Small businesses under pressure as sales plummet to pandemic levels

A combination of multiple interest rate rises and higher-than-usual inflation, coupled with a slowdown in sales and wages growth, have been pinpointed as the main reasons for the largest decline in Australia’s small business performance since the beginning of the pandemic, according to new Xero data.

Global small business platform Xero released the latest findings from its pulse check on the health of Australia’s small business economy on Tuesday. 

The Xero Small Business Insights (XSBI) data, which covers October through to December 2023, showed a significant shift in the final month of last year when the Index fell 37 points to 89 points, its lowest level since September 2020 and the first time in a year the index has dropped below the 100-points level. 

It is the largest single-month decline since April 2020, when the economy was essentially closed down by the pandemic.

The report also illustrated the strain on household budgets, with multiple interest rate rises and inflation seeing small businesses, particularly those in the retail and hospitality sector, reach a tipping point in December.

December 2023 also saw the smallest rise in sales growth since January 2021, averaging 1.7 percentage points less than the September result at 6.8% year-on-year.

Wage growth also saw a distinct slowdown in December, with wages rising just 2.5% year-on-year. This result contrasts the upward trend seen at a national level, with the wage price index (WPI) rising 0.9% in the December quarter and 4.2% in the 12 months to December.

However, on a more positive note, small businesses have seen a modest pick-up in jobs growth in the final few months of the year, by 3.5% year-on-year for the December quarter. 

Jobs growth was above the pre-COVID average for this series (3.0% year-on-year), and showed an increase when compared to the September quarter, which came in at 2.7% year-on-year.

Xero’s interim country manager Theo Konstantas told SmartCompany the latest Xero Small Business Insights data indicates a challenging period for small businesses, marked by a slowdown in both sales and wages growth over the October to December quarter.

“The shifts in the data are in line with what we’re seeing across the broader economic landscape,” he says.

“Higher-than-usual inflation and associated cost-of-living challenges are impacting consumer behaviour. 

“It was positive to see the sales and wages growth slowdown partially offset by a modest pick-up in jobs, with healthcare and education and training sectors leading the gains.

Konstantas says the slowdown in performance means small businesses need to take steps to address their unique challenges and remain productive.

“This could be thinking about how to implement technology to streamline processes, or using accounting software to generate cash-flow projections to plan for future expenses and manage cash reserves,” he says.

“It’s important that small businesses work closely with their advisors, particularly accountants and bookkeepers. The relationships are invaluable during uncertain periods.”

“We can ride it out”

Sydney family business Sticky, led by partners and owners David King and Rachel Turner, has had a retail store down in The Rocks for just over 20 years and currently has 18 staff members.

Sticky makes homemade rock candy and has amassed 7.5 million followers on TikTok and 618,000 followers on Instagram.

As well as Australia, the former SmartCompany Resilience Awards winner also sells goodies online to the US, UK, Singapore, Malaysia, Hong Kong, Indonesia, Cambodia, Saudi Arabia and Mexico.

Turner spoke with SmartCompany about what the Xero data means for small businesses, as well as Sticky also experiencing a drop in business performance for the month of December like other businesses.

“We sell a relatively cheap item and people, I think, can still afford a bag of candy. It’s a bit of a treat,” she says when reflecting on Sticky’s last quarter. 

“But we certainly did notice leading into October that figures were looking pretty soft.

“I thought ‘oh, this is going to be quite a quiet quarter’. 

“November was quiet. I would say that our sales were incredibly well buoyed by Black Friday sales, so I do feel like customers were holding out for those sales particularly.

“December was pretty flat for us. So for the whole month, if you looked at the quarters as a whole, it was actually not bad. But if you break it down by individual months, if it hadn’t been for the Black Friday sales that would have been a very soft quarter.”

Turner says the Sticky team is optimistic about what the future holds and encourages customers to keep supporting local businesses.

“I think it’s a difficult time but I feel like we can ride it out,” she says. 

“I know other businesses probably may not feel that way, but it is a tough time. 

“I think that if we just tighten our belts a little bit and move forward, that it’ll be okay.”