Small businesses are increasingly getting overburdened by the rising inflation as they are forced to absorb high input costs amid declining consumer spending.
The Kenya Private Sector Alliance (Kepsa) says costs, including the prices of raw materials, have gone up by about 20 percent making the production of goods costlier, worsened by the unpredictability of supply chains.
As a result, businesses have been compelled to cut their expenses while juggling to keep their employees.
“Small businesses are being forced to reduce the units being produced to sustain operations. The decrease in units being produced also means that some employees are being let go for the businesses to stabilise their operations,” said Kepsa chief executive Carol Kariuki.
“Servicing of loan facilities to businesses, including SMEs, has become costlier denting the capital reserves of the businesses.”
Despite the rising prices of items on shelves, the majority of the businesses have not fully passed the whole cost to the consumers which would see prices soar further.
“Price evaluation and marketing strategies are being reviewed to continue to attract customers whose household disposable income has been reduced therefore reducing customer demand,” she added.
Inflation rose to a 58-month high in June hitting 7.9 percent, which is above the government’s upper limit target, from 5.08 percent in February.
This has been attributed to soaring prices of food items on account of bad weather, high fuel prices and transport costs.
Food inflation hit 13.8 percent in June, attributed to the jump in prices of wheat and maize flour, cooking fat, cooking oil salad, bread, and milk due to shortages and a spike in the global cost of edible vegetable oils such as crude palm oil, sunflower, soybean and corn oil.
In a survey by the Central Bank of Kenya (CBK), inflation has been the biggest concern for small businesses and corporates, as it hurts purchasing power amid rising costs of raw materials.
Firms have already reported depressed orders due to reduced consumer purchasing power.
As a result, they have been forced to absorb all the high input costs, eroding their margins as they are unable to pass on the increasing costs to consumers and further push down the demand.
“The scope for passing this (high input costs) on to consumers in the form of higher prices of goods and services sold remains limited as firms expect higher costs to negatively impact demand,’’ CBK said in CEO’s survey released in June.
A Superbrands Consumer Insights Survey, also showed consumers across different purchasing classes have had to opt for more affordable brands because of budget constraints.
Low-value brands are now no longer solely for the mass market and are much more visible to even the middle-class consumer.
“With increased adoption of e-commerce throughout the Covid-19 era, consumers are now increasingly researching about products before they make their purchase decisions,” said market research agency, Kantar TNS.
“Some consumers are starting to place emphasis on differentiation, and punishing brands that are more premium or value, but not differentiated from the low-priced mainstream brands.”
With difficult economic times, some brands attract fewer buyers as consumers focus on necessities and no longer have the luxury of spending disposable income, further driving small business margins lower.
Further taxation on digital loans is set to hit businesses harder as they remain dependent on short-term credit for working capital and ensure the businesses survive.
The government on July 1 introduced a 20 percent excise tax on fees charged by digital lenders including individuals and most small businesses.
“The excise duty Act therefore will widen the bracket on costs, meaning the borrower will be charged more when final computation is done,” said Digital Lenders Association of Kenya chairman Kevin Mutiso.
“The deductions will however not include interest on loan or return on loan or any share of profit or an insurance premium or premium based or related commissions specified in the Insurance Act or regulations- therefore interest is excluded from the deductions.”
According to the State of Digital Lending in Kenya Report 2021, by consumer intelligence firm Reelanalytics, majority of Kenyans place digital lending platforms top on their priority list of credit sources to fund the growth of small businesses.
Further, the report shows that in the absence of digital lending platforms, most Kenyans would seek business growth loans from sources such as close family members.
“Excise duty is usually a cost to the final consumer. This means it is loaded in the pricing and transferred to the consumer as a cost,” added Mr Mutiso.