Insights

How the Rise in Fuel Affects Small Businesses in Kenya

Insights

The beginning of May brought some disturbing news to most Kenyans. Once again, the cost of fuel has risen, going from KES 100.9 per litre in February to KES 112 per litre of petrol in May in Nairobi and further to KES 115.05 in June.

The change is attributed to a global rise in prices triggered by the United States’ sanction on Iran oil. Consequentially, most countries including Russia, China, Turkey, India and Japan have switched to alternative sources. This means that there is reduced global supply of fuel.

What Does this Mean for the Average Kenyan?

While we have nothing to do with the higher powers at play, this political game affects all of us. As we may all know, a rise in fuel costs automatically leads to a higher cost of living.

The first thing to be affected is the cost of transport. I think we’re all familiar with the chaos that this brings on the roads. Fortunately, this time around, matatu fares will remain unchanged, according to the chairman of the Matatu Owners Association. However, Kenyans who prefer to drive may be forced to leave their cars at home.

On a larger scale however, higher fuel costs mean that manufacturers’ cost of operations are affected. A manufacturer of unga for example, will have to pass on the added cost to the consumer, which inevitably means that food will be more expensive.

How Does this Affect Your Business?

Life as a small enterprise owner is hard enough given the uncertainty, hustle for cash and constant pressure. Unfortunately, the increase in fuel prices is likely to add more to your plate.

First, it means that there will be a decrease in spending power among the population. This is because the average Kenyan will simply be trying to survive. As a result, people will spend less on what they perceive to be luxuries and instead stick to the basics. What this means is that if your business offers a service that cannot be avoided such as medicine, food or water, you may be safe. However, if you’re dealing with nice-to-have items like make-up, you could be negatively affected as people may not have the disposable cash to spend.

Secondly, the high cost of production and operations could make Kenya unattractive to investors. We can all agree that no one wants to spend all their money on tax, electricity and endless red tape. Foreign investors would be discouraged from coming to Kenya, especially if other African countries are making it easier to do business. Several companies have already moved to Ethiopia and Rwanda. An interesting opinion piece by Bitange Ndemo shows the stark contrast of business culture in the two countries.

Finally, local manufacturers might go at a competitive disadvantage. Because of the increased costs, local goods may become too expensive for Kenyans to afford. If this happens, individuals and businesses alike will opt to import cheaper goods from China.

How to Deal With Rising Costs

While things may look bleak, there are a few steps you could take to avoid increasing your costs as a business owner.

  • First, you could try maintaining the same levels of productivity with less staff. If there is a way to operate the same level of business with nine people instead of ten, pursue it. This could also be an opportunity to automate processes instead of doing things manually.
  • A second option is to find cheaper alternatives. Explore different suppliers who can give you the same quality at a reduced price. [1]
  • Another solution is to ramp up your customer retention techniques. As prices increase, your existing customers will be trying to look for cheaper alternatives. However, you can keep them from leaving by creating incentives such as after-sales care, loyalty points or by providing exemplary customer service. Have a look at our customer service article for tips.
  • Borrow now. Rising prices means that interest rates will also go up. You will need to think ahead and take the loans that you need as soon as possible. You can explore Credit Bank’s rates and see what works for you. [1]
  • Finally, If you must increase prices, do so strategically. It helps to inform your customers of your situation and how they will be affected beforehand. People generally tend to appreciate the authenticity. As your raise prices, keep an eye on the competition so that yours are slightly below theirs.

Aside from this, you can get insight and encouragement on how other entrepreneurs are dealing with the situation by registering to our Entrepreneurs Hub.

Long-term Solutions

Ultimately however, the power to curb future inflation lies with the government. Prices could be more manageable in future by:

  • Stabilizing the shilling’s exchange rate against the dollar: This would avoid such extreme disruptions in fuel price.
  • Setting up petroleum reserves: Reserves would act like that emergency savings account that we’re all recommended to have. If this is done, Kenyans wouldn’t have to be subject to global costs.
  • Reviewing taxation on petroleum products: Taxes currently account for 40 per cent of the retail cost of petrol or Sh45.59 of the Sh112.03 per litre Nairobi. If you think about that for a moment, it means that almost half of what you’re paying in fuel goes to taxes. Lessening the percentage of tax would relieve the burden off the people.

In conclusion, the issue of rising fuel costs can be daunting for the entrepreneur. While it’s tempting to dismiss the solutions as out-of-our-hands, the hard truth is that continued inflation will lead to an unsustainable business environment. It is thus our responsibility as small business owners and citizens to push for solutions, having seen the direct impact that a rise in fuel has on our lives and businesses.

Bibliography

1. Six Ways to Prepare your business for inflation. [Online] [Accessed 23 05 2019]. https://nevadasmallbusiness.com/prepare-your-business-for-inflation/.
2.Gaebler, Business Strategies for Inflationary Times. [Online]. [Accessed 16 May 2019]. http://www.gaebler.com/Business-Strategies-for-Inflationary-Times.htm.

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