Is gentrification driving small businesses from the ‘burbs?

Higher house prices contributing to the rapid gentrification of Kiwi suburbs pose yet another challenge for small business owners, who may find the products and services that served them well a year ago no longer meet the changing neighbourhood’s needs.

BetterCo director Alister Siew (pictured), says his firm is working with some small businesses whose profits are declining because their offerings don’t meet the tastes of more affluent buyers moving into Auckland suburbs like New Lynn, Glen Innes and Mt Roskill.

“Where a year ago a pie and an energy drink were the standard stock-in-trade for say a small bakery, today it may be a gourmet pie and a smoothie. Rising house prices, particularly in Auckland, are seeing some rapid changes as wealthier people move in.

“For the most part, the more affluent can afford to be socially responsible and will support local businesses, but not if your premises look rundown or the products you offer do not fit their taste.”

The problem arises, says Siew, when businesses fail to move with the new market because they can’t afford to pivot or they catch on too late. “Parking prices increase, rents rise, laundromats go quiet, and businesses that are without an exit plan or the ability to pivot go out of business after having been around for 20 or 30 years in some cases.

“Gentrification usually happens over time, but I think with a median house price of more than $1.1 million in Auckland, $730,000 in Hamilton and $890,000 in Wellington, it’s happening much faster, catching some small traders flat-footed.”

Siew said that where some landlords might refuse to renovate a building, the businesses usually end up paying the price. “Affluent people like character and history, but they tend to avoid giving custom to companies in rundown buildings.

“It doesn’t just affect traders. If you are an accounting firm or law firm, you’re going to have to change some things to make yourself more appealing to the changing neighbourhood.”

He offers the following advice to small businesses owners both in Auckland and countrywide:

1. Keep your fingers on the pulse

“Join the local business association, read the community newspaper and actively observe how your neighbourhood is trending so that you respond to changes in the market before it begins to reflect in the cash register.”

2. Use technology to track your business

Siew says small traders who aren’t using technology to track purchase behaviour should seriously consider investing in tools like point-of-sale software or accounting software like Xero.

“Using technology in your business is not expensive. While it is a bit of a learning curve, it will enable you to understand your regular customers, their purchasing habits, cashflow forecasting, and your profit and loss.

“Just like you should keep your fingers on the pulse of your neighbourhood, you should do the same for your business – get professional advice if the prospect intimidates you.”

3. Put in place an exit plan

An exit plan is not only a response to potential future threats; it is also valuable for ensuring you get a return on your investment when the time comes to exit the business, whether that’s a result of gentrification, market downturns or retirement.

“If things do go unfortunately wrong – like a rent increase you cannot afford – you will at least have a plan to get you out relatively unscathed.”

Siew says that doing tax returns once a year or relying on customer loyalty or the quality of your products and services won’t cut it because when neighbourhoods change – and they are changing – everything gets turned upside down.

“It isn’t only about preparing for the worst or preparing to pivot. Talk to a financial adviser about the opportunities to create a better, more successful, profitable and valuable business. Change is inevitable, but how it ends is what you make of it.”

BetterCo is a business advisory and chartered accounting firm. https://www.betterco.nz