Jon Hurst is president of the Retailers Association of Massachusetts. Mark Melnik is director of economic and public policy research at the UMass Donahue Institute.
Facing a mix of rising operational expenses and demographic factors, the small-business community in Massachusetts is at a critical inflection point. That is the stark takeaway from a recent survey of 635 small businesses across the Commonwealth, in which businesses report they are struggling to make ends meet under a sea of rising costs after the COVID-19 crisis. Now on top of the cost challenges small employers are already facing, the uncertainty of increased costs and product availability under tariffs make a difficult environment far worse.
Multiple studies have demonstrated the cost problem in Massachusetts. For consumer-serving small businesses such as stores and restaurants, the high cost of goods and services not only hurts sales but also increases the expenses involved in opening the doors, employing staff, and serving consumers. The result is that more and more small establishments are operating in the red.
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But as the UMass Donahue Institute’s Economic & Public Policy Research group recently found, the cost problem has gotten much more complicated for local businesses. In our study surveying members of the Retailers Association of Massachusetts and other small-business organizations, we found that most businesses in Massachusetts (71 percent) have seen sales increase or remain steady since the pandemic. However, 44 percent of businesses responded that their overall profitability has decreased over the same period. Operational costs have increased for 91 percent of respondents, with 76 percent confirming that their expenses are rising faster than sales.
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Business owners were asked to list the most negative impacts of running a business in Massachusetts. Five of the top six responses pertained directly to cost, including constrained consumer spending with small businesses, the cost of electricity, interchange fees, payroll taxes, and health insurance premiums (the availability of labor was the other issue in the top six). Taken together, these findings show how cost-sensitive small-business owners are and how inflation and the rising expenses of business operations, particularly around health care and energy, are affecting small businesses around the state.
Another sign of volatility in the small-business community is the fact that 51 percent of respondents suggested they were very likely or somewhat likely to sell or close their businesses within the next five years. Many noted that they were nearing retirement age, while others reported high costs as a driving factor behind the possibility of selling or closing their businesses in the near future.
So, what to make of these findings, and what can be done about them? First, small-business owners appear sensitive and motivated by costs. This speaks some to the alignment between economic development policy and some to the more kitchen-table type concerns expressed by the small-business community. Case in point: Small-businesses owners did not perceive government as being on their side. Nearly three-quarters — 73 percent — of respondents reported that “government tends to do more to disadvantage small businesses than it does to help small businesses.”
To be sure, not all the challenges are affected by public policy. Many small businesses must deal with shifting consumer habits and sales due to mobile commerce purchases and remote work. That said, it is important for state leaders to recognize that for many small businesses, whose margins may already be thin, recent increases in operational costs have put them on an unsustainable path. As a generation of small-business owners reach retirement age, the next generation of entrepreneurs needs to be set up for success if we want a vibrant small-business community.
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New policies need to recognize the challenges facing small businesses. These could include ways to help lower mandated operating and payroll expenses, including soaring utility rates and rising employment costs such as unemployment insurance and health insurance premiums. Reduced taxes on consumers would also put more money in their pockets to spend in the local economy.
The state should consider the unique challenges faced by small businesses. These are the businesses that add to the economic vibrancy and character of our local communities. Finding ways to better support these entrepreneurs will be an important part of the long-term economic future of the state.
