It’s now over a year since the first cases of Covid-19 were reported in the UK, thrusting many small firms into a battle of survival. But the pandemic has also accelerated a number of longer-term trends – many of which are here to stay, as Penelope Rance reports.
The coronavirus outbreak had a major impact on almost every business in the UK. Small firms, with their tight margins and sector specificity, suffered some of the greatest impacts. The latest FSB Small Business Confidence Index found that 58 per cent of small firms expect to see revenues drop in the first three months of 2021, and 5 per cent do not expect to survive the year.
In the year since Covid-19 hit, the pandemic has redrawn the landscape for SMEs. However, while vulnerable, they boasted traits needed to survive the fallout of Covid-19 – not least the ability to adapt to unprecedented events.
“The pandemic caused huge strains on small businesses, their owners and those that work within them, but in many cases it’s brought the best out of them,” says Chris Thornhill, co-founder of Growth Animals.
“While large businesses responded with the speed of an oil tanker doing a U-turn, small businesses adapted on the fly, showing how innovative, resourceful and hard-working this backbone of British society can be.”
Yet while some sectors managed to survive and even thrive, others were poleaxed. In the depths of the first national lockdown, hospitality was paralysed. “Xero research found that small business hospitality revenues were down 34 per cent, and those in the arts and recreation were down 38 per cent year-on-year,” reveals Gary Turner, co-founder and Managing Director of Xero UK. “These are staggering figures.”
Things were less bleak on the country’s building sites. “September’s SBI data found small businesses in the construction sector managed to keep losses down, with revenue down 7 per cent compared to 2019. They were able to continue operations without having to adjust as much,” says Mr Turner.
Throughout the pandemic, Be the Business tracked SMEs’ responses, segmenting them into four groups: including Hibernators, Survivors, Pivoters and Thrivers. “We’ve seen more than one in five firms become Pivoters by changing their business model,” says Anthony Impey, CEO of Be the Business and chair of FSB’s Big Ideas Group. “This allowed them to remain open and they’ve consolidated positions as innovators and dependable local firms.”
Thrivers were found in essential sectors, where they were able to ramp up production of existing products or services. There is no hard and fast industry rule, however. Consultancy firm McKinsey found companies that benefited from the pandemic tended to be individual businesses, typically smaller, rather than part of systematic trends in specific sectors.
Perhaps surprisingly, businesses were also established during the crisis. Starling Bank analysis of data from the Office for National Statistics found a 5.3 per cent increase in new firm formations from April to June 2020 compared with Q3 in 2019.
Mr Thornhill, who founded Growth Animals mid-lockdown (see below), has also seen many others start out, or rewrite their business models, in response to the demands of the pandemic. “In our early days, we spoke to so many businesses that had started or pivoted in response to the crisis that we started a content series all about it, called Covid Creations,” he says.
A defining trait of the ‘new normal’ is the integration of technology into SMEs – and this is an evolution that is unlikely to be reversed. “Small business owners have innovated in the face of challenging circumstances, embracing technology and developing new products and services,” says Mr Impey. “There was as much innovation in the first three months of lockdown as in the previous three years. This goes beyond the ‘Zoom boom’: there has been significant uptake in online collaboration software, cloud-based back office systems and ecommerce.”
This has also prompted a change in how small firms sell to customers, says Mr Turner, and it’s likely that this is here to stay. “It’s hard to imagine that businesses will abandon the investments they have made in their online presence,” he says. “We will continue to see small businesses offer alternative ways to shop.”
It’s not just retail that has gone digital, either. “Consumers now expect to be able to do everything online, with products and services delivered instantly – sometimes via new methods, such as vending machines or in collaboration with partners,” says Suzi Woolfson, private business leader at PwC.
Owners and founders who create new revenue streams, develop new business models and adopt new technology will be well positioned for an economic recovery, says Mr Impey. “While there is no certainty about what the future will look like post-pandemic, we can be sure that businesses will be a lot more digital,” he predicts.
Another major, and perhaps lasting, change has been the rise of remote working. For SMEs, there may not have been the sweeping change seen in the corporate world, but the impact has still been felt. “If you can be remote-based, you can benefit from a potentially global talent pool, and do so with a dramatically smaller cost base,” says Mr Thornhill.
Not everyone can work from home, of course, and some small businesses need premises and a local workforce. “The workplace plays an important role in society, whether for sharing ideas or for the mental health benefits of seeing colleagues, so businesses have to find the right balance,” says Ms Woolfson. “Start-ups in particular need spontaneous conversation which can spark new ideas or leftfield thinking.
I think there will be a growth in flexible office space, where many start-ups begin their business journey.”
High street resurgence
The effects of increased home working have also been felt on the UK’s high streets, impacting the SMEs both trading there and in associated supply chains. While the impact of the lockdowns has hit hard, there was a boost to footfall when hospitality re-opened, including many small businesses.
“It climbed throughout August as Eat Out to Help Out drew people to town and city centres,” reports Simon Quin, executive director of the High Streets Task Force. Autumn saw a resurgence of Covid-19 cases and the closure of many shops, but smaller locations continued to show better performance, reflecting a shift to local shopping and leisure.
Peak shopping times also shifted, says Mr Quin. Saturday ceased to be the biggest day of the week, as home workers were able to visit local town centres during the week.
Likewise, flexible hours meant lunchtimes were no longer the busiest time of the day.
“With consumers spending more time at home, they have rediscovered local high streets and local independent businesses,” says Ms Woolfson. “Our consumer sentiment survey showed that 24 per cent were visiting more independent stores instead of chains, with 29 per cent saying they would do so in the future.”
PwC’s store openings and closures survey also shows a record number of multiple/chain retailer closures. “This offers an opportunity for independent operators to take their place on the high street, often for lower rents than in the past,” says Ms Woolfson.
Encouragingly, the Office for National Statistics survey found retail and business services industries made up a larger proportion of business creations in the third quarter of 2020 than in recent years, suggesting that while some retailers are closing, others are emerging to take their place. Many of these will be smaller start-ups.
Long term, Mr Thornhill is optimistic about the shift from a city culture to more local dealings. “People enjoyed the sense of community and ‘shop local’ spirit,” he believes. “Firms that can demonstrate a willingness to put people first and give back to the community will be well placed to succeed.”
Chris Thornhill co-founded marketing company Growth Animals during the first lockdown in 2020, using the unprecedented situation as a springboard after taking voluntary redundancy. “The pandemic presented us with an opportunity that might never have otherwise arisen,” he says.
Mr Thornhill, co-founder Jen Bayford and partner Jerin Micheal now use their expertise to help other SMEs succeed. “Our founding principle is to help businesses sell more through ethical growth marketing, in a positive, conscious and human way.”
Despite Government programmes set up to help businesses during the pandemic, they didn’t fit the needs of the new start-up, and Growth Animals had to seek support elsewhere.
“All the Government initiatives were skewed towards big businesses, and small start-ups failed to meet requirements for support,” says Mr Thornhill.
“But there was a groundswell of support within the business community. The pandemic brought a sense of civic responsibility that meant you were never far away from someone willing to share ideas, give feedback and point you in the right direction.”
Networks including FSB and LunchClub proved invaluable.
“I’d be lying if I didn’t admit to concerns around launching a business during the biggest economic downturn for decades,” he concedes. “But in many ways it made our offering more relevant. An affordable, flexible marketing resource in this climate can be extremely useful. We’ve also had positive feedback on our ethical approach to growth marketing, as clients become more purpose-based and aware of the need for businesses to have a social conscience.”
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