Dire Small Business Warning — Deutsche Bank Research, Payments Expert (5 April 2020)
Summary
This is a Deutsche Bank Research North America industry update dated 5 April 2020, Payments Expert Call: Dire Small Business Warning, on a conference call hosted with Toby Scammel, Founder & CEO of Womply. It discusses the evolving negative impact of COVID-19 on US small business sales and the challenges with the US small business stimulus plan. Scammel is described as cautious on the current plan's ability to reach small businesses effectively and in time, and as believing that pushing funds through fintechs and card processors could be one of the only viable solutions. The report cites potential for an over 30% failure rate to be realized without significant small business assistance.
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Deutsche Bank
Research
North America Industry Date
United States 5 April 2020
Payments Expert
TMT Industry Update
Payments, Processors,
& IT Services
Call
Dire Small Business Warning
Bryan Keane
Small Business needs help urgently Research Analyst
We hosted a conference call with Toby Scammel, Founder & CEO of Womply, to +1-415-617-4246
discuss the evolving negative impact from COVID-19 on US small business sales Korey Marcello
and the challenges with the US small business stimulus plan. Scammel described Research Analyst
the current small business situation pessimistically, with small business owners +1-904-527-6235
panicked, confused and running out of time. Through robust data insights,
Marcel Abend
gathered across its +450k merchant commerce platform and payment
Research Associate
partnerships, Womply has seen small business physical transaction revenue drop +1-904-645-4197
-25% Y/Y in recent days. Small businesses are critical to the US economy making
up ~$10trn in GDP and ~55% of jobs but are also the most vulnerable and hardest Top Picks
entities for the gov’t to reach. In addition, with the gov’t using traditional SBA and
Visa Inc. (V.N),USD151.85 Buy
bank rails to deliver stimulus (Friday was first day to start applying for loans),
MasterCard (MA.N),USD237.03 Buy
Scammel was cautious on the current plan's ability to reach small businesses
PayPal (PYPL.OQ),USD92.39 Buy
effectively and in time. Urgently, he believes pushing funds through fintechs such
Square (SQ.N),USD43.72 Buy
as SQ and PYPL as well as card processors like FIS, GPN, and FISV to small
businesses faster could be one of the only viable solutions (gov't needs to embrace Fiserv (FISV.OQ),USD86.19 Buy
this method immediately). Please see body for detailed data on current trends, Global Payments Inc.
Buy
(GPN.N),USD126.30
stimulus, and let us know if you are interested in a replay and slides for the call.
Source: Deutsche Bank
Significant small business headwinds could worsen Companies featured
Some of the hardest hit sectors include transportation, arts/entertainment, lodging, Visa Inc. (V.N),USD151.85 Buy
restaurants/bars, health/beauty, and auto sales/services. Restaurant sales are MasterCard (MA.N),USD237.03 Buy
down 50-70% with data from OpenTable showing table reservations falling to zero. PayPal (PYPL.OQ),USD92.39 Buy
Toast POS data shows restaurant revenue down ~73% nationwide. Further, travel Square (SQ.N),USD43.72 Buy
and tourism sales are down +80%. Although retail and grocery initially saw a strong
Fiserv (FISV.OQ),USD86.19 Buy
boost from panic buying and stocking up on essential goods, those trends have also
Fidelity National (FIS.N),USD115.22 Hold
recently moderated. In addition to overall physical small business sales being down
Global Payments Inc.
significantly in recent weeks, data from Homebase (+1m employees in the US) Buy
(GPN.N),USD126.30
shows 60% fewer hours worked from hourly employees (disproportionate impact
Paychex (PAYX.OQ),USD59.55 Hold
on hourly workers, minority businesses, and poorer communities) with many local
Automatic Data Processing
businesses being fully closed. According to Faire survey data, ~70% of Hold
(ADP.OQ),USD128.57
independent retailers don’t have enough cash, 64% have started reducing
Source: Deutsche Bank
inventories, and retailers are expecting a temporary revenue reduction of 50% of
more (potential for tens of millions of lost jobs). As lock-downs and shelter in place
orders continue, Scammel sees the potential for further weakness with many of the
companies now looking for phase 2 of their job cuts. He sees the risk of substantial
Deutsche Bank Securities Inc.
Distributed on: 05/04/2020 23:24:10 GMT
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware
that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED
IN APPENDIX 1. MCI (P) 066/04/2019.
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US business bankruptcies as real, with potential for an over 30% failure rate to be
realized without significant small business assistance.
Stimulus leveraging traditional rails despite faster methods
Positively, the CARES Act, signed into law March 27th, provides stimulus for small
businesses and individuals. However, the gov’t is currently using traditional rails to
deliver the funds like banks and the SBA with the timing being crucial. Although
Scammel was positive on the treasury and its hard work/talent, historically the SBA
track record for delivering funds in a timely manner has been lackluster. For
example, the SBA failed to deploy just ~$1bn in funds effectively during Hurricane
Sandy with application processing taking 46 days on average, approval rates of
24%, and long delays for disbursement (current rules like 75% of loan going to
payroll to be forgiven creating challenges). Additionally, the whole loan process is
too convoluted with requirements and risk for small business, so Scammel believes
grants or revenue replacement instead of loans are what’s required to save small
businesses. Positively, players like Womply, SQ, PYPL, Intuit, and Plaid (acquired by
V) are coming together and leveraging their unique data to support the gov’t. In
addition, other fintechs as well as payment processors like FIS and FISV are working
to distribute funds faster. Fintechs like SQ Capital, Shopify Capital, and PYPL
Working Capital underwrite on existing sales data so they are best suited to revenue
replacement.
Womply platform and business model
Womply is a local commerce platform, with a suite of solutions such as CRM and
marketing automation, partnering with ~55 of the largest processors, banks and
other small business providers (e.g., FIS/WP, GPN/TSS, Elavon, and PaySafe). As a
result, the company has robust and diversified data insights across US small
businesses primarily into credit card transactions as well as sales data from bank
accounts and other sources. The company operates through a SaaS model
charging merchants for access to software and also generating revenue share from
processing relationships (high 70% gross margins with large % of margin coming
from revenue share). Womply has strong software capabilities and has also
invested +$150m in the platform to drive data analytics. Merchants benefit from
business management and increased sales and processors benefit from better
retention.
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Monitoring Impact to Small
Businesses
Small Businesses critical to US economy
Small businesses make up ~$10trn in GDP and ~55% of American jobs. Unlike
previous financial crises, the massive effect of the economic slowdown began with
small businesses shutting off due to lock down and stay at home measures because
of COVID-19. As a result, there is no typical trickle down effect on small businesses,
and Womply stated that it is truly hard to overstate how bad the impact would be
to most American small businesses. "Although the government is going well out of
their way to help out, if they don’t figure out how to quickly deliver capital to small
business owners, the likelihood, could be a mass extinction event". They
emphasized the urgency being days and not weeks. In fact, the company is already
seeing tons of data (excluding large businesses and accounting for seasonality)
showing the devastation to small businesses across industries. Although most
industry revenues are down considerably Y/Y, some industries such as Groceries
and Retail/Services saw a spike in recent weeks as a result to panic buying.
However, Womply expects these to fall over the coming weeks as most consumers'
panic buying sprees are over. In addition, there is disproportionate harm to hourly
workers, where the amount of hourly workers scheduled to work fell by ~70% just
last week.
Stimulus should curb impact and help recovery
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), signed into
law on March 27th, provides needed stimulus particularly for small businesses and
individuals across the US to manage through the global health crisis. Small
businesses will have access to EIDL grants, PPP loans, and SBA disaster loans.
Larger businesses will also benefit across certain industries in distress such as the
air carriers. In addition, individuals will receive direct payments to help manage
through the crisis along with better unemployment insurance.
In particular, as it relates to small businesses, the CARES Act enables Economic
Injury Disaster Loans (EIDL) of up to $10k as well as the Paycheck Protection
Program (PPP) for companies below 500 employees to get up to $10m. Further, the
loans could be forgiven if used primarily for payroll and less than 25% for things like
the mortgage/rent and utilities.
Overall, the current stimulus package (also ongoing discussions of further potential
stimulus) should help to stem some of the job losses and small business closures
across the country. In addition, depending on the depth and breadth of the
economic impact, it could help to spur a more robust recovery post the health crisis
which we will monitor. Furthermore, globally, there are multiple countries impacted
by COVID-19 that have announced significant stimulus packages.
SMB Hourly Workers
According to data from Homebase, an employee scheduling company for over 100k
businesses, the number of SMB employees and amount of hours worked by each
has seen a significant decline in March. The latest data shows that the numbers of
employees going to work was down ~60% with the number of hours worked down
closer to ~70%. Not only are the number of people working much less, but the hours
of those that do get to go into work have been significantly cut.
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Figure 1: Change in hours worked by SMB employees in US
Source : Homebase
Figure 2: Change in number of hourly SMB employees going to work in the US
Source : Homebase
In addition, Homebase data, not surprisingly, shows that the number of businesses
that remain open are significantly decreasing with time. There was a higher
percentage of closed businesses among cities with lock-down implementations;
however, the total US numbers are quickly following. Furthermore, the company
data shows that the US is losing ~$2bn in wages daily with a projected wage loss
of ~$60bn on a monthly basis going forward.
Figure 3: Percentage change in number of SMBs open
Source : Homebase
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Figure 4: SMB wage loss
Source : Homebase
COVID-19 impact across all businesses
Across all industries, Womply data shows that the average daily revenue variance
for small businesses has been negatively impacted since mid-March. Since the
beginning of 2020, revenues have, on average, shown a +8.5% Y/Y growth;
however, towards the end of March, the data shows that revenue began falling well
below the average and into negative territory reaching a low of -25.6% Y/Y. Not all
industries are impacted equally, so it is important to also look at small businesses
data across different segments.
Figure 5: All businesses - daily average revenue Y/Y
Source : Womply
Industry Y/Y Variance
For the week ended 03/30, Womply data shows how each industry's average
revenue (rolling seven day period) performed in comparison to the same week in the
previous year. The data shows that on average, small businesses were down 28%
Y/Y, with impacts as high as -90% Y/Y for transportations businesses while food and
beverage shops held up on a net basis (+63% Y/Y) even though restaurants have
suffered significantly. However, the numbers have gotten much worse in the past
2 weeks and the number of industries that turned to negative has significantly
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increased. This is a trend that is expected to continue as businesses remain closed,
where even the segments that showed positive growth last week could soon fall
below zero.
Figure 6: Industry impacts for week ended 3/30/20
Source : Womply
Figure 7: Industry impacts by state for week ended 3/30/20
Source : Womply
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Top Level Industries
Amongst the top level industries namely Retail & Services, Restaurants, Grocery
Stores and Travel and Tourism, there have been widely differing impacts thus far as
a result of the virus. The data shows that up until March the industries were
overlapping pretty closely; however, beginning in March, with a more pronounced
impact in 2H, we see that Travel & Tourism as well Restaurants plummeted. Retail
& Services was slightly impacted but not as much with sales growth dropping into
negative territory in the more recent weeks. Furthermore, the data shows how
Grocery Stores sales rose sharply mid-March, likely due to panic consumption;
however, towards the end of March sales began to slow down significantly as
consumers satisfied their hoarding needs.
Figure 8: Top level industries - daily average revenue Y/Y
Source : Womply
Restaurants/Bars
The restaurant industry is a vertical that has seen significant impacts to their in
person sales. YTD daily sales have on average shown 2.8% Y/Y growth, however
growth dropped of fairly quickly shortly after the first week of March reaching a
minimum of -66% Y/Y growth. However, there has certainly been a fair amount of
substitution of purchases, where customers that were previously purchasing in a
restaurant shifted to buying through PostMates, UberEats or other delivery services
causing Womply to lose visibility. Bars showed very similar results to Restaurants;
however, there was a slight lift in the final days of March that was interestingly not
seen in the Restaurants vertical. Last week, states across the US showed the
devastation to Restaurants & Bars for the most part being down over 50% Y/Y in
comparison to the same week in 2019, with an emphasis on states with lock-down
or stay-at-home orders (e.g., California, New York, Florida).
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Figure 9: Restaurant - Daily average revenue Y/Y
Source : Womply
Figure 10: Restaurant - Daily average revenue Y/Y
Source : Womply
Figure 11: Restaurant - Average revenue Y/Y for the week ended 03/30 by state
Source : Womply
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Toast, a private POS platform for restaurants publishes a live dashboard showing
restaurant daily sales variance Y/Y capturing takeout orders and off-premise dining
as well. The data shows that while there has been a shift to off-premise dining, there
is still a considerable decline factoring that in, with sales going from being relatively
level at the beginning of the year to down 70-80% towards the end of March.
Figure 12: Restaurants - Daily average revenue Y/Y
Source : Toast
Figure 13: Shift from in restaurant dining to off premise
Source : Toast
Travel & Tourism
It is no surprise that among the industries most affected is Travel and Tourism
(lodging places, parking businesses, and transportation businesses). Devastation
is widespread across all states in the US, with revenues being generally down 75%+
Y/Y last week. Looking at lodging businesses in particular, although revenues on a
daily basis were down for the most part YTD (average -36.5%), this figure more than
doubled towards the back end of March reaching growth as low as -85.5% Y/Y.
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Figure 14: Travel & Tourism - Average revenue Y/Y for the week ended 03/30 by
state
Source : Womply
Figure 15: Lodging - Daily average revenue Y/Y
Source : Womply
Retail
Retail shops have seen a lot of volatility moving between positive and negative,
which Womply attributed being largely due to the denominator (previous years
sales). The data shows that there was a significant panic buying trend in Retail ~2
weeks ago, and in many cases that has come to an end as more stores are closing
and consumers are done panic buying (should be reflected in the numbers soon
enough). Last week, across the US, Retail & Services (wide ranging category that
includes retail shops and local services) across the states was widely distributed,
with some states being significantly up and other significantly down. However, for
the most part the data shows sales in the states were either slightly up or down in
the single-digits range.
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Figure 16: Retail - Daily average revenue Y/Y
Source : Womply
Figure 17: Retail & Services - Average revenue Y/Y for the week ended 03/30 by
state
Source : Womply
Interestingly, firearm and sporting good stores saw a sharp increase in revenues
starting in mid March, showing up to +200% Y/Y growth; however, the figures have
been gradually decreasing over time and are likely to continue doing so.
Figure 18: Firearm and Sporting Goods - Daily average revenue Y/Y
Source : Womply
Grocery stores
Similar to Retail, Grocery as well saw a huge spike following the initial virus fears in
mid-March and then began to level off to normalized levels towards the end of the
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month once consumers were through panic buying. Data across the states from last
week shows that most states are still seeing positive growth; however, this is
expected to come down to normalized levels over time.
Figure 19: Grocery - Daily average revenue Y/Y
Source : Womply
Figure 20: Grocery- Average revenue Y/Y for the week ended 03/30 by state
Source : Womply
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Appendix 1
Important Disclosures
*Other information available upon request
*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local
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and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary
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Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject
issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any
compensation for providing a specific recommendation or view in this report. Bryan Keane.
Equity Rating Key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder
return (TSR = percentage change in share price from current
price to projected target price plus pro-jected dividend yield ) ,
we recommend that investors buy the stock.
Sell: Based on a current 12-month view of total share-holder
return, we recommend that investors sell the stock.
Hold: We take a neutral view on the stock 12-months out and,
based on this time horizon, do not recommend either a Buy or
Sell.
Newly issued research recommendations and target prices
supersede previously published research.
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are neither an indicator nor guarantee of future returns. Actual results will vary, perhaps materially, from the analysis.
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David Folkerts-Landau
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Research Debt Research Global Head of Company
Research
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Company Research Company Research
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Thematic Research Economic Research
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