The Future of Small Businesses

The pandemic forced many small businesses to join the digital economy, but will they be able to fend off the aggregators in the long run?

Richard Yao
IPG Media Lab

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Photo by Brandon Jean on Unsplash

It has been a hard year for small businesses. Social distancing restrictions have been disproportionately damaging to the travel, retail, events, and food service industries, where small businesses tend to concentrate. In July, the House Small Business Committee reported that 110,000 small businesses had closed permanently and another 7.5 million were facing the same fate. The latest survey from Tech.co found that 80% of small business owners say that COVID-19 has hurt their businesses.

However, things are taking a turn for the better as states gingerly reopen and ease restrictions. In addition, support for local businesses is surging following the hardship caused by the pandemic. At the end of July, some 64% of small business owners reported they are confident that they can survive for more than a year under current conditions, up from 34% that held this optimistic view in April, the latest CNBC survey revealed, although the level of optimism varies by industry.

Source: CNBC

Weathering this pandemic will inevitably leave its mark on small businesses, but it also presents an opportunity for a much-needed transformation. Although small businesses have long been rather resistant to new technologies, partly due to resource constraints and limited scale, circumstances created by the pandemic have made a strong case for small businesses to adopt digital tools and evolve their business models to compete in a post-COVID future. Let’s take a look at some of the key trends that are shaping the future of small businesses and how B2B brands that work with small businesses can help them make that transformation smoothly.

Weathering this pandemic presents an opportunity for a much-needed transformation.

A Transformational Moment

Running a small business is no easy task, especially given the shifting competitive landscape today. Long gone are the You’ve Got Mail days when Meg Ryan tried to keep her indie bookstore alive against a Barnes & Noble-style chain owned by Tom Hanks. Nowadays, local businesses are not only competing against the national chains, but also the digital-native startups and D2C brands, flush with VC funding and eager to disrupt consumer-facing categories. Warby Parker is displacing the local optometrists that have been struggling against the likes of LensCrafters, and Intuit TurboTax is disrupting small tax service and accountancy firms, who already have to compete against big companies like H&R Block.

There is a worthy distinction to be made between conventional small businesses and newcomers that are looking to compete in the same consumer-facing categories. Most D2C brands and digital-native companies may tick off some boxes on the list of “what constitutes a small business,” such as employee count, revenue size, and market share. However, we’re not categorizing them as small businesses here, for they do not share the same business model or growth objective due to their difference in funding sources. Pursuing vastly different goals in terms of scale and addressable customers, the newcomers deploy a digital-native go-to-market strategy foreign to most small businesses.

Now that the pandemic has shuttered the conventional offline channels that most small businesses rely on, many have been pushed to adopt digital tools to meet customers where they are shopping and interacting. The lockdowns pushed late-adopters to try out (and stay on) digital channels, thus further underscoring the need for small businesses to evolve.

Take ecommerce for example — In Q2 2020, US total retail ecommerce sales grew by almost a third (31.8%) from the previous quarter, or 44.5% year over year, per the latest data from the U.S. Department of Commerce. A decade’s worth of retail transformation took place in a matter of months. Forced by reality, many local shops quickly opened online stores using services like Shopify and Squarespace; Shopify reported that new stores created on the platform jumped 62% from March 13 to April 24 (the first six weeks of lockdown) compared to the six weeks before. 25% of brick-and-mortar small retail businesses surveyed in June said they’ve added an e-commerce channel to their operations this year.

Besides building out online channels, some forward-thinking small businesses across various industries are seizing this opportunity to upgrade their customer experience to keep up with accelerated behavioral changes. Private medical clinics embraced telehealth services while high-end restaurants packaged upscale dining experiences for at-home enjoyment. Fashion boutique Nava started offering virtual shopping appointments in addition to private in-store shopping by appointment. Junzi Kitchen debuted a new pop-up shop with a revamped American-Chinese takeout menu and a strong digital presence.

Some forward-thinking small businesses are upgrading their customer experience to keep up with accelerated behavioral changes

Back-end infrastructure is also being updated as small businesses increasingly embrace cross-platform SaaS solutions for operational needs like HR, payroll, and logistics. For example, Kabbage, a digital-native small business lender that was recently acquired by American Express, has rolled out Kabbage Checking, which aims to help small businesses access digital banking services like electronic wallets and bill payments.

Still, the ramifications of this pandemic will be felt for years to come. Economic uncertainty clouds long-term recovery for small businesses funding, while population shifts from urban centers to suburbs and secondary cities will have major implications for small businesses in metropolitan areas. Eventually, the rent for commercial space in city centers will decrease while the cities repopulate to a point where it is favorable to start new businesses in urban areas again, as Derek Thompson reasons in his thoughtful piece for The Atlantic, but that recovery will take time. In the meantime, small businesses need to survive, and that means adapting to new consumer behaviors and platforms.

Given the ongoing shift towards digital channels, small businesses of the future will likely adopt a go-to-market strategy akin to that of D2C brands, but without the VC funding and the resulting obsession with scaling the business at all costs. For businesses that don’t involve in-person services, future entrepreneurs will start building their businesses online before they open any offline location. Even then, the physical channel will serve more as an experience center and a marketing channel rather than the main consumer touchpoint or sales channel. Even the ones that do require in-person presence, such as nail salons or indie cinema, new digital touchpoints will be deployed at inception to facilitate a seamless cross-channel customer experience. Compared to the D2C brands, their marketing will be minimal and hyperlocal, leveraging location-based targeting to effectively reach relevant consumers. Social commerce will also serve as a key channel for future small businesses to engage with their customers and build a direct relationship.

Future entrepreneurs will start building their businesses online before they open any offline location

For B2B brands that work with small businesses, this means now is time to line up the digital tools and services that small business owners will need to start their business fresh in the digital economy. These capabilities should also be clearly communicated in your brand messaging and integrated with easily accessible customer service that will guide business owners to the right solutions for them.

Fending Off the Aggregators… or Joining Them?

As more small businesses, previously accessible only through offline channels, move online and adopt digital infrastructure in droves, one interesting implication to ponder is the application of aggregation theory, developed and popularized by business analyst Ben Thompson, to assess the future of small businesses.

Source: Stratechery

Small businesses, especially the ones that started offline, are pre-internet businesses. Their main competitive advantage derives from their control of distribution, namely their access to local customers by the virtue of being geographically close. As many of them enter into the new digital economy, however, they will inevitably face a similar challenge that many publishers and vendors have encountered before — how can they resist being commodified into undifferentiated suppliers of goods and services at the mercy of powerful platforms that control access to their customers?

The restaurant business offers a good example to illustrate the impact of aggregation. As a vital part of the small business landscape, non-franchised restaurants, which make up about 70% of all restaurants in the U.S., have been ruthlessly aggregated by local discovery services like Yelp and delivery services like Grubhub and Postmates. As online ordering for takeout continues to soar in usage, especially during lockdowns, local restaurants are losing control over their customer relationships to these food delivery platforms that promise hungry users a one-stop shop to discover all the restaurants nearby. Furthermore, this potential commodification can and will go even deeper to the point of integrating suppliers directly into the distribution platform, as the rising crop of ghost kitchen operators such as Reef indicate.

By the same framework, could what has happened to restaurants happen to small businesses in other sectors as well? In some sectors, this is already happening. Instacart is aggregating local grocery shops for same-day delivery, and TalkSpace is aggregating independent therapists to its platform and matching them to a worldwide clientele. Aggregation could happen in offline form too. For example, Sola Salon Studios, which offers beauty professionals move-in-ready studios in a shared setting, is expanding its footprint across the U.S. via franchising.

As every type of small business becomes accessible online, it opens up an opportunity for aggregators to swoop in and take over the market. In certain categories, local scarcity can protect some small businesses from being commodified — you can’t aggregate nail salons when there are just one or two shops in town — but only to a certain extent; in most cities, there are enough small businesses in close proximity for aggregators to sustain their platform value and attract users.It should come as no surprise that the usual suspects are already making moves accordingly, and each of the platform owners has their own strength and strategy in aggregating small businesses and taking a cut of the local commerce pie.

Each of the platform owners has their own strength and strategy in aggregating small businesses and taking a cut of the local commerce pie.

Google is a powerful aggregator at its core, and it has set out to aggregate local businesses through its dominance in local search. It now allows any business that has an online presence to list their products on Google Shopping for free, while also partnering with PayPal to help bring more merchants onto the platform faster by letting them link their existing accounts for accepting online payments. Its ownership of Google Maps, one of the most popular mobile apps for navigation and local discovery, also points to enormous opportunities for the search giant, as the company recently unveiled Local Search Ads in Maps, with Promoted Pins for specific in-store products are currently in the works.

Facebook has a long history of trying to aggregate the local business market by building a social commerce and marketing platform for small businesses. Putting aside its previous attempt to push proximity retail technology to offline stores via its failed Facebook Beacons initiative, it is still a strong candidate thanks to its stronghold on popular social channels. The recent launch of Business Messenger and Facebook Shops reaffirms its commitment to bring small businesses onto its platforms. Furthermore, 76% of Facebook’s advertising revenue currently comes from millions of small- and medium-sized businesses, and Facebook has tailored and mastered their ad products to serve small businesses that usually don’t have the budget to conduct a national media campaign. Therefore, it is in Facebook’s best interest to keep small businesses on its platform.

As the undisputed leader in U.S. ecommerce, Amazon is leveraging its leading advantages in strong customer relationships and logistics prowess to build its flagship platform into an aggregator of small businesses. AWS provides affordable cloud services to small businesses expanding their digital footprints, while Amazon Home Services help connect home service providers with local customers in need. Often shunned by the small business world as the archvillain destroying local economies, Amazon is nevertheless making an earnest play to get small businesses on board. Its latest move to offer small businesses who sell on Amazon easy access to credit lines with a fixed annual interest rate is a testament to its ongoing efforts to lure small businesses on board with integrated services.

Besides the three major aggregators, companies like Shopify, Microsoft, Walmart, and Oracle are all working towards building a suite of services aimed at bringing small businesses into the fold of the digital economy and, later down the road, build an aggregation platform on top of it. Shopify, in particular, recently launched its own mobile shopping app “Shop,” which allows consumers to browse a feed of recommended products, learn more about the vendors selling on Shopify’s platform, and make purchases using the one-click Shop Pay checkout process.

But, there are some obvious downsides to aggregating small businesses. For one, it is in aggregators’ best interest to commodify suppliers into undifferentiated service providers and disintermediate them from customers. A recent report by the non-profit anti-monopoly advocacy group American Economic Liberties Project details how Google and Facebook harm local communities by, among other things, siphoning resources from local businesses:

“Google is so dominant in search, merchants have little alternative to battling the corporation endlessly, trying to buy ads for which they can’t ascertain the true value — and where a substantial amount of clicks can be fraudulent — or simply vanishing from the vast majority of internet searches when they are either not listed or when their listing has incorrect information… Facebook can create similar issues for small businesses via fraud, driving up costs for businesses running ads, and opaque algorithm changes that limit small businesses’ ability to ensure their customers actually see their content.”

Circling back to restaurants, they have recently realized the need to take back control of their customer relationships from the aggregators. Some restaurants are fighting back by trying to preserve their brand and differentiation by turning to the Tock app, which is designed by a restaurateur to correct the wrongs of delivery services. The platform specialized in “fine dining experiences’’, shunning chain eateries in favor of getting more people to try out unique restaurants and dining experiences. Interestingly, some galleries in Chicago also started using Tock to manage reservations, private tours, and re-openings, pointing to an interesting scenario where small businesses can in fact use aggregation platforms to their advantage. After all, there’s strength in numbers, and local businesses tend to cluster together for the agglomeration effect.

Going one step further, non-profit sites like bookshop.org and webuyblack.com set out to aggregate small businesses themselves before the aggregators come knocking. By owning their own aggregating platforms, these small businesses are able to own their customer data and reach local audiences as a unified collocation. The characters in You’ve Got Mail certainly could not have seen that coming!

Ultimately, the biggest advantage that small businesses have over big conglomerates is the fact they know their audience and are part of their local communities. The personalization and interpersonal relationship that small business owners can provide their loyal customers with on a one-on-one basis is something that no data-driven CRM system could ever replicate. For small businesses, the human touch is the Midas touch they cannot afford to lose, and how to digitally enhance that will be a key challenge for small businesses and B2B brands going forward.

For small businesses, the human touch is the Midas touch they cannot afford to lose

Want To Learn More?

Small businesses are a key driver of U.S. economic growth and dynamism, not to mention irreplaceable champions of local communities. According to recent data reported by Forbes, they employ over half of America’s private-sector workers, produce over half of America’s non-farm private GDP, and create roughly 75% of new private-sector jobs.

We here at the Lab are keen to witness the transformation that small businesses are undergoing and eager to help brands better support and work with small businesses. If you wish to learn more about the developing trends reshaping this vital space and the brand opportunities that lie within, please reach out to our Group Director Josh Mallalieu at josh@ipglab.com.

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