Are all small businesses doomed because of the Covid-19 pandemic? Absolutely not.
Will many small businesses fail because of the pandemic? Yes, they will.
The coronavirus crisis and accompanying full or partial lockdowns have taken a massive toll on the health of small businesses around the globe. This has, of course, led some to ask whether small businesses are sustainable in the long run.
From my perspective, given my own businesses and what I’ve seen in the small businesses with which I work, the results are largely bifurcated. Businesses in certain industries and with low levels of pre-pandemic marginal profitability are being wiped out. On the other hand, businesses in other industries less exposed to the lockdown (e.g. they’re largely done online, at a distance) with strong pre-pandemic profitability are surviving and even thriving during the pandemic.
So, not all small businesses are doomed. In fact, many are flourishing under the new rules of engagement necessitated by the pandemic.
The small (and large, in some cases) businesses that are failing at an alarming rate are in the industries you would expect: bricks and mortar retail, restaurants and bars, and tourism related operations, among others. This is only a partial list, of course, as the ripple effect can be extensive — it also includes many of the small businesses that supply products and services to those mentioned above. Mckinsey & Company has an interesting chart in a recent article regarding how long it’s expected to take for certain industries to recover, as well as the small business share of that sector.
Bear in mind, though, that many of the “doomed” businesses mentioned above were not doing great even before the pandemic. Some were, but many were not. Take bricks and mortar retail, for example. Many such retailers, a large percentage of which are small businesses, were already feeling a lot of pressure from their customers’ move to shopping online. Have you been to a mall lately? Many of them are half empty, as the smaller retailers simply cannot compete with buyers’ propensity to seek convenience and better prices from online retailers.
How about restaurants, particularly the mom and pops where they’re not operating on a formula and nor are they operating with the backing of a larger corporation with a balance sheet and access to financing that can get them through tough times. In order to survive and maybe, and in some cases, make a decent profit, most restaurants need to have high capacity utilization, especially during just a few peak hours when customer frequent their establishment. It doesn’t take much for restaurants to be knocked off track and not hit the occupancy / capacity utilization numbers necessary to survive, never mind thrive. The same can be said for many tourism related businesses that often operate on a limited season to begin with.
None of us wants to see our favorite restaurant go out of business. We often know the owners and many of the staff. We have great memories of the experiences we’ve had there and the great times we’ve shared with loved ones in those restaurants. The same is true of many of the tourism and other small businesses that are struggling in the Covid-19 crisis. We don’t want to see them fail, but we and even the owners are powerless to keep them going. They are victims of market forces that are beyond the control of small business owners and their customers. Not all small businesses are doomed, but some of the ones most dear to us and our families are going to have a very hard time surviving.
On the other hand, some small businesses are thriving in the crisis. Those businesses are often not the ones that create memories and pleasurable experiences for us and our families. Rather, they are small businesses that support larger companies and allow them to operate more profitably. The small businesses that I see surviving and even thriving during the crisis include consultancies that support industries such as finance, insurance, marketing/advertising and software development, to name a few. These flourishing small businesses typically do not have huge overhead and operate largely online or virtually, and they did so even before the crisis.
I’m not sure what this says about our society or its future, as a lot of the interactions that we’re having now, and likely into the future, tend to be virtual rather than in-person. That will abate, of course, as the pandemic becomes more controlled due to an effective vaccine and better therapeutics becoming available, as well as due to better “social distancing” practices becoming more widespread.
Even the term “social distancing” gives you the sense that our world is changing and not just for the present. If you are starting a business or you own a small business, you must take these societal behavior challenges into account when you put together and execute your business plan. Make sure you are realistic in your financial projections and make sure your plan takes into account that the world is changing, perhaps more rapidly, more profoundly and more permanently than at any point in our lifetimes.
Be sure your product or service offering has sufficiently high profit margins that you can whether the storm when the next one inevitably hits. Also, particularly if you’re just starting up, don’t have so much operating or financial leverage that you’ll be unable to weather the current or future storms. This is true in general, but especially when you’re starting out. You may want to introduce more leverage later, but if you do it too early and a storm such as the current crisis arrives, without significant access to capital, you are unlikely to survive.
Not all small businesses are doomed. Some are, but some will thrive in the crisis and beyond. Most of the old rules of creating and sustaining a successful business are the same, and some such as making sure you have strong profit margins to begin with, and managing operational and financial leverage, are of even greater importance now. If you don’t, your business will be exposed quickly in a crisis such as the pandemic. There are no guarantees in small business, but the advantage, as it usually does, will go to those who plan well upfront and position their businesses as well as possible for the inevitable challenges that will arise.
Image by leo2014 from Pixabay
