There’s only so long you can keep your chin up.
After a 2½-year battle against health and economic devastation, Rhode Island companies have been beaten down, according to Providence Business News’ Summer 2022 Business Survey.
Indeed, less than half of the business owners and executives who responded to the biannual survey predict a sunnier future for their firms next year – the first time that optimism has dipped below 60% of participants since the winter of 2009, when Rhode Island was in the grip of the Great Recession.
This time, spiraling inflation is the culprit, propelling prices higher on everything: goods, shipping, utility bills and labor.
In turn, bottom lines are shrinking, with more than one-quarter of the survey takers reporting net income had dropped compared with a year ago, double the percentage in the summer 2021 survey.
And few seem to feel as if the economic discomfort will ease any time soon, with more than 6 in 10 expecting inflation to keep driving up fixed costs.
“The potential around a recession is really impacting their perception of what is to come,” said Edward M. Mazze, a University of Rhode Island distinguished professor of business administration who helped develop the biannual PBN survey in 2008.
But it’s not all pain and suffering.
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SEEKING APPROVAL: Neurotech Pharmaceuticals Inc. CEO Richard Small, right, speaks with process development engineer Lovisa Selander in the biotech company’s lab in Cumberland. Neurotech is completing final trials for an implantable device to treat eye disease, but Small says several economic factors have proved challenging recently.
PBN PHOTO/
RUPERT WHITELEY[/caption]
While Mazze acknowledges the struggles that companies are up against, he also points out the positives that survey takers might be forgetting or dismissing too quickly.
The health crisis caused by the COVID-19 pandemic has abated. Gas prices are falling. A rebound in travel is finally giving a much-needed boost to Rhode Island’s hospitality and tourism sector.
And in many cases, business owners have figured out how to cope with soaring costs and persistent snags in their supply chains.
“Sharp businesspeople are going to make adjustments,” Mazze said. “They recognize they are going to have to pay more money, so they are going to be careful about what they buy or who they hire.”
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WRONG DIRECTION:
Net income compared with the previous year dropped sharply from last winter and a year ago. Gains in business activity are also down from last year, as are expectations for the state economy over the next 12 months. The latter is at its lowest level since summer 2012.[/caption]
HELP NEEDED
The PBN survey, which has been conducted twice a year since 2008, is not scientific. PBN sent 22 questions to 1,146 businesses in the newspaper’s database, including one new question about the long-term impact of inflation. One hundred and nine responded, representing a span of industries from banking and manufacturing to hospitality and health services. A few employ more than 1,000 people, but most are small and midsize companies.
The latest survey results show that a lack of job applicants continues to weigh heavily on businesses. Nearly three-quarters of those surveyed name worker shortages as one of their top business challenges, on par with the historic high reached during the winter 2022 survey.
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HOLDING STEADY:
Uncertainty over where the economy is heading is not significantly affecting short-term purchasing or hiring plans. Both are in line with expectations over the past year.[/caption]
While more than half of employers want to hire in the upcoming quarter, the tight labor market is making it hard. More than 50% of survey takers say they had the same number of workers this quarter compared with last quarter, while about one-third had added employees.
Sometimes, just getting someone to show up for an interview can be a problem.
That’s one of the frustrations for Susan Fabrizio, founder and president of Flagship Staffing Services Inc. in Warwick.
Between interview no-shows and wading through resumes from unqualified candidates, Fabrizio feels like she’s wasting too much time on “nonproductive busy work.”
“It’s frustrating because we reach out to so many individuals who send us their resumes and try to schedule interviews and then we get ghosted,” Fabrizio said. “It’s clogging up our calendar.”
This leaves little time for her to find her own badly needed fourth employee. Fabrizio has been trying to hire someone for 1½ years but has been too busy filling the needs of a growing number of clients.
While declining to say how many companies use her services, Fabrizio says her client count has increased in the last year, with some firms returning after taking a break during the early part of the pandemic.
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OPTIMISM WANES:
The unrelenting economic toll of the pandemic and the inflation and hiring challenges that have followed are chipping away at the renowned confidence of many local business owners. For the first time since 2008, fewer than half expect things to improve for their business in the coming year.[/caption]
Another new challenge: workers’ demands have changed drastically since COVID-19 first hit, but the many professional service firms haven’t altered their expectations much around remote work or pay.
Fabrizio tries to act as a mediator between employers and job seekers. She recently persuaded a company looking for a bookkeeper to hike the pay by 15% after she explained that the initial proposal was too low to attract talented applicants.
Salaries are increasingly becoming a pain point for companies, with almost half of those surveyed naming it the fastest-growing expense over the last five years, versus the one-third who complained about salary costs a year ago. In fact, salaries have overtaken health insurance as the top cost hike, for the first time since PBN began asking that question on its survey in 2011.
That’s partly because the rising health care costs, which once outraged employers, have now become part of the norm, Mazze says.
Higher costs for materials and supplies are also pervasive – faced by 9 in 10 businesses, according to the survey, while energy costs are appearing on companies’ radars, with Rhode Island Energy warning of significantly higher gas and electric bills this winter.
Over one-third of companies say energy expenses are a challenge to operations, twice as many as the prior survey and the highest in survey history since summer 2008, when nearly half complained about energy bills.
In this environment, many businesses are making difficult decisions. Over half of the companies have hiked prices to cover at least some of their rising costs.
Among them: MasterCast Ltd. The Pawtucket manufacturer used to evaluate prices once per year, but these days President David Katseff is assessing them every few weeks.
That’s because raw materials are becoming more expensive to buy, such as acrylic resins and metals used in the promotional items such as keychains and golf accessories that his company makes for distributors and other manufacturers. And supply chain bottlenecks add weeks to shipping times for those materials, particularly if it’s coming from overseas suppliers. Sometimes, they might not show up at all.
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SHIFTING CHALLENGES:
A shortage of qualified workers that mushroomed last winter continues to vex 7 in 10 respondents. But a decline in concern over health care costs that began in 2019 has fallen to its lowest level since the biannual survey began in 2008.[/caption]
Katseff feels constant anxiety about buying supplies from overseas companies, but he’s got little choice. The materials from China and Taiwan might be late, but they are cheaper – sometimes half the price of materials from U.S. sources.
“Our budget is based on the pricing from these imported products,” he said. “We can’t afford to end international buying.”
Especially now, when he’s just starting to rebound after hitting “rock bottom” in 2021, he added. Businesses still aren’t buying promotional tchotchkes in the same amounts as before the pandemic.
“Companies are just working to survive, so they are not doing marketing the way they used to do it,” Katseff said.
And he’s finding it difficult to change with them.
“I wish I could find a different area that was doing better, but this is what we’ve done for decades, so I guess we’ll just stick with that,” he said.
WORKAROUNDS
Not all company executives share Katseff’s strategy of staying the course. More than half of those surveyed say their operations will change permanently because of the pandemic, down 15 percentage points from the winter 2022 survey but still the No. 1 long-term effect of COVID-19, according to the survey.
Meanwhile, just 14% expect fewer people would be employed at their companies, compared with 40% who said the same thing six months ago.
The fresh reluctance to lay off people might reflect the challenges faced by a seasonal summer tourism season in which restaurants and hotels struggled to find enough workers, according to Mazze.
Just ask Brad Marthens, co-owner of The Atlantic Inn on Block Island.
The Victorian hotel and restaurant relies on international students to fill summer jobs, and typically, Marthens hires a dozen J-1 visa holders to wait tables and clean rooms. He could only find three this year because of stricter policies on work visas.
And he wasn’t able to tap the culinary programs at Johnson & Wales University to find chefs for his from-scratch restaurant because an early start to the fall semester meant students couldn’t work through the end of August. That meant Marthens was hurting before the season even started.
He found workarounds where he could.
Without a pastry chef, the inn substituted coffee and tea for its typical breakfast service. The skeleton crew took on multiple positions – housekeeper by day, restaurant server by night – which also sent the overtime budget “through the roof,” Marthens said.
He didn’t have enough staff to open the restaurant for daily operations until August – usually, he scales up to seven days a week by June.
And by August, he had another challenge. While visitors packed the restaurant and filled the inn’s 21 rooms at the height of summer, there were a lot more vacancies than usual come August. Marthens wasn’t sure why tourists seemed to be cutting summer short this year, though he wondered if earlier back-to-school dates were to blame.
Marthens cut room rates to offseason prices – a $350 room with a queen-sized bed and ocean view went for $275 a night – a move he would have never considered before.
“I’d rather have half of something than 100% of nothing,” he said.
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ARE THEY LISTENING?
It’s no surprise to see businesses looking for government help to reduce business costs, but the nearly 4 in 10 respondents who identified that is the lowest since PBN began asking the question in 2012. In another sign government leaders may be listening, the percentage of respondents who called for a reduction in red tape associated with doing business is also the lowest in the survey’s history.[/caption]
TRIALS AND TRIBULATIONS
The worries are different at the Cumberland-based biotech firm Neurotech Pharmaceuticals Inc. The company is finishing final trials for an implantable device to treat eye disease and is preparing to seek U.S. Food and Drug Administration approval later this year.
Richard Small, Neurotech’s CEO, doesn’t have to fret too much over rising costs; he says a private family investor is funding the venture. But money can’t combat the supply chain problems stopping orders from reaching their destinations on time.
As a small company with 40 employees, Neurotech also can’t compete with the pharmaceutical giants vying for the same supplies, and it doesn’t get the preferential treatment given to COVID-19 vaccine suppliers, Small says.
The company has learned to place orders with three or more vendors for the same product, waiting to see who can deliver plastic resins or glass testing vials the fastest. Once one order is filled, the other two will be canceled.
“It’s just something you need to pay more attention to than you normally would have,” Small said.
A bigger concern is whether the company will remain in its Cumberland headquarters once the implantable device gets approval to enter the commercial market.
Small is already having difficulty hiring scientific analysts. Rhode Island “is not the center of life sciences,” he said, adding it might be better to move somewhere with a bigger pool of qualified workers and a better business environment.
The business community can be quick to complain about high taxes and red tape, which make it hard for small companies in Rhode Island to start and grow. However, these complaints appear to be falling away as inflation and labor shortages increasingly squeeze business owners.
One in three survey takers say they want the state government to support them by reducing red tape, the lowest rate in the history of the survey. And concerns over the costs of doing business were less prominent, voiced by two-thirds of those surveyed compared with over 75% in the winter 2022 survey.
BUILDING MOMENTUM
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Michael Giuttari / PBN FILE PHOTO/MICHAEL SALERNO[/caption]
While some businesses struggle, Michael Giuttari has very little to complain about at the moment.
The president of MG Commercial Real Estate Services Inc. is still riding high from a record-breaking sales year in 2021, including brokering the $8.3 million Phillipsdale Landing sale in East Providence and part of the Johnston land that will become the new Amazon warehouse.
Demand for traditional office space might be waning, but the industrial market has never been hotter. And Giuttari is in an advantageous position, representing both buyers and sellers.
In fact, he recently spent $150,000 to renovate his downtown Providence offices with new heating and cooling systems, information technology equipment, furniture and a fresh paint job.
“We’ve got the money and it was time,” he said.
He’s not alone. One-quarter of businesses are planning capital expenditures next quarter, and 1 in 7 will be expanding their facilities – nearly twice the rate of the prior survey.
The economic storm hasn’t hit everyone equally, Mazze says. Some businesses and whole sectors have thrived in the face of hardship, while others can barely keep their doors open.
Indeed, Giuttari’s business seems resistant to recession. Right now, available property is scarce, so it’s boosted the sale prices. But if the pendulum were to swing the other way?
“If the economy is down, then more buildings are for sale, so we still make out,” he said.