Small businesses resilient in fuel crisis, but challenges loom

The latest Xero Small Business Insights (XSBI) data reveals a surprising trend: despite the fuel crisis erupting in March, small business sales held firm. But this resilience is fragile; the longer the crisis persists, the greater the pressure on profit margins and the broader economy. 

What happened to fuel prices in March?

During March, average petrol and gasoline prices saw a substantial surge across all tracked countries, with price increases ranging from 15% in the UK to over 43% in Australia. Diesel price increases were even greater, led by New Zealand (+85%).

Unfortunately, fuel prices are unlikely to come down meaningfully any time soon, given it will take many months for the world oil market to return to normal, even after the Strait of Hormuz is reopened. 

How can fuel price spikes impact small businesses?

Fuel price increases can hurt small businesses both directly, through rising costs of fuel (and eventually many other inputs), and indirectly, as customers are left with less to spend on non-fuel goods and services. Profit margins come under pressure as owners try to balance the impact of rising costs against the challenge of passing these on to customers as higher prices. 

What happened to XSBI sales in March?

March data shows surprising resilience in consumer demand. 

Small business sales rose in all 5 countries tracked by XSBI during the month of March. Led by Australia (+10.9% y/y), New Zealand (+5.5% y/y), United Kingdom (+5.0% y/y), United States (+3.6% y/y) and Canada (+1.0% y/y). This suggests customers still had capacity to spend on non-fuel goods and services, even after the pain of filling up their car. 

The immediate impact on profit margins would have varied by industry, with those having high fuel dependency feeling the biggest initial squeeze. 

Will this trend continue?

It is still early days in this crisis and the fuel price impacts have not yet worked through the economy. To date, much of the price impacts are in fuel-exposed industries, such as transport and logistics. This can be seen in the March CPI data, released by national statistical offices (e.g. US Bureau of Labour Statistics), which show while CPIs increased in March this was almost entirely due to fuel prices only – other businesses aren’t yet raising the price of their goods and services. 

Yet is the key word here.

Business profit margins can’t absorb these dramatically higher fuel prices indefinitely. Transport is such a key input for many businesses that eventually the higher transport costs will flow through to the price of goods and services across many industries in the coming months, spreading the economic damage. 

Once price rises become widespread, this puts pressure on central banks to respond with higher interest rates to combat the broader inflation shock. 

This combination of rising, broad based inflation and interest rate rises will put further pressure on household budgets and reduce their capacity to spend in small businesses.

The situation is even more serious for Australia and New Zealand who import fuel, much of which comes from Asia via the Middle East. Current advice is that fuel stocks are sufficient and small businesses should continue to buy and use fuel as normal as both governments work to secure future supply. But any future rationing of access to fuel would clearly have a bigger negative economic impact than the price hikes have to date. 

How can small businesses navigate these rising costs?

During periods of major geopolitical upheaval that are outside their control, small business owners need to continue to focus on the aspects of their business they can influence. This includes working with financial advisors to understand and manage cash flow, using prompt payment practices to improve the chance of getting paid on time, and keep delivering great customer service.