Bay Area small businesses struggle with inflation as optimism slides

While big companies in this region get a lot of attention, a large majority of employers are small businesses with fewer than 20 employees.

It is definitely not party time at Aimbrell Shanks’ Santa Clara rental company, PartyTime Machines. As at a great many Bay Area small businesses, inflation is not only driving expenses up, it is shrinking her market as consumers cut spending to cope with their own rising household costs.

“I am not optimistic,” said Shanks, who in 2015 bought PartyTime — which rents out machines that dispense popcorn, churros, ice cream, margaritas, slushees and other festive delicacies — after working there for a decade. Her raw material costs have gone up about 25% across the board, with some items like sugar for cotton candy machines 30% to 40% more expensive, she said.

These days, even those who patronize her business — couples getting married, families throwing parties, churches, companies and convention centers — often rent the bare minimum, she said. Regular patrons have reduced the number of machines they rent for their events. Some customers buy their own popcorn kernels and serving cups to use with the rented machines. On a job that in years past would have brought in $5,000, she may now only make $800, she said.

Shanks, who is also a small business development counselor, said she is far from alone among business owners struggling as rising costs afflict them along with potential customers.

A new report from Bank of America shows that in the Bay Area, small business owners’ confidence in the economy has fallen from last year, with inflation the top concern. Polling firm Ipsos surveyed 1,288 small business owners across the U.S. for the bank between March 4-28.

A little more than half (53%) of Bay Area small business owners said they expected the local economy to get better in the coming year, much lower than last spring’s two-thirds. Slightly under half (49%) of Bay Area owners said they expected the national economy to improve over the next year, but last spring, 57% expressed that view.

For Janae Nguyen, owner of Contempo Furniture in San Jose, the Bay Area’s housing crisis and inflation are quashing sales. Fewer people changing residences means lower demand for furnishings, she said. And while her costs have risen for everything from wholesale goods to business insurance, her potential customers are also faced with higher expenses for necessities. New furniture is often far down the list. But raising prices is not an option, she said.

“People are not going to purchase from you,” Nguyen said.

Still, nearly two-thirds (64%) of Bay Area owners said they expected their revenue to increase in the coming year. And businesspeople in this region expressed a substantially rosier view than their counterparts across the U.S. Nationally, only 42% of small business owners thought their local economies would get better, and only 33% believed the national economy would improve.

Nguyen counts herself optimistic — or at least hopeful. “Cross my fingers it’s going to get better this year,” she said.

Raul Anaya, president of business banking at Bank of America, believes some of the drop in confidence since last year among Bay Area small business owners results from issues affecting the technology industry, such as a slowdown in venture capital funding, the fall of Silicon Valley Bank, and layoffs by tech companies.

“Some of the large tech layoffs, sometimes that casts a certain kind of sentiment across the economy,” Anaya said.

The pandemic-era shift to remote and hybrid work likely plays an even bigger role in local small business owners’ concerns, said Abby Raisz, a senior research manager at the Bay Area Council, a nonprofit group that promotes business and economic development.

Hollowed-out downtowns, lower foot traffic in commercial zones, and less work supporting office workers undercut revenue for many small companies wrestling with inflation, Raisz said.

“We had this whole structure that was very sound,” Raisz said. “Everything’s tied together. That was disrupted. That’s left a lot of small businesses wondering whether it even makes sense to keep going.”

Despite the layoffs and an overall slowdown in venture capital funding, the Bay Area remains a tech powerhouse. The artificial intelligence industry is drawing billions in new investment, so it is not surprising that many Bay Area companies would express more optimism than their counterparts across the U.S., Raisz said.

“More money has been pumped into sub-sectors of our economy than in any other place,” she said.

And some Bay Area owners’ optimism is on the upswing.

“We have been consistently growing,” said Abbas Attarwala, co-founder of Union City fragrance maker Nemat International. “We’ve added three new employees this year. We expect to add more closer to the end of the year. We are blessed. We are very happy with where things are, where things are going.”

Attarwala was upbeat even though inflation has taken a bite of the business. Raw materials have risen in price. Some perfume bottles are 50% more expensive. Shipping costs have jumped significantly. Buying more supplies in bulk has helped shave expenses by 5% to 10%, and his new processing machines have boosted production without adding labor costs, but the company had to raise prices a bit last year, he said.

“That helped to mitigate some of the cost, but we’re trying not to pass too much cost onto the consumer,” Attarwala said.

Inflation has also boosted the cost of living for his employees, most of whom have worked for him for many years, Attarwala said, adding that the company raised the workers’ pay by 10% or more.

“In the Bay Area it is expensive,” he said. “We are making more money, we can share it with employees.”

In Novato, rising expenses for materials and shipping hit aerospace parts company OMW across the board, said CEO Joe Osborn.

“Labor continues to climb: that’s our biggest expense,” Osborn said. “You’re going to pay people more if the inflation rate is high — you’re going to have to keep doing that.” The national economy matters most for OMW, and Osborn said his outlook was “pretty positive” given the strength of the private space industry that relies on his company.

Osborn has raised prices where possible, but “customers are obviously very sensitive to that, and we have a lot of parts that are on long-term contracts,” he said.

In Santa Clara, Shanks just wants to stay afloat through the coming year.

“I am hoping that the income that comes in will sustain the business,” she said. “It’s not going to pass on any revenue to me personally.”