Mom and pop shops are cutting back on software spending, creating jitters on Wall Street

  • Software vendors serving small and medium-sized businesses have been hammered by investors recently over worrisome guidance.
  • Analysts see a decline in software spending by restaurants, retailers and other local and regional businesses responding to weaker consumer trends.
  • “Every subscription we have is under a magnifying glass,” said Nick Martin, co-founder and CEO of Joe Coffee.

Nick Martin, co-founder and CEO of Joe Coffee, is so concerned about the state of the economy that he’s looking for ways for his company to save money. One main area for cuts: software.

Martin started the Seattle-based company with his brother, Brenden, to help local coffee shops better compete with Starbucks by making it easier for them to fulfill mobile orders, track analytics and automate their marketing.

While their 8-year-old business has held fairly steady through the economic plunge that started in 2022, Martin said he sees evidence that people are now buying fewer lattes than they did a year ago. Any consumer slowdown is a potentially worrying sign for Joe Coffee’s customers, and the company is proactively tightening its belt.

Martin, 38, told CNBC that Joe Coffee has reduced its subscriptions to HubSpot, a marketing automation software vendor, and is closely examining its spending with payment processor Stripe to see if its deal with the company will be worth renewing.

“Every subscription we have is under a magnifying glass,” Martin told CNBC. “We have to have a really good business case to make new expenses.”

The Martin brothers aren’t alone, based on recent earnings reports from software companies that serve small and medium-sized businesses (SMBs), which could be your local shoe store, a small restaurant chain, or the neighborhood spa.

HubSpot, Bill Holdings, Paycom and ZoomInfo all warned investors of potential trouble on the horizon. Their comments reflect broader economic data that show consumers are feeling the lingering effects of inflation and high interest rates.

Retail sales for October fell 0.1%, underscoring pressure from higher prices. The consumer price index for last month rose 3.2% year over year, according to the Bureau of Labor Statistics.

Joe Coffee founders Nick and Brenden Martin

Joe coffee

Wall Street is on edge. While broad market indexes have risen slightly since the middle of the year, tech companies that specialize in the SMB space have hurt.

Paycom, which provides payroll and human resources software, saw its stock plunge 38% on Nov. 1, a day after the company said revenue growth in 2024 would be 10% to 12%, well below analysts’ expectations of growth above 20% .

Two days after Paycom’s fall, shares of Bill fell 25%. The company, whose software helps customers track and control their receivables and payables, cut its profit and revenue expectations for 2024. Bill’s chief financial officer, John Rettig, said on the earnings call that the company is “operating in an environment of increasing economic instability and small businesses are under increasing pressure to adapt to current realities.”

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On the last day of October, ZoomInfo stock fell 16% on a weaker-than-expected fourth-quarter forecast. CFO Cameron Hyzer told analysts it “continues to be a tough world out there” for revenue retention. ZoomInfo helps sales and marketing teams track leads and customers.

HubSpot stock fell 6.1% after the earnings report last week, though the stock has since recovered. The company’s outlook was largely in line with estimates, but growth is slowing, and CEO Yamini Rangan described the environment as “unsteady and challenging” with customers “continuing to optimize consumption.”

“Sales cycles remain lumpy, budgets are still under scrutiny and the urgency to buy remains,” Rangan said on the earnings call.

Representatives from Paycom, ZoomInfo, HubSpot and Bill did not respond to requests for comment. Since June 30, shares have fallen between 12% and 49%. The Nasdaq is up more than 2% during that stretch.

The sector of the market these companies serve is vital to the domestic economy. Over the past two decades, small businesses have accounted for 40% of the United States’ gross domestic product, according to the Chamber of Commerce. They also employ 46% of the US workforce.

Jake Dollarhide, CEO of Longbow Asset Management, said results from Paycom and other SMB providers provide a window into the state of the economy.

“Whenever people don’t feel wealthy, they tend to withdraw,” Dollarhide said.

The Martin family knows what it’s like to deal with the everyday challenges of making ends meet. Their father’s small business made sheds in their hometown of West Richland, Washington, about 200 miles southeast of Seattle, until bigger companies came into town and ran it into the ground.

“If America is truly built on the backbone of small business owners, why are they the ones who never catch the break?” said Brenden Martin, Nick’s younger brother. “Why isn’t there someone out there fighting for them? For us, that’s our primary driver.”

The Martin brothers have a background in technology. They both worked at Microsoft, and Nick went from there to Zillow, while Brenden held jobs in product strategy and web development at various companies.

Zhang Peng | Getty Images

They also both loved the role coffee shops play in communities, having worked as baristas in the past, and wanted to help small cafes fend off Starbucks.

When Starbucks launched mobile ordering in 2015, Joe Coffee was not yet up and running. But the brothers could see an imminent opportunity in the market.

“At first we were like, shit, we missed our shot,” Brenden said. “And then we realized, well, no, small businesses still need this.”

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They got their big break in August 2018 at Coffee Fest, a venue for coffee brands to debut their products and services. Just before the event in Los Angeles, the Martins learned they had received $1 million in funding, their first outside investment.

They initially built a mobile-order-only platform, but the Covid pandemic created a whole new set of demands from customers struggling to stay afloat. In 2021, Joe Coffee, which now has 17 employees, created a complete software and payment package for coffee shops.

For Joe Coffee’s business to work, its technology must create near-instant revenue and profit gains for its customers, who are already operating on tight budgets. The company does not charge a recurring subscription, but only a percentage of each transaction.

Nick Martin cited higher borrowing costs as a main reason Joe Coffee has reduced the number of software products it buys. The company now has about six software subscriptions, down from 12 to 15, accounting for 3% to 5% of operating expenses, down from about 8%, he said.

Decisions about what to dispose of are based on whether a product is a “nice to have” or essential to business operations.

“Can we get away with just doing this in a spreadsheet?” he said. That’s how the company decided which HubSpot services to cut. Joe Coffee is still a HubSpot subscriber, but pays for fewer seats and fewer tools, Martin said.

As for Stripe, which is privately held, Joe Coffee is looking for other payment processors that have lower fees, Martin added.

Stripe said it does not comment on specific customers.

The macroeconomic story will play out differently for software companies, depending on their revenue models and their reliance on certain industries.

Bill could see a more immediate impact than others because more than three-quarters of its core revenue comes from the money it makes from transactions, while the rest comes from subscriptions, which are contract-based.

“What Bill is more exposed to would be the payment volume coming from these SMBs,” said Taylor McGinnis, an analyst at UBS that follows Bill, ZoomInfo and HubSpot.

Investors across the sector are trying to figure out whether SMB spending has bottomed out, or if companies are still looking for opportunities to slim down their software portfolio should the economic picture dim further.

“I think what we’ve learned, especially in B2B, is that it’s more macro-driven than we’re used to,” said Bryan Keane, an analyst at Deutsche Bank who covers software and payments companies. “If there’s another shoe to drop, there will still be downside risk.”

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