There’s a Small Chicken Shortage
I did not expect to open The Wall Street Journal the other day and see the headline “KFC, Other Chains Hunt for Elusive 4-Pound Chicken,” but there it was. Apparently due to the skyrocketing popularity of spicy chicken sandwiches (and they are delicious; shoutout Hattie B’s) small-breast meat is in high demand while chicken farmers prefer to produce larger, meatier, more profitable birds.
The market should correct for some of this but among smaller businesses there’s a concern that “in a few years the large fast-food chicken chains will hog the tight supply.” And it’s a valid concern. In fact, one of the biggest risks for any small business is that a larger, better resourced competitor changes the rules of the game because any changes will have a disproportionate impact on the small business.
A good summary of this reality comes from a 1981 Harvard Business Review article that I discovered back before I took a job at Permanent Equity when I was reading around trying to get a lay of the small business landscape. “A Small Business Is Not a Little Big Business” makes the compelling case (and I’ve found it to be largely true) that small businesses, through no fault of their own, suffer from resource poverty and therefore “external forces tend to have more impact on small businesses than on large businesses” The authors warn further that “small businesses can seldom survive mistakes or misjudgments” (also true), which is why when you meet small business owners liquidity, and not ROI, is paramount.
This is where higher prices for small chickens, or a lack of supply, could be devastating for the not Chick-fil-As of the world. That’s because direct costs, such as chicken prices, are likely to be a greater percentage of total expenses for a small business than a large one. Moreover, a higher percentage of operating expenses at a small business are likely to be fixed or difficult to cut because they have fewer employees, smaller marketing budgets, etc. Finally, if a small business has to do something like borrow to buy its raw materials, rising input costs and rising interest rates can combine to wipe out any remaining profits pretty fast and there is likely less ballast on the balance sheet to sustain them.
Or as HBR put it, the short-term variances during the year at a big business are relatively small compared to the overall result so their financial statements describe a system in approximate equilibrium. Small businesses, on the other hand, are “seldom in equilibrium, or even near it.”
When you don’t have a steady state, any adversity can be major adversity if you’re not prepared for it with a lot of room for error.
– By Tim Hanson
