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Surging energy prices and supply chain delays are threatening the economic recovery and causing significant issues for merchants still struggling with the aftermath of COVID-19 restrictions. On top, merchants must navigate local bottle-necks – e.g., UK border delays, transport, and petrol shortages – causing further stress.
Worries about stagflation and the looming rise of interest rates are undoubtedly causing angst across Europe as well. The perfect storm of consumers spending less and the impact of the supply chain crisis, e.g., fewer goods on the shelves to sell, means cash flow issues are hampering merchants.
How did we get here?
As Covid-19 hit, consumer demand went from being skewed from services towards goods. Restaurants and pubs closed, stages were empty across theatres, and cinema screenings came to hold amid extensive lockdowns and restrictions on social assembly.
Instead, consumers started spending more money on anything from clothes to electronics, furniture, pets, DIY and fitness equipment, amongst other things. This spending was supported by economic stimuli from governments across the developed world, keeping unemployment relatively low, meaning consumers still had money to spend but fewer places to do so.
While demand can be boosted by printing money, supply is not as easily boosted. Put differently, a road doesn't get more lanes just because more cars are using that road. This dynamic has caused the biggest traffic jam in the supply chain in peacetime, resulting in significant delays in delivery times.
Adding to the challenges, shortage of materials, e.g., chips for electronics, and reduction in factory output due to Covid-19 difficulties have reduced the number of goods being produced.
Further, energy prices and wage inflation has added further problems.
After Covid-19, we are now in a world of significant shortages from a world of excess supply. One key pain point for merchants is cash flows; fewer goods mean lower revenue, more expensive goods mean lower profit margins, and delivery delays mean working capital issues.
What is ahead of us?
We are optimistic that 2022 will see improvements, albeit slow. However, as for the remainder of 2021, we struggle to see material gains.
This view is by no means contrarian, and risks to the downside are building things that get worse before they get better.
Apple guides to lost revenue in the coming quarters amid an inability to produce enough iPhones and other products to meet demand. Similarly, Amazon guides for a weak 4th quarter where profits are expected to suffer from challenges in fulfilment and increasing labour costs.
On the transport side, FedEx paints a gloomy picture pointing to the lack of drivers as their single most significant business problem and guiding for a rough six months ahead.
How can merchants protect their businesses?
Merchants will need to adjust to more volatile supply chains in the future.
A key challenge is cash flow. Order and delivery cycle expansion will impact merchant cash flow negatively. And lack of visibility will impede the merchants' ability to plan, invest and grow.
No two merchants are the same, but we have identified three high-level areas where merchants should focus.
🡪 Source locally to reduce transport time and costs
The delivery cycle is significantly extended from both shipping and ground transport bottle-neck. There are significant price rises on key commercial routes, e.g., Asia to Europe, making it relatively more attractive to find local suppliers if possible. Local suppliers who may have seemed more expensive pre-pandemic are becoming more beautiful as you can eliminate the rising shipping costs and have higher visibility to delivery times.
🡪 Plug the (potential) cash flow gap quickly through external finance
Extended delivery times mean the working capital of merchants is more strained than usual, despite the increasing economic activity. Simply speaking, even though merchants sell more, they are paying earlier for goods, receiving them later, and making less profit as shipping costs can erode margins short term.
🡪 Align your funding profile to a lumpy supply chain (revenue-based finance is one solution, B2B BNPL another but here fixed amortizations are an issue)
In times of uncertainty about the lead times for receiving goods and thus the length of time between paying for goods and receiving revenue by selling them, it is important to finance working capital flexibly. A fixed amortization product fits poorly to this reality whereas revenue-based repayments link the finance directly to being able to sell the end product to the consumer. This gives the merchants increased flexibility in times of unknown working capital cycles.
Payments companies and e-commerce platforms are ideally placed to solve this problem for merchants. By offering embedded financing solutions similar to what YouLend provides, because these companies in partnership with a provider i) understand the merchants' reality through real-time data better than, e.g., high street banks, ii) link amortizations to realized revenue and iii) offer a seamless and efficient onboarding process relative to other providers who don't know the merchants already. We argue this is a solid solution to the current economic environment merchants experience.
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