From Recovery to Growth Business in the USA and Canada

Small companies in several sectors can recover by means of better operations and modification of business models. Finding the money to do so can prove challenging.Downloads: Article (PDF-769 KB). As US small businesses negotiate their path toward recovery, the particular character of the COVID-19 situation presents fresh set of difficulties. Health and safety regulations force many to have subdued demand, new consumer expectations, and operational issues.

There will be time for recovery. While smaller businesses required an average of six, larger firms recovered to their pre-risis contribution to GDP in an average of four years following the 2008 recession.

The length of the current recession will rely on the macroeconomic perspective in their particular sectors as well as their economic sensitivity to the COVID-19 reaction. Under two scenarios projected by McKinsey Global Institute and Oxford Economics, that might take five years or more across all companies; more than half of global executives polled see as the most likely outcome (Exhibit Second Recovery is probably going to take significantly more time among small companies. Many might never open once again. Many American small businesses will have to make drastic changes if they are to survive. By now, the fundamental themes are common and usually the same as with most big companies: safeguarding employee and consumer health and safety, changing business models, funding talent and technology, and modifying labor practices and workforce levels. Small businesses will have to make all these changes at higher relative cost and with less operating capital, though, just like Ginger Rogers, who danced the same steps as Fred Astaire, only backward and wearing high heels. Small companies with narrow margins have little space to make investments in the technology and business strategies they will need to endure. Maintaining their viability will need cooperation across the economy. The special difficulties and chances for rehabilitation in three important sectors manufacturing, retail, and restaurants are discussed in this paper. Taken taken combined, these industries account for almost thirty percent of small-business employment in the US.

Although these industries have unique qualities, much of their experience can be generalized to other areas.

Many small companies in many different fields arrived at the COVID-19 problem lacking financial fortitude. Close to a third of the respondents to our poll were running at a loss or breaking even before the crisis.For small stores selling basics like groceries, three EBITDA4 margins usually go below five percent; for those offering discretionary goods, they fall below ten percent. Since a good amount of the expenses for small enterprises in manufacturing, retail, and restaurants are very fixed, balance sheets for those three sectors also lack adaptability. For smaller companies, for instance, occupancy expenses are particularly sensitive as they typically lack the market clout to renegotiate the terms of their leases. Small stores have less control over the considerable amount of cash locked up in keeping inventory in addition to set occupancy charges. When inventory is seasonal, product has an expiration date, and consumer demand is erratic, it is not unusual for clothes businesses to carry 90 days' worth of sales in inventory, therefore severely stressing profits. Small manufacturers, whose working capital is contained in inventory, sometimes account for 20 percent of sales as well as loan servicing expenses. Their investment and working-capital needs mostly depend on financing, hence debt is rather common.

According to our poll of more than 1,000 small businesses, the average cost of debt servicing is 30% of income for small manufacturers, 11% point higher than in more financially strong sectors including high-skilled professional, scientific, and technical services.

Depending on the economic impact of the COVID-19 epidemic, the whole sector could need more than five years to recover to precrisis GDP levels. Furthermore, their knowledge could be helpful for other sectors with high capital intensity such transportation, warehouse operations, or natural resource exploitation. Restaurants also deal with margin issues. By raising packaging costs and limiting their capacity to sell high-margin goods like booze and desserts, a move to a more off-site world—delivery or carryout—is probably going to diminish their profitability. And many small firms were already vulnerable before to the crisis. Based on our poll, about forty percent of small enterprises in the restaurant industry run at loss or just break even. And any higher expenses for meeting evolving expectations would have a larger impact on rather small operating margins (Exhibit 2). Compliance with new hygiene and safety procedures could be onerous in industry, retail, and restaurants. Less likely to be negotiable for smaller businesses, which are less likely to qualify for the bulk-pricing reductions available to bigger ones, are the cost of cleaning supplies and disinfection wipes—which more than half of restaurant patrons now demand to be provided. The same is true for smaller stores as well as, more generally, for most customer-facing small enterprises in other sectors, including arts, educational services, entertainment, and recreation. Small groceries would have to set aside about one percent of their sales to pay for cleaning supplies and extra work. And space restrictions will make it more difficult for independent stores than bigger ones to c