Small Business Insights

Deck the halls: How small businesses are preparing for ChristmasA Xero Small Business Insights Report

NOV 2017

Welcome

It’s a momentous time of year for Australian small businesses. Christmas is fast approaching, and along with it comes the excitement and fervour of the annual holiday season.

It’s always a busy time of year, but there’s one key difference in 2017. The US retail juggernaut, Amazon, is set to land on Australian shores (after years of rumour), bringing with it US$530 billion worth of firepower. Understandably it has everyone, from the largest department stores to our humblest corner stores, unsure of what the future might bring.

Thankfully, our retail industry is in good shape.

We recently launched Xero Small Business Insights, a monthly snapshot of the small business economy, to track and monitor how this big driver of our economy is performing. Built with support from KPMG Enterprise, it provides one of the most comprehensive looks at key performance metrics for small businesses, including cash flow, getting paid, hiring people and global trade.

The Christmas season marks not only the peak sales period for the retail industry each year, but plays a significant role in shaping the 12 months that follow. The latest Xero Small Business Insights show just how prepared businesses are. The number of retailers who are cash flow positive — a key measure of profitability and potential for survival — has been rising in recent years, while the number of late payments to all businesses continued to fall during 2017.

The changes, while gradual, are crucial for the success of the local retail industry, especially in light of the challenges they could face in coming months.

Amazon is expected to arrive any day now – potentially before Christmas. The move has many nervous, and its arrival may herald a new age of retail in Australia.

Inside, we look at what Australia’s small retailers are doing to prepare for Christmas, Amazon’s arrival, and the potential pitfalls of failing to prepare.

If you’d like to understand more about Xero Small Business Insights, head to xero.com/small-business-insights.

Trent Innes Managing Director, Xero Australia

Deck the Halls

It seems like Christmas comes earlier every year. Even in mid-October, the halls are already decorated, the tinsel is out, and the carols are blaring incessantly through the shopping centre speakers. But even before kids begin to prepare their wish lists, inside the offices of 130,000 small retailers around Australia, lists forecasting cash flow and supplies are being made, checked and double-checked.

Months before the big day, preparation has begun for the holiday season.

“Christmas is absolutely ridiculous,” says Pippa Oostergetel. “I’ll spend all of January recovering, just getting some sleep.”

As founder of Squeak, a retail business specialising in digitally printed scarves, Christmas is the biggest time of year for her. Some years, she says, November and December sales can make up half of her annual revenue.

Like all small business owners, Pippa plans ahead where she can. However, knowing what to plan, and how to ensure that planning is accurate isn’t always easy.

“Small businesses need to have their books in order for Christmas,” says Charles Klvana, managing director at Perth bookkeeping practice Eye on the Books. “They need to use up-to-date financial data, look at how they travelled last year, and budget based on sales in previous years and what they’re expecting this year.”

For Kelly Jamieson, founder and managing director of unique gift service Edible Blooms, comes the added stress of making sure enough casual staff available on call to keep things moving, as well as ensuring there’s enough stock on hand.

“We start preparing for Christmas in the middle of the year,” Kelly says. “Normally, across Australia and New Zealand, we deliver an edible bloom every two minutes. At Christmas, it’s every twenty seconds. We’re Christmas experts by now.”

PaidTo Pay

Pippa Oostergetel, Squeak Designs,Melbourne Online Small Retail Owner

Xero Small Business Insights shows that both online and physical retailers are in good shape for Christmas 2017.

Over the past several years, the number of smaller retailers with positive cash flow has ticked upwards as businesses bring in more cash than they spend. A total of 61.1 percent of retailers were in the black as of Christmas 2016, far above the 54.6 percent of all Australian small businesses, a sign of retailers’ relative financial health compared to the rest of the economy.

Some 36.5 percent of invoices paid to small business during December 2016 were overdue, a slight rise year-on-year, showing the impact large businesses continue to have on the cash flow of smaller ones. However, late payments have dropped significantly across the board during 2017, as large businesses begin to settle outstanding invoices with small business suppliers far more quickly.

Thankfully, the healthy signs for retailers are expected to persist in 2017, with fewer invoice payments being overdue as compared to previous years.

“Retailers are increasingly less financially stressed this year, which would align with the view that the small retail sector is improving as the mining downturn recedes,” says Bernard Salt, KPMG Special Advisor. “If this is indeed the case, then the proportion of invoices paid in December in this sector this year should approach the 62% mark.”

Economic improvement across small businesses is good news for retailers like Squeak and Edible Blooms, who rely heavily on their business data to forecast expected sales and stock level requirements for Christmas.

Roy Habibis, co-founder of Melbourne boutique department store D’Artagnan, orders Christmas stock from January onwards to provide a clear line of sight throughout the year.

“If our stock levels are low, so is our revenue. As a result of forward-ordering, our business has seen huge growth,” he says.

Charles from Eye on the Books says businesses need to be diligent in the lead-up to Christmas and beware of over-ordering.

“If they have to discount after Christmas, it negates any extra income they would have received from the extra stock. A business with 30 percent profit margin offering a 25 percent discount needs to increase sales by 500 percent to get back to the same amount.”

Kelly Jamieson from Edible Blooms says they are always learning.

“Every Christmas, we debrief with all of our store managers, make a list of what worked and what didn’t, and figure out how we can improve for next year,” she says. “We’ve done that for 12 consecutive years. I can confidently say that every year we get a little bit better — I don’t think you ever get it perfect, but with the busy periods it gets a little easier.”

Santa Claus is coming to town

If they have to discount after Christmas, it negates any extra income they would have received from the extra stock. A business with 30 percent profit margin offering a 25 percent discount needs to Increase sales by 500 percent to get back to the same amount again.

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61.1% of retail business were cash flow positive in December 2016 (up 3.1 percent yoy)

36.5% of invoices paid in December 2016 were overdue (up 2.3 percent yoy)

Hire up, but cautiously

The Christmas period is a boon to casual workers looking for some extra cash during the holidays. Retailers need more service personnel and salespeople on the point-of-sale machine so they continue to provide the best possible service during what is typically a manic season.

Staff numbers at Edible Blooms often grow over November and December from 50 employees across seven locations, to more than 80 to cope with the extra demand. Managing director Kelly Jamieson says they often call on existing staff to find extra hands, and use the previous years’ forecasts to ensure they’re hiring plenty for the three weeks leading up to Christmas.

But for Roy Habibis at D’Artagnan, hiring too many new casuals means bringing in people who don’t know the business or its customers, leading to poorer service. Instead, to cope with the extra demand over Christmas, he prefers to give existing casual staff more hours.

“Our employees aren’t the type that stand behind the till and process sales; they’re the customer’s counsel, advising them on our products and on what would work best for them,” he says. “Over the busy Christmas period, it doesn’t make business sense for us to bring in somebody that doesn’t have the same level of expertise as our other staff. It’d be detrimental to our business and our customers’ experience.”

December is typically a major hiring month for most retail businesses in the lead-up to Christmas. Retailers in Queensland and Victoria had the lowest rates of casual staff employment growth (1.02 percent and 1.53 percent respectively).

Overall, hiring appeared to ease during 2016, with casual staff growing 2.27 percent between November and December, a slower rate than previous years, suggesting retailers are protecting themselves from overspending, particularly in the face of competition from online retailers both small and large.

Through 2017 so far, Australian retailers have been hiring at lower rates than other industries. But growth is expected to return in the coming months. KPMG’s Bernard Salt says the collapse of the mining boom has continued to have a flow-on effect throughout the economy, impacting retail hiring, but this is beginning to ease, causing retailers to hire once again.

“In short, December 2017 is likely to be a better than December 2016 for many retailers,” Bernard says. “It’s time to move on from the all the doom and gloom of the end of the mining boom. And besides, immigration levels have continued to grow the demand for retail goods this year as compared to last year.”

Charles from Eye on the Books says small retailers need to be cautious about taking on the extra admin and cost of hiring staff for the Christmas period.

“Some retailers go from three staff normally, to 15 in a matter of weeks as they gear up for Christmas,” he says. “If their existing systems can’t deal with large increases in staff for a short amount of time, they need to review internal systems such as timesheets. The time it takes to do payroll blows out amazingly during that time.”

HIRING

HIRING

Hiring people in retail

How retailers are gearing up for Christmas

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Australian businesses show strong similarities across the countries, but there are still quirks to being in some states over others. Overall:

Xero Small Business Insights show a gradual decrease nationally in the percentage of overdue invoices in December, showing that efforts such as a voluntary payments code are working to bring down the time it takes for larger businesses to settle their debts in a timely manner.

With many invoices continuing to exceed their due dates, small retailers across the country are managing one of the busiest times of the year on a tightened and restricted budget.

How states compare

Queensland businesses saw overdue invoice payments increase by a third between 2015 and 2016, while employment only inched up, suggesting retailers are struggling to grow.

Victorian retailers have a relatively high instance of overdue invoice payments, at 40.5 percent in December 2016, and have been cautious on employment, with part-time workers falling 0.4 percent between November and December in 2016.

New South Wales businesses saw a drop of 3.75 percent in overdue invoice payments between 2015 and 2016, allowing businesses to grow healthily than other areas.

Getting ready for Christmas 2017

Retailers need to ensure they’re well-prepared, financially and logistically, to make the most of Christmas 2017. Here are some key tips for retailers to get themselves in the best position.

1. Use your data

Many retailers collect a lot of data in their day-to-day operations but don’t fully use it. Look back at previous years’ operations to see what sold well (and what didn’t), your stock and hiring levels, and profit margins across the business, in order to make more informed business decisions.

By using your financial data more intelligently, you can hire the right amount of staff ahead of the Christmas rush and ensure you don’t over-order on stock.

2. Know the full cost of hiring morestaff

Hiring Christmas casuals can be significantly more complicated than just employing hired hands. With more staff comes significantly more admin. Make sure you consider the full costs of hiring staff, from any additional penalty rates and additional payroll admin, to ensuring your systems can cope with doubling or trebling your staff counts quickly.

Don’t forget to monitor your cash flow – you’ll need to set aside taxes and super which are often due early in January. And you’ll need to plan payroll to so that staff get paid on time if paydays fall on a public holiday.

3. Find the right suppliers

Once you’ve determined the right supply levels, use every option available to buy and manage stock in the right way for your business. Order initial stock well ahead to make sure it has plenty of time to arrive, or find suppliers who can deliver stock at short notice.

Better yet, find suppliers that provide stock on consignment terms. While this differs from industry to industry, buying stock on these terms can ensure you’re not left in the lurch with unsold inventory.

4. Beware of discounts

Unsold stock often leads to heavy discounting following Christmas. Boxing Day sales can seem like a great idea to clear stock but it’s not always a wise move. Many other retailers offer discounts at the same time, making it competitive and driving down prices.

Make sure any discounting is based on a sound pricing strategy that doesn’t trade profit margins for a quick buck.

5. Plan now for the year ahead

It can be tempting to sit back and take it easy once the Christmas rush is over. And after spending months preparing and planning for the busy season, retailers well deserve a break. But it’s also a good idea to start preparing early for the year ahead.

Speak to your bookkeeper or accountant about a financial plan for the next 12 months, chase customers for unpaid invoices, and ensure your systems are in order before the end of the holidays so you’re in a great position for a stress-free start to 2018.

Kelly Jamieson, Edible BloomsAustralian Small Retail Owner

As retailers prepare for Christmas 2017, there’s one more thing to think about and that’s Amazon.

The global retail giant is headed down under – perhaps by the end of the year – causing many in retail to wonder how it might impact their business.

“It’s a little bit scary. It’s definitely what everyone is talking about. Everyone knows that it’s coming,” says Pippa Oostergetel from Squeak.

Analysts peg Amazon’s potential revenues at up to $12 billion annually in the next decade — half of what Australians spent online in the past year — with major department stores the most likely to be affected by the fast-shipping retailer.

But should smaller retailers worry?

“Amazon is arriving quite late in the game in Australia, so it won’t be the same doom and gloom as elsewhere,” says Charles of Eye on the Books.

For one thing, Australian ecommerce – though growing – remains behind comparable countries. According to the NAB Online Retail Sales Index, Aussies spent an average $940 online (or US$725) in

the past year, compared to US$1230 in the United States. Australia is on a par with Canada’s US$730 in online sales per capita, where Amazon’s entrance several years ago threatened retail stores but failed to make the same mark as it has in the US.

KPMG Special Advisor Bernard Salt says small retailers are likely to fare better than larger ones.

“Smaller retailers are local, agile, and have a niche position in terms of customer base and stock composition,” Bernard says. “In some ways, I suspect that the impact of Amazon with be greater at the bigger end of the retail industry. Time, and 2018, will tell on that score.”

There are ways small retailers can shore up their chances of keeping and growing their customer base: ensuring they have an online presence, offering fast delivery, and creating a personal touch that offers friendlier, more loyal service than a major company like Amazon might be able to provide.

Kelly Jamieson of Edible Blooms says she’ll look to Amazon as a new distribution channel to reach consumers faster than before.

And for Pippa, it’s an opportunity to improve customer service and give them what they want, when they want it.

The new kid in town

Pick me

“I want to try to create that boutique feel as opposed to a mass market feel,” she says. “I still pack orders and go off to the post office — that’s great and has that personal touch because everyone gets a personal note but I also need to be able to offer same-day dispatch.

“It’s trying to keep a personal feel that will get people coming back to me. But I’m not a snob about it; when Amazon gets here I’ll also be saying ‘pick me, pick me’.”

Amazon’s impending launch is set to have a major impact on the retail industry, and major retailers are preparing for battle, with recent reports suggesting they stand to lose up to $800 million from their profits.

For smaller retailers, the direct impact is more difficult to predict. As more people head online to shop, there is potential for growth and success alongside, as well as with, Amazon.

Here are five steps retailers can take to ensure they’re ready for Amazon’s launch.

Preparing for Amazon’s arrival

1. Find your point of difference

Amazon’s success is built largely on low-cost consumer products and fast delivery. As a company, they use data insights to understand the behaviour of their customers and to drive conversions. Without competing on every level, it’s important to play to your strengths and understand your point of difference.

Do you have a strong consumer community? Do you offer personalised customer service? While they may have the buying power, they can’t offer the local insight, customer loyalty, and individual customer service smaller retailers can offer.

2. Improve your customer experience

Amazon is known for its quick turnaround, same-day delivery, and seamless user experience.

Most smaller retailers may not be able to offer near-instant delivery, but they can significantly improve the experience they provide. Like Pippa from Squeak, using fulfilment agencies and warehouses to speed up shipping times can significantly increase customer loyalty, and make the experience more seamless. And having a beautiful, mobile-focused web presence puts your products in the best light.

3. Get your books in line

Xero’s Small Business Insights suggest that two-thirds of small Australian retail businesses are likely to be cash flow positive over the Christmas period this year. This positive cash flow is essential for the growth and success of your business over the months – and year – following Christmas.

As a small business, you’ll be in the best position to compete in the new age of retail if you’ve got sufficient cash flow to maintain and grow your business. Make sure you have clear-cut policies in place for late or non-payment and create an internal timeline for payment reminders and collections.

4. Understand what’s coming

How well do you actually know Amazon? If you are going to hold your own as a business in the new age of Australian retail, it’s crucial to understand the competition. Get to know the Amazon platform, their marketplace and the options.

Amazon offers services for sellers and a marketplace for smaller businesses to sell their products, alongside fulfilment and shipping options. While this might not suit all retail businesses, knowing what’s available to you will help significantly.

5. Get started now

Amazon’s launch date is still an unknown, but you can be putting your mitigation strategies in place now. Take the time to continue building consumer loyalty, optimise your website, and refine your processes for delivery. Waiting until Amazon launches means you’ll be playing a dangerous game of catch-up.

About Xero Small Business Insights

Xero Small Business Insights is a snapshot of the sector’s health, updated monthly. Its metrics are based on anonymised, aggregated data drawn from hundreds of thousands of our subscribers. The result is a picture of business conditions that’s more accurate than most private surveys, which have a far smaller sample size, and it’s more frequently updated than most ABS data on small business.

This report contains general information only and should not be taken as taxation, financial, investment or legal advice. Xero recommends that readers always obtain specific and detailed professional advice about any business decisions.

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