who runs a women's clothing store in the New South Wales regional town of Gosford, agrees extra money in workers' pockets is a good thing for a business like hers right now. 

Ms Dickens has already noticed her customers with mortgages tightening their belts.

"I think a lot of people a little bit nervous at the moment -- they're being cautious," Ms Dickens said.

"I have noticed a little bit of downturn."

Kerry Dickens owns a women's clothing store in the New South Wales town of Gosford.  (ABC News: Keith )

She's also trying to balance the rising cost of doing business with staying competitive.

One of her suppliers has recently increased prices because its shipping costs have quadrupled. 

"Prices for my next a lot of orders will clearly increase... I try to stay relevant in the market by absorbing price increases," Ms Dickens said.

Council of Small Business Organisations Australia chief executive Alexi Boyd said small businesses need a break from any new changes or compliance requirements. 

"So they have an opportunity to get their head around what's required now, and maybe a break of say, six to 12 months of any drastic changes, so they can really start to focus on growing their business," Ms Boyd said.

Mr Spence said business owners that have not yet passed on input costs to customers probably can't hold out for much longer. 

"What do consumers do based on the outlook?" she asked.

"We've seen consumer confidence fall to quite low levels, lowest levels since the peak of the pandemic in 2020."

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