SBAM score card shows mixed bag

Report indicates small business closures and loss of revenue are continuing in Michigan.
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Retailers facing a worker shortage are making hard decisions involving services and hours of operation. Courtesy istock

An array of factors expected to continue into 2022 are causing small businesses in Michigan to lag behind the national recovery, a new report found.

The fall edition of the Michigan Entrepreneurship Score Card, published by the Small Business Association of Michigan (SBAM) in conjunction with Michigan Celebrates Small Business, showed while Michigan’s economy has seen “clear and consistent” improvement in 2021, that trend is not representative of the reality being experienced by small businesses in the state.

The 17th annual score card this year included spring and fall editions to analyze the quickly changing economy amid the pandemic.

Brian Calley Courtesy SBAM

“The story of Michigan’s economic recovery is complicated and changing quickly,” said SBAM President Brian Calley. “While it is great to see consistent overall economic growth, the topline statistics are not necessarily representative of what’s happening with small businesses who have experienced significant closures and lost revenue. New challenges of acute workforce shortages, rising costs and supply chain disruptions are hampering the recovery.”

The fall score card identified factors that helped and factors that hindered Michigan’s economic rehabilitation, in addition to what the state’s prospects are for a full and robust recovery.

Signs of positive improvement include:

  • Eight months of improved gross domestic product in a row on the Comerica Economic Activity Index
  • Michigan’s economy improving at an average pace as compared to most states in 2021, according to the State Coincidence Index of the Philadelphia Reserve Bank

The score card showed while Michigan’s recovery is occurring, many industries dominated by small businesses still are struggling. The report showed:

  • Changing consumer habits drove customers to large online retailers, and long-term closures and restrictions decimated small stores, restaurants and event venues.
  • A significant permanent shift to remote work left many downtown business districts lagging in their recovery.
  • Personal consumption expenditures on goods have fully rebounded, but personal expenditures on services remain below pre-pandemic levels. The service industry is dominated by small businesses.
  • Employers reported significant hardships in staffing their businesses to grow or even remain fully open, as the pandemic seems to have exacerbated a long-term decline in the labor force participation rate.
  • The Michigan recovery is below the national average in the number of small businesses open and the loss of revenue experienced by small businesses as compared to the year before the pandemic.
  • Rising costs are squeezing margins for small businesses, and supply chain disruptions are presenting challenges to economic recovery.

Calley said the top concern he has been hearing from small businesses has been staffing shortages, which is worrisome because the labor force participation rate does not historically snap back as quickly as other economic indicators following a downturn.

“The decline that we’re feeling today has been 20 years in the making,” he said. “Before the 2001 recession, labor force participation was more like 67-plus percent. It dropped down last year extraordinarily low (to just over 60%), then popped back up, but instead of getting back up to 64% or 65%, like it was pre-pandemic recession, it has only gotten back up to about 61.7%. … History tells us that a growing economy does not solve the labor force participation rate problem that we find ourselves facing today.”

He said this reality forces small businesses, particularly in the service sector, to make tough choices, such as limiting hours and days of operation while still having to pay fixed real estate and equipment costs; training workers to new levels of productivity; adding self-checkouts at grocery stores and iPad ordering systems at restaurants (or eliminating table service and switching to bar or counter service) — all so that the business can run with fewer workers.

Changing consumer behavior regarding the shift to online shopping means small businesses that may not previously have done online sales have to enter the e-commerce realm — a very noisy and overwhelming place — to compete.

“Even though most retail businesses do have and have had an online procurement and order fulfillment system, the presence online is what is impossible for some smaller businesses to compete in without using somebody else’s platform,” Calley said. “There are certain stores that cater to office worker traffic, and that’s their market and their exposure, is the fact that they’re physically located in a place that is within the literal eyesight or within the purview of thousands of office workers. Overnight, the office worker habits, in terms of where and how they’re working, changes, and markets literally move from downtown areas to suburban areas.”

He said it wasn’t easy for them to recover sales to that lost demographic, because being found online requires a new skill set and new level of resources.

“Somebody can’t just throw up a website and have anybody online find them. When you search for things, a lot of the big, dominant, giant online retailers, they create and buy a presence that is literally not possible for most small businesses to replicate or compete with,” he said. “Either they have to sell through somebody else’s network and give them a piece, or there are some brands that are just strong brands with a loyal following, and people seek them out.”

Calley said some types of retail businesses are more impacted by this changing consumer behavior than others, but there will always be a segment of the consumer population that prefers to touch, feel and experience items before they buy.

“That market, I think they’ll always be served, but it’s hard for me to imagine the proportion of online procurement getting smaller anytime in the foreseeable future,” he said.

Calley noted some large retailers like Meijer are providing a place for locally owned small businesses to sell their goods, which helps provide more sales channels.

“I think the market is going to find its way to a new equilibrium. Some consumer habits won’t change back, and they don’t necessarily have to, but there will definitely be winners and losers in the mix of where things settle,” he said.

“One thing I know about entrepreneurs is as long as they know the rules of the game, they’ll innovate, and they’ll find their new place in it. Where I draw my confidence is that while some industries are going to be irreparably damaged by the permanent changes in the pandemic, there are many entrepreneurs that are also going to take advantage of the situation to build a better mouse trap.”

The full score card report is available to download at sbam.org/scorecard.

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