What’s the State of Small Business in 2022?

COVID-19 crisis has posed a unique set of challenges specifically for small businesses across the globe. Many small businesses face reduced demand, operational challenges, and new customer expectations. This is because of the health and safety standards that you as a small business have to adhere to.

Thus, recovery of the small business segment will take time. As per a report, it took larger companies an average of four years to recover to their pre-crisis contribution to GDP. Whereas, the small business segment took an average of six years to recover.

Therefore, the prevailing macroeconomic outlook and vulnerability to COVID-19 will determine the current recovery. On average, it may take more than five years for most affected industries to get back to 2019 level contributions to GDP.

There might be a possibility that many of the small businesses may never reopen. Thus, as a small business, you would have to take dramatic steps to survive. However, the challenge is that you need to take extreme steps at a relatively greater cost and with less working capital.

This article covers the opportunities and challenges that lay ahead for you as a small business owner.

• Downward Push on Already Small Margins

Before COVID-19 – Manufacturing, Retail, and Restaurants

Many of the small businesses across sectors did not have the financial strength when the pandemic hit the global economy. Almost one-third of the businesses were operating at a loss or breakeven before the COVID crisis.

Typically, small business retailers selling staples like groceries earned profit margins below 5%. Whereas, those selling non-essentials earned profit margins below 10%.

Furthermore, those in the manufacturing, retail, and restaurant business had a weaker financial position before the crisis. This is because a huge portion of the costs spent by such businesses was fixed.

After COVID-19

Retail

Small business retailers do not have the power to renegotiate their lease terms and their occupancy costs. Besides the fixed occupancy costs, the small retailers also do not have the financial strength to manage cash tied up in inventory.

For instance, it is quite common for apparel stores to have an inventory turnover of 90 days, impacting margins badly. This is because the nature of inventory is seasonal, has an expiration date, and demand from customers is uncertain.

Manufacturing

Small scale manufacturers have to incur costs related to the additional debt. Provided they have invested 20% of sales in working capital for inventory. This means such businesses have to heavily rely on funds to fulfill their working capital and investment needs.

As a result of the additional financing, the indebtedness of manufacturing units is high. As per the survey, small businesses reveal that the cost of servicing debt is on an average 30% of their sales. This is extremely high a percentage relative to the more financially strong industries like those providing scientific and technical services.

Accordingly, as per the statistics, it may take the manufacturing sector more than five years to recover to GDP level before the COVID crisis. However, this would depend on the impact of the pandemic on the global economy.

Restaurants

The most badly hit among all the sectors is the small restaurant business. Currently, the restaurants are also facing a reduced margin challenge. Due to the novel corona pandemic, restaurants had to shift to an off-premises model including either delivery or carry out.

Such a model would have a great impact on the profitability of small restaurants. This is because the packaging costs would increase and pose a challenge in selling high-margin items like alcohol and desserts.

It is important to note that many small businesses in the restaurant segment did not have financial resilience before the crisis. As per a report, 40% of small restaurants either operated at a loss or breakeven before the COVID crisis. Thus, any costs related to changing customer expectations would hit the already small margins for small restaurants.

Way Ahead

It would be quite challenging for manufacturing, retail, and restaurant segments to meet the costs related to hygiene and safety protocols. Customers now expect restaurants to invest heavily in cleaning supplies and disinfectant wipes.

Thus, it would be quite challenging for the small restaurant owners to negotiate the prices of such supplies. This means there is a lesser chance for them to avail bulk pricing discounts that are available to large restaurant owners.

Furthermore, businesses in the customer-facing segments like retailers in entertainment, arts, educational services, etc would have to face similar situations. Likewise, small grocery stores would have to invest an average of 1% of their revenues in cleaning products and additional labor.

Moreover, it will be challenging for small retailers to adhere to physical distancing norms. Besides the profit margins, even the revenues are likely to be impacted negatively.

This is because consumers would reduce their spending on non-essential goods and services in a crisis environment. Lastly, restaurants or food service establishments would be required to separate tables by at least six feet. This would put a restriction on the number of customers a restaurant can serve. Though, efforts are made to set up tables on sidewalks and public squares. But such efforts are not turning out to be effective.

• Accommodating New Business Models

Restaurants and Retailers

Small restaurant owners and retailers would have to make significant changes in their business and operating models.

Curbside Pickups

For instance, most of the restaurants have added a curbside pickup to deal with the current crisis.

Besides the restaurant owners, even the retailers have innovated rapidly to adjust to the new environment. For instance, retailers selling essential goods like grocers also started offering curbside picks. In addition to this, they limited the number of customers in their stores, changed their hours, and even created time-slots to serve the most vulnerable population.

Other Operational Changes

Furthermore, they even adopted new payment methods and apps to practice the physical distancing norm. On the other hand, retailers selling non-essential goods like apparel stores quickly uploaded their products on e-commerce websites. Also, they started offering free delivery and extended their return policies.

Small retailers can also focus on hyper-local demand trends, compete on service quality,

Though, many small businesses have adopted such measures quite rapidly in the short-term. However, it would be quite challenging for them to sustain such efforts in the medium term.

It is easy for large restaurant chains to change their operating models and marketing techniques to stabilize their business. But, it is quite challenging for small restaurants to make such changes.

At the operational level, small restaurants and retailers can take temporary measures to maintain their margins. These may include increasing their promotional activities, offering temporary discounts, focusing on high-value items, and renegotiating with their suppliers.

Manufacturing

Factories would also need to make operational changes to meet health and sanitation requirements. For instance, they need to maintain physical distance between workers on the manufacturing floor.

Furthermore, they also need to try out other operational changes like the pod system. Under this system, the operators are assigned to less number of machines. However, they are given more responsibility with regards to the tasks to be carried out within their work areas. Thus, such a system would help them in reducing contact with staff and equipment outside the pod.

Thus, modified physical infrastructure and optimized operating processes would help in meeting physical-distancing guidelines. Besides this, small business owners need to ensure that they follow additional safety standards with regard to workers. These include providing personal protective equipment, checking the body temperature before entering the building, etc.

• Implementing Latest Technologies

Restaurants

As mentioned above, small businesses need to implement new hygiene and safety standards. Thus, the most effective way of implementing the same is to devise effective contactless experiences.

For instance, many small business owners have invested in digital technologies and they have performed better. These technologies have helped them to increase delivery. Besides this, mobile applications have helped them to build customer loyalty.

This is because such applications helped customers to order online and get quick delivery.In addition to this, few of the international restaurant chains served food through drive-through, delivery, and take out channels.

Retailers

The retailers who invested in digital technologies have been performing better since the beginning of the crisis. For instance, software as service tools and online platforms have made it relatively easier for retailers to reach customers and sell online.

However, developing these digital capabilities increases the operating costs for small business owners. These expenses may include getting professional product pictures clicked, back-end order processing, logistics for delivery and returns, etc.

Manufacturing

Small manufacturing units would have to make significant changes to adopt new technology. For instance, the scope of shifting to digital operations in the manufacturing segment is quite huge. The COVID-19 crisis has compelled the manufacturing units to think on the lines of upgrading digitally.

In addition to this, other technological investments have also become necessary. These include investing in:

• digital training courses for employees and workers
• performance management tools to decrease personal check-ins
• virtual floor walks, etc

Therefore, as we can see, the lower-tier suppliers are least technologically advanced. Therefore, they have a great opportunity to earn potential gains by adopting digital capabilities.

• Finding Solutions

Manufacturers

The biggest challenge with small businesses is that they do not have sufficient financial resources to make huge investments. As we already know, it requires a significant amount of investment to implement any kind of solution. Post COVID-19, new technologies and changes in business models may give an opportunity to small businesses to survive.

However, most of the small businesses would not be having sufficient capital, requisite people, and access to technology. This is in comparison to large scale companies. Accordingly, increased innovation and participation across the global economy would have to take place to help small businesses grow.

But again the challenge would be that small and medium-sized manufacturers would not be able to invest in equipment and facility upgrades. Besides this, changes at the operational level would be costly. This is because small businesses have a limited amount of cash on hand to invest. Therefore, one solution can be to operate at partial capacity. This solution can be adopted by those businesses that do not have sufficient funds to implement safety standards on an immediate basis.

Next, it would be difficult for smaller manufacturers to attract investors relative to large scale manufacturers. Hence, it would be challenging for small manufacturers to fund modern technology without the requisite capital. In addition to this, factories can enhance the skill of their workers by giving them digital training. Such training would enable them to switch roles when the need arises.