The Hitchhiker’s Guide to Inflation
By Todd Davis
“All politics is local.” Tip O’Neil, former Speaker of the House, said that back in 1982, it has become a catchphrase in American politics ever since. Tip originally was referring to the need for Representatives to win their districts. The phrase has gone on to take a broader meaning that voters are more concerned about issues that affect their personal lives than they are about large, ambiguous ideas.
The same concept can be applied to inflation. Most Americans in the workforce had never experienced inflation before 2020. Since then people have become all too familiar with it. Prices have risen on everything from bagels to lumber. Political Pundits in the Washington Beltway might tell you Inflation sits at 3.7% but for everyday Americans that number makes no sense. Local inflation, for them, is far higher. Everyday food products have doubled, sometimes tripled in price over the last two years. Virtually everything purchased is marked up. For people in America, and across the world, inflation is an everyday local problem, a growing hole drilled into their bank accounts that drains resources and resists any attempt at plugging. Even worse, few of us understand how prices are driven up making inflation seem otherworldly, an economic version of Michael Myers unleashed on our bank accounts.
Worldwide Inflation
The worldwide inflation rate in 2020, before the COVID-19 pandemic, was 1.93% the lowest it had been since 2016. In 2021 inflation rose to 3.48%. 2022 saw inflation skyrocket up to 8.27%. COVID, or more specifically, governmental policy in reaction to COVID, has had a dramatic effect on the world economy driving up prices at all levels of the supply chain. But how does this actually work? With the idea that all inflation is local as a reaction to these worldwide trends, we are going to take a look at one small business, the troubles it is facing due to rising costs, and how it has adapted to address the new economic model brought about by worldwide inflation.
Pendraken
Pendraken is a small business in Middlesbrough, England. Pendraken is the manufacturer and retailer of 10mm military miniatures. Considered the gold standard in their field of expertise, Pendraken could be described as the Tiffany’s of 10mm miniature design. As a hobby shop that specializes in wargaming, Pendraken is a niche business that represents one of hundreds of thousands of small operations around the globe providing products worldwide that would have been nearly impossible to attain a few decades ago.
Businesses like Pendraken are facing economic hurdles created by the pandemic, politics, and war. Sales initially reached a peak for Pendraken during the initial months of the COVID-19 pandemic, as they did for many hobby businesses. Many governments infused large amounts of cash into their economies to offset the loss of wages caused by mandated shutdowns. People had discretionary income and spent it on retail products. Pendraken was fortunate in this regard, for it provides a product that cannot be purchased on Amazon. With a dramatic shift to online commerce following COVID lockdowns, global billionaires saw their collective net worth almost double in 2021 from 8 trillion to 13 trillion creating one of the largest transfers of wealth the world has ever seen.
British and American governments began to scale back COVID benefits, and as you would expect, sales have been reduced for Pendraken since then, but when you combine that turnover drop with the huge increases in costs that the company has seen in the past 2-3 years, Pendraken is facing grim numbers. As a result, for the first time in its history, Pendraken ran at a loss during the 22-23 tax year, by a considerable margin.
Price Increases
Pendraken first raised the price of its product in January 2021 due to the exceptional cost increases brought on by the pandemic. The company took something of a gamble, only raising prices by 9%, in an attempt to keep products in line with what its customer base was currently paying. This price increase generated around £18,000 extra income per year, which was not even covering the increased costs of running Pendraken which had risen by £35,000 per year. Pendraken’s primary product is 10mm military miniatures and these require metal to manufacture. Virtually all raw materials, from metal to lumber, to concrete have risen in price following the pandemic. Anyone going to Home Depot knows that it costs a lot more to buy paint, screws, and 2x4s to build a shed than it did three years ago. Imagine factoring in these raw materials to a product you are manufacturing and selling on a daily basis. Pendraken hoped that some of the materials costs would come back down to somewhere sensible levels and things would balance out again. That has not happened.
Both metal and medium-density-fibreboard, raw materials used in the manufacturing process, are now approximately 50% higher than the pre-pandemic levels, adding somewhere around £15k-£18k to Pendraken’s annual materials bill. Things like acrylic have more than doubled, and mold rubbers are up 30%-40%. The meat and potatoes required to run the manufacturing process at Pendraken have risen anywhere from 50 to 100% due to global supply chains.
Brexit
Brexit and the UK’s withdrawal from the EU single market has been a big hit for Pendraken. The fees and handling charges that now apply for its European customers are painfully high, especially on a small or regular-sized order. This has made the purchase of small batches of figures unattractive to customers. Fewer customers want to order £40 worth of wargame figures and then have to pay another £25-£30 in fees just to receive the package, so people, reluctant to pay these fees that function as a tax, are going elsewhere or choosing not to purchase figures altogether.
Prior to the July ’21 deadline, our EU sales were around 19%-20% of our turnover. Now we’re at 8%-9%, so we’ve lost over half of our EU customers, which in monetary terms is something like £30,000 per year of lost sales. The only way to get this back is to try and access the EU’s IOSS VAT system but this comes with an annual cost of £2000-£3000 to the business.
None of the political decisions regarding economic policy that we see on television or social media happen in a vacuum. Most have consequences. The people who are affected the most by them are small businesses. Pendraken has lost over 10% of its sales due to Brexit. Whether you support Brexit or not isn’t at issue here, the fact is economic decisions have genuine trickle-down effects.
Bricks and Mortar
Retail space, the real estate, utilities, and personnel needed to staff a building are some of the handicaps that have put small businesses into such a bind as the global economy has first consolidated and then gone digital. Consolidation occurred when conglomerates like Walmart and Target appeared and those bankrupted nearly every hardware, clothing, and small grocery store. This consolidation can be seen in every retail field from car washes to pharmacies.
Niche hobby stores like Pendraken, open since 1992, have continued to exist because they fulfill a small area of interest that doesn’t have a lot of competition. You aren’t going to find 10mm 1870 Prussian infantry skirmishing on aisle 10 at Walmart. However, that doesn’t mean the costs of maintaining a bricks and mortar building are easy. Like everything else, the costs are increasing.
Pendraken moved into a new building that it purchased, transitioning from leasing into ownership. In the long term, this is a sound business decision, but it opens up immediate problems that, as always, cost more money driving up business expenses that the customer never sees.
Business insurance doubled overnight due to there now being a rebuild cost in the event the building falls down. A £400,000 rebuild valuation on a £150,000 building. A roof had to be fixed due to storm damage, the insurance company claimed it was outside the policy, so that was £13,000 out of pocket. Repair work totaling several £1000 was needed on the heating system, something that would usually be the responsibility of the landlord in a rental unit but an additional cost for a business that owns the property. Other utilities such as water were also affected. Pendraken now has to pay a drainage charge for water that simply lands on the property, so there’s an extra £600 per year for the privilege of being rained on.
Shipping
Shipping costs constantly go up. Small businesses are especially hurt by these increases because it is difficult to pass the cost on to customers accustomed to getting free shipping from mega-corporations like Amazon. Before the pandemic, Pendraken had less than 5 packages lost per year while shipping worldwide. Delays might occur, but the orders were almost always delivered. Over the past two years, various postal systems have crumbled and Pendraken has had almost 30 packages confirmed as lost, totaling over £2000 of goods. Pendraken has had to replace all of those missing packages at its own expense. The Royal Mail system in Britain provides little if any reimbursement for this lost product.
Staffing
COVID-19 brought about a complete change to the global workforce, especially in Western countries like the United States and Britain. People found a voice for the first time in decades and labor was able to dictate terms to management. Labor shortages remain a problem in both countries as people are not inclined to work at jobs that are demeaning or unfulfilling. Wages have increased due to this. Long overdue increases that still barely cover the cost of living in large cities. And yet, as always, these paradigm shifts are felt the most in small businesses. Pendraken doesn’t have the payroll budget of AT&T, and while AT&T doesn’t care about its employees who are working in cubicle call centers, Pendraken cares a great deal about its staff.
Increases to the United Kingdom minimum wage added more than £10,000 to Pendraken’s payroll. That cost has to be made up somewhere. The company is reluctant to cut staff hours. Many of its employees are reliant on their Pendraken wages for their households, so it’s not a preferred option. Even so, efficiencies during slow hours may lead to reduced staffing.
Business Changes and Adaptations
Faced with these numerous increased costs, Pendraken has proactively made a number of changes to promote growth and stay solvent in the years ahead. New design work has been halted until 2024. A focus will be placed on putting into production figure ranges that have already been created and have been awaiting release. Stock levels of current products, especially the less popular lines of miniatures will be decreased. Inventory space is always a precious commodity in stores. Orders will take longer to fulfill for customers purchasing models within these ranges.
Pendraken will be migrating to a new website with full IOSS functionality in an attempt to win back EU customers. Changing websites isn’t easy and comes with its own challenges, some of which will affect customers.
We’ll need to get a new website online and ready for the autumn hopefully. We’re going to do everything we can to minimize the impact to our customers but there will be some things that we’re not able to do seamlessly. The major pain is that we’re not sure if we’ll be able to bring your order history over to the new website accounts, so we need to look into that. You’ll probably have to create new passwords to activate your website accounts, as those are encrypted and we can’t export/import them into the new site.
The new website is going to be a ton of work and another £2k-£3k of costs, so we’ll do our best to get it up and running as soon as possible. The new platform should allow us access to a lot of new features though, so we’ve got some plans for that.
Price Increases Part Two
As consumers, we look at the price of yellow rice, or brown free-range eggs, or 10mm WW1 French infantry and see it costs more than it did two years ago. Behind every increase is a story, mostly untold. In many cases, the story is about a small business struggling to stay solvent while dealing with factors largely out of its control. As consumers, we will prioritize where we can spend our money. Everyone suffers during inflation. Inflation terrifies politicians like few other problems because people see and feel it daily.
Pendraken announced that it will increase prices across the majority of its products on January 1st, 2024. True to the care and appreciation it has for its customers, Pendraken announced this news 5 months in advance. New pricing will go from £6.00 to £6.50 for standard packs of miniatures and army packs rising from £36 to £40. Two price raises over three years aren’t making Pendraken rich, it’s keeping them open.
Everything costs more today than it did yesterday. We hear people say this all the time, and mostly, they are right. However, for small businesses, these increases aren’t price gouging. They are necessary, often excruciating decisions that were made to stay open. 34% of American small businesses remain closed from 2020. Most of those are never coming back. All those businesses had a story. All had employees who had lives and their own backstories. The butterfly effect that COVID-19 inflation has had on the globe is momentous and monstrous.
