Small business in the time of COVID-19

In our latest post, Professors Andrew Henley and Tim Vorley comment on the impact of the COVID-19 pandemic on small businesses in the UK.

Across the world, as the COVID-19 pandemic is raging, the disruptive impact on small businesses has been without precedent. Immediate commentary documenting both scale and specific examples of this impact is not in short supply. This blog post offers some preliminary thoughts and reflections on performance and productivity for small businesses. While it is too soon to provide any hard assessment of the impact of the current crisis on business performance, so our purpose here is comment on some emerging themes based on current knowledge and ongoing responsive research.

The economic impacts of the crisis are likely to be multidimensional. These include differences between short-term and medium-to-long term impacts, variations across different sectors, the differential spatial impacts of the crisis. At the same time, the resilience of small businesses and their ability to survive the crisis has demanded business models be redesigned. Many of the issues that small businesses face and their capacity to respond are determined by their response at the onset of the crisis – and so the immediate decisions of owner managers will have longer term implications.

In the short-term it is inevitable that productivity will take a further significant hit – a conclusion that is particularly unwelcome given the ever-widening UK productivity gap. This is because in a recession businesses generally attempt to retain employees with skills, especially if those skills are scarce or central to the firm. Employee absence due to illness or quarantining is hitting many SMEs, especially small and micro-businesses, very hard, since business-critical skills coverage is not “de-risked” across a large employee pool.

Labour hoarding sees the productivity numerator (turnover or value-added) fall more quickly than the denominator (labour input). If firms have flexibility to reduce hours, then the adverse impact on productivity per hour worked may be less severe than on productivity per employee. Recent emergency policy announcements on wage subsidies under the job retention scheme are specifically designed to maintain employee attachment and therefore indirectly to lower productivity.

These initiatives are likely to be more crucial to business survival for less well-capitalised, and less profitable SMEs, and speedy policy implementation here is of the essence. Survey data collected in mid-March 2020 by the University of Sheffield with Small Business Britain bears this out – almost three quarters of SMEs surveyed expected revenues to fall by over half [1]. One emerging recommendation relates to the urgency of making relief available: roll the policy out and worry about deadweight losses later, which might be partially recoverable through business and self-assessment tax systems.

Early research indicates that since the Government announced the measures available that there is considerable local variation in the administration and access to support. These difficulties are compounded by the eligibility, or perceived eligibility, meaning that not all micro businesses will benefit as intended and as entitled. This reflects another major perennial challenge for small businesses policy, which is encouraging the take-up of government programmes, as 82% of firms surveyed have not previously sought business support.

Some firms simply won’t survive. In the medium-longer-term, if the crisis persists beyond two quarters into late summer and autumn, the least resilient SMEs will shut down, that is those least well capitalised or those seeing the biggest falls in revenue. As recovery returns this shake out process could then see a productivity bounce, although this will have been at a very high price in terms of firm failures.

In the UK the most immediate distress has been seen amongst those businesses which provide non-essential face-to-face physical service delivery in leisure, hospitality, transport services and non-food retailing. In advance of the shutdown and lockdown, these sectors had already been earmarked for support by the Chancellor in the Budget on 15^th March 2020. As well as these sectors, places such as historic city centres and coastal resort towns have been hit hard, as the demand shock of ‘social distancing’ is seeing some consumers deferring discretionary spending on non-essential items. The societal importance of supporting these firms is important for safeguarding the efforts and livelihoods of small businesses through this crisis, and will help ensure the future vitality of these hard hit places.

However, despite the early and enhanced support for these sectors many are in the so-called ‘long tail’ [2], and while making an important contribution to localities are unlikely to be the engines of recovery and future growth. Naturally, there are some firms are adapting to new realities by shifting their business models with and without the help of government support. The study highlighted that as well as those businesses already working online, many of whom have been less affected, many other owner managers have sought to take their businesses online. The shift from bricks to clicks presents an opportunity for productivity gains as revenue streams shift on-line, with online sales are twice as productive as offline [3].

Even a cursory glance at the business pages of the news media reveals some significant changes to working practices and business models. At this stage, however, it is unclear to what extent these changes to working practices and business models represent temporary ‘work-arounds’ or whether they are genuinely new-to-business innovation. Where effective these reforms have the potential to promote future resilience and enhance productivity, especially if they result in significant and permanent reductions in cost associated with activities such as business travel etc.

At the other end of the spectrum knowledge based and services businesses, for example software development, are likely to be more resilient and may even see some productivity gains from costs savings associated with remote working and the of closing physical office space. What is as yet unknown is the extent to which SMEs are at risk from collapse in the supply chains in which they sit, especially in sectors such as manufacturing , construction or business-to-business service provision. This potentially threatens the so-called ‘tradeable’ as well as ‘non-tradable’ businesses.

Recent analysis by Brookings highlights the likely differential spatial impact of the crisis, arising from the uneven spatial distribution of SMEs by sector [4]. In the UK the South West, in particular, is exposed to distress in the accommodation, food and drinks sectors, accounting for almost 10% of private sector employment, although this sector is also relatively larger in London. Retailing is another low productivity sector that also accounts for a large employment share in the North and in Wales compared to the Midlands and London. On the other hand knowledge based and services businesses, which might be more resilient to disruption, account for less than 3% of private sector employment in the North East, North West, Yorkshire and Humber, East and West Midlands and Wales, but nearly 8% in London [5].

So, to conclude, the short-term damage to productivity looks likely to be significant, and in the context of the UK’s persistent and widening productivity gap this is highly unwelcome. However, where micro businesses have the ability to transform and adapt there is the potential for enhance resilience and productivity gains over the longer term where they are able to implement permanent changes to ways of doing business.

Andrew Henley is Professor of Entrepreneurship and Economics and Director of Research Engagement and Impact at Cardiff Business School.

Tim Vorley is Professor of Entrepreneurship and Associate Dean Impact, Innovation & Engagement at Sheffield University Management School.

This article was originally published on the Productivity Insights Network.

Sources

[1] Ovens, M. ‘Strength in numbers’, Forbes (March 2020).

[2] Strauss, D. ‘Is ‘long tail’ of small businesses to blame for poor UK productivity?’, Financial Times (August 2018).

[3] Bughin J., et al. ‘Solving the United Kingdom’s productivity puzzle in a digital age’, McKinsey & Company (September 2018).

[4] Muro, M., et al. ‘The places a COVID-19 recession will likely hit hardest’, Brookings (March 2020).

[5] Authors’ own calculations from ONS UK Business Count Data and ONS Business Register and Employment Survey, 2018.