Pump prices start to hit small business sales

The June quarter Xero Small Business Insights (XSBI) results show how higher prices at the pump, due to the conflict in the Middle East, are impacting small businesses differently across Australia, Canada, New Zealand, the United Kingdom and the United States.  

The link between pump prices and small business sales

Filling the car up is costing more than it was at the start of the year, which is squeezing household budgets and leaving less money to be spent in small businesses. At the same time, freight costs are also increasing which means small business owners are seeing costs increase, to varying extents, across a range of inputs. 

In the initial two months of the conflict, small business sales appeared largely unaffected. However, by May, when pump prices peaked, all countries tracked by XSBI saw a dip in sales growth. This was followed in June with a sales uptick, to varying extent, as fuel prices eased back on the ultimately misguided hope of a sustainable cease-fire agreement.  

Top performers, low performers, and an outlier

The impact of rising energy costs is never uniform. The June quarter results highlight a sharp divide between industries that can pass on costs and those that are more exposed to discretionary spending. 

For example, the Transport, postal, and warehousing sector in the UK (+8.2% y/y) and Australia (+11.6% y/y) was one of the top performers. However, this is likely to be largely “nominal” growth due to price rises. These businesses are often the most exposed to fuel prices and are forced to (and can) pass these costs on to customers immediately to survive. This means much of the growth represents higher prices rather than an increase in actual business activity.

Conversely, sectors tied to discretionary spending are bearing the brunt of current conditions. When household budgets are squeezed, “wants” are sacrificed for “needs”.

• Hospitality: In the UK, hospitality sales actually fell during the quarter. Even events like the World Cup in June failed to provide the expected boost.
• Retail Trade: Growth in this sector was a meager 2% in the UK and 1.5% in Australia.
• Arts and Recreation: These sectors also saw significant softening, growing by only 3.2% in the UK and 0.7% in Australia.

The exception to this narrative in the June quarter was New Zealand, in particular its export-focused agriculture industry. This recorded an impressive 16.3% y/y increase in sales, on the back of strong export growth. This helped boost overall quarterly sales growth in New Zealand from 5.1% y/y in the March quarter to 8.6% y/y in the June quarter.

Secondary ripples: jobs and cash flow

Beyond the immediate impact on sales, we are seeing secondary effects that should concern every business owner: a stall in hiring and an increase in late payment times in some countries.

Small businesses are currently easing back their hiring. In all the countries where we track jobs growth (the UK, Australia and New Zealand) hiring momentum slowed during the quarter, as owners exercised caution amidst economic instability. 

The combination of rising costs alongside increasingly reluctant customers is likely to be squeezing profits and cash flow. This can emerge through the XSBI late payments metric, which may worsen as businesses throughout the supply-chain try to hold onto cash for longer. This creates a circular pressure: if your customers pay you later, your ability to pay your own suppliers is compromised. To date the evidence in this area is mixed. Canada already had the worst late payments record, at an average of 11.3 days late. The US (8.5 days) and Australia (6.0 days) saw an improvement in late payments between the March and June quarters (although this was due to seasonal factors in Australia). And the UK (8.3 days) and New Zealand (4.7 days) both experienced small increases in late payment times. 

Looking ahead: resilience in a softening market

The data from the June quarter is a sober reminder of how interconnected the global economy is. The conflict in the Middle East may feel distant, but its impact on oil prices has a direct, measurable effect on a local bakery in Sydney or a boutique in London.

Overall, while the sales data isn’t moving in the direction we would want, small businesses have historically shown remarkable resilience. The key to navigating this period is for owners to focus on the variables you can control:

• Monitor and protect profit margins: Make sure you understand how your costs are changing and, where possible, reflect any increases in your prices to protect your profit margins.
• Cash flow vigilance: Don’t let your invoice payment times drift higher, stay on top of your accounts receivable to ensure your liquidity isn’t trapped in someone else’s bank account.
• Strategic hiring: If you must hire, focus on roles that directly contribute to revenue generation or efficiency. Work with a trusted financial advisor to understand the pros and cons of these decisions over the coming months.

The current softening in sales growth is a challenge, but by understanding the macroeconomic forces at play, you can better navigate the road ahead.