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STATE OF PLAY

The pandemic exposed small businesses’ vulnerabilities—and how to fix them

Illustration by Jovaney Hollingsworth
  • Tim Fernholz
By Tim Fernholz

Senior reporter

Published Last updated

Sipping a strong drink outside with friends, jazz music in the air, you could almost forget the pandemic—except for masks dangling around everyone’s chins.

Telegraph Avenue in downtown Oakland, California has been closed to auto traffic through a program called flex streets, allowing watering holes like Bar Shiru to set up their tables in the street for socially-distanced service. To limit menus, credit cards, or cash from passing back and forth between customers and servers, ordering and payment is done on customers’ own mobile phones, enabled by QR codes. Even the servers have a different glow: In the Covid era, they are “essential workers,” with early vaccine eligibility. The idea of supporting their places of employment has an added tinge of moral righteousness.

“The way we kind of put the pieces together and tried to make ends meet was by essentially re-inventing our business what seemed like every two weeks,” says Daniel Gahr, who owns the Japanese-style record bar with partner Shirin Raza, “all the while chasing down every last penny of aid we could get.”

These changes were forced by a public health crisis that is now, knock on wood, subsiding, thanks to the proliferation of vaccines. But that’s no reason to abandon the attitude that small businesses of all kinds, and their employees, are essential to communities as well as to prosperity.

“Small restaurants are creating creative, good-paying jobs for people,” Ouita Michel, a Kentucky restauranteur, told Quartz. “I see now how valuable that is to my community. They’ve shown me that in 2020. I want to make sure we are living up to what the community needs after how much they’ve invested in us.”

While not all small businesses are restaurants and bars, the challenges they face in the changing economy exemplify many of the experiences faced by small firms in an increasingly digital world. And the strategies for supporting them apply across the diverse range of small, independent enterprise.

Local and national governments can do more to bolster small businesses with the same tools they used during the pandemic. Technology adapted ad hoc for a crisis can increase efficiency and equity during boom times. And perhaps most importantly, the lip service paid to the value of people in jobs unfairly dubbed “low skill”—from bartenders and cooks to carpenters and care workers—could be made real as we recognize their contributions to the daily life of advanced economies.

What is a small business anyway?

What are we even talking about when we say “small business,” and why do they matter? We’re not quite looking at a page from Richard Scarry’s Busy World here.

Statistically speaking, a small business is one that has 500 or fewer employees, but anecdotally you’re probably imagining a firm with dozens of employees. “Small businesses” make up nearly half of US employment, but most of that is firms with more than 100 workers.

A more useful category might be independently-owned local businesses, firms begun in a specific geographic area to serve it: Everything from small retail stores, bars and restaurants, to child care centers and small manufacturing firms. They don’t necessarily envision growing many times over, though they may find themselves doing so through franchising or other quirks of growth. There’s no great measure of firms like these, but one proxy is companies with fewer than 100 employees, which make up about 9% of companies and employ nearly a fifth of US workers.

When the coronavirus became a wall between customers and small firms that were once a part of everyday life, they suffered: Small businesses closed at frightening rates, with Black- and women-owned firms hit disproportionately. The official data is still trickling in to the US census, but academic surveys early in the pandemic showed mass temporary closures that some business owners expected to become permanent. The business review service Yelp reported that at least 163,000 businesses on its platform closed temporarily, while the National Association of Restaurants found that 110,000 eateries had shut down permanently.

And just consider: How many small businesses in your life have closed in the last year?

How to throw money at the problem

One of the first government responses to the crisis in the US was the Paycheck Protection Program (PPP), designed in April 2020 to provide cash to businesses at risk of closing if they kept paying their workers.

The PPP helped reveal a lot of society’s cognitive dissonance around small business. Venture-backed start-ups, franchises backed by multinational conglomerates, and even subsidiaries of large firms were able to win funding quickly. But at first, many smaller firms struggled to access the program.

Greg Hunicutt runs a construction business in Houston, Texas, specializing in custom home building and renovation, the kind of artisanal work ideal for small firms. He stopped work entirely for about six weeks, paying his workers out of his pocket because they couldn’t get access to unemployment benefits and he couldn’t snag a PPP loan.

“The PPP was designed to route through banks,” says Philip Gaskin, who works on capital access for small business at the Kauffman Foundation. “The majority of entrepreneurs do not have relationships with banks.”

Surviving is a competitive advantage in and of itself.

That lack of access to the traditional financial system is in fact the norm. Gaskin’s statistics are rather stunning: 83% of small businesses don’t access bank loans or venture capital. Instead, they bootstrap themselves or rely on investments from family and friends. Hunicutt was eventually able to win an emergency loan from the Small Business Administration and access the second round of PPP funding, but not every small firm can make it through—one study during the pandemic found that the median business with $10,000 in monthly expenses had just two weeks of cash on hand.

“Surviving is a competitive advantage in and of itself,” Hunicutt says. “It’s very discouraging to see so many businesses that we used and patronized, especially restaurants, that did not make it in the last year. I can’t really emphasize enough that cheap money by the government is really helpful for small businesses.”

Gaskin leads a project called the Capital Access Lab, which is working to increase financing to investors who provide capital to minority- and women-owned businesses, and those in rural areas. But it will take more action across a laundry list of policy areas to improve access to capital: from backing community-focused financial institutions that target disadvantaged areas to setting aside more Small Business Administration loans for the smallest firms.

Technology is a problem… and a solution

Candy Yiu and four partners worked to open their dream restaurant in Portland, Oregon for years. Candy and her husband Akshay Dua had fallen in love with the food that chef Jessie Aron served at her food cart, Carte Blanche, and joined the effort to find her cooking a brick-and-mortar home. Finally, the handmade wallpaper and the menu were just right. Malka’s soft opening was in January 2020.

The creative restaurant attracted enviable reviews, but it had to close down its dining room after just over a month. It was able to remain open for pick-up orders, but the owners began exploring as it became clear the pandemic would not be over in a few weeks or months. They ran into a problem that was common knowledge in the industry but took on an outsize importance as delivery meals became a growing part of pandemic life: National delivery services aren’t working.

DoorDash, Grubhub, and Uber Eats demand around 30% of the revenue a restaurant earns from a delivery, which can easily amount to the eatery’s entire profit on an order, or more. That’s when they’re not bringing restaurants onto the platform without permission, or backing copy-cat eateries. These apps also charge service and delivery fees that can increase the consumer cost of a meal 20% or more above the menu price. And the drivers they depend on work as independent contractors, without minimum wages or benefits.

“My husband tried to drive with DoorDash just to see how it works,” Yiu says. “He got two orders [over two and a half hours] and got paid like $8 dollars. This is not even minimum wage!”

He got two orders and got paid like $8 dollars. This is not even minimum wage!

Yiu and her husband, software engineers by training, had the technical know-how to do something about this. They launched Slurpalicious, a downloadable delivery app, that pays drivers a fair wage working alongside restaurants. Since February 2021, when they began working with one waffle cart, they have added 20 restaurants in Astoria, Oregon, the community where they are demoing the application.

Aaron Withers had a similar epiphany. A chef who has worked at some of the world’s great restaurants, including Noma in Copenhagen and Den in Tokyo, Withers was plotting to open his own restaurant in Lexington, Kentucky, where he had gone to college. As the pandemic hit, he put the eatery aside to think about “different and more equitable ways to serve as a delivery partner for our restaurants.” He and his partners settled on a shared ownership model, with restaurants and drivers owning the business and sharing profits. The Delivery Co-op was born.

In this model, restaurants pay a flat $300-a-month fee to be part of the service, which hires drivers as employees with benefits—they make $10 an hour and keep 100% of their tips, averaging to $20 an hour, according to Withers. Besides the cost of their meals, customers pay a flat $25 a month for unlimited delivery services. Thus far, the Delivery Co-op has 10,000 subscribers, six restaurants on its list, and eight drivers, with a waiting list of 50 eateries.

Michel, the owner of six restaurants in and around Lexington that emphasize produce from local farmers, was one of the first restauranteurs to join the Delivery Co-op. She had balked at the fees demanded by national delivery apps, but with the Delivery Co-op saw an opportunity to find additional revenue, keeping her doors open and employees at work. One of her chefs even set up a delivery-only ghost kitchen pop-up for Japanese-style cuisine.

A different model for growth

Michel sees the Delivery Co-op as something that can be a safety net for hiccups on the path out of the pandemic. It also has the potential for increased business—Michel envisions a re-opened downtown Lexington, where Co-op members order lunches that are delivered to their offices by bicycle, or with robots the Co-op is experimenting with.

“It’s not that the Delivery Co-op is going to make my business profitable,” she says. “They are another stream of revenue and service to our guests that helps build our community and makes the density of our food net more secure.”

The challenge, Withers says, has been hiring drivers at the right pace to match customer growth and guarantee service for new restaurants.

They are another stream of revenue and service to our guests that helps build our community and makes the density of our food net more secure.

Yiu has also encountered the challenge of optimizing the ratio of drivers to eateries, the problem at the heart of any of these platforms—“we have a lot of sympathy for DoorDash…The problem they are trying to solve is really hard.”

DoorDash, which lost $461 million in 2020, says that its business model will be profitable once it reaches scale and expands into new markets and services. The company argues that its higher restaurant fees reflect extra levels of service and marketing they choose. “DoorDash was founded to help grow local economies,” a spokesperson told Quartz, adding that its drivers value flexibility of being independent contractors, and earned an average of $22 an hour in September 2020.

Slurpalicious isn’t profitable yet, but Yiu hopes to continue expanding it steadily. Withers’ Delivery Co-op is barely profitable, which he notes makes it the most profitable delivery app in the world at this point. Though both are hoping to work with new partners to see their delivery models expand to other cities, neither entrepreneur is eager to throw VC money at their problems, despite receiving offers from investors.

“We just decided that that really wouldn’t give us any advantage, even in growth,” Withers says. “Our restaurant members have a share in the co-op, it’s not in their best interest to sell out. They joined the Co-op to get kind of a different way of delivering food.”

Yiu, familiar with VC-backed software companies, says “I know what it costs to get VC funded…they expect [revenue] to double every year.” Which might not be possible if a company is treating its partners well, or focused on community needs: Slurpalicious is particularly known for its “pay it forward” feature, which allows users to buy a charitable meal for an anonymous recipient.

The delivery start-ups are betting on the idea that a slow-growing, locally-focused business can do what the national conglomerates can’t, which is make the economics of app-based delivery work. For Withers in particular, it comes down to hiring drivers and paying them well enough to stay on.

“The main thing that is breaking the bank for big delivery is driver turnover,” he says. “Most of their new hires quit before three months.”

The government can help

Yiu is watching another development closely: How the city of Portland regulates restaurant delivery. The city imposed a 10% cap on the fee that delivery apps can take from any restaurant order in order to help struggling restaurants during the pandemic. Now, national apps are lobbying the city to raise the fee. DoorDash says the price caps force it to pass costs onto customers, but Yiu says that at 10%, her business can survive. She worries that, if the cap is lifted, free-spending national competitors could push her out of business. Already, she says, DoorDash has moved into Astoria.

“We are small potatoes—they are actually throwing money at Astoria,” she says.

We are small potatoes—they are actually throwing money at Astoria.

Policymakers could make the difference for the small business rebound. Capping fees on delivery apps for restaurants is just one example. The stereotypical complaint about the small business political agenda is that they are asking for protection from competition with bigger firms, and in some cases that is true. More often than not, though, small firms aren’t asking for protection so much as a level playing field. When grocery stores were considered essential businesses to be open during the pandemic, big box retailers were also able to keep selling books, toys, and clothing while individual retailers of those items were closed up. Local jurisdictions had to play catch up to say that only essential goods could be sold.

Indeed, many local responses to the pandemic involved deregulation. To-go alcoholic beverages are one “innovation” it’s hard to see being pushed back into the black market. Other changes are similarly overdue: Cities lifted caps on street vending permits to allow restaurants more opportunities to market their food while in-person dining was prohibited. Those limits had been criticized for years for targeting the poorest vendors, often immigrants, with little obvious benefit.

In Oakland, the flex streets initiative eliminated the limit on mobile food permits and waived permitting fees, while allowing restaurants and bars to serve customers in parklets, sidewalks, parking lanes, and other city owned property. It still wasn’t easy to get things moving, according to Raza and Gahr, the Oakland bar owners, particularly because of the confusing intersection between local, county and state regulators offering inconsistent guidance, like allowing wineries and breweries to offer limited indoor service while still keeping bars closed.

Greg Minor, the Oakland official who ran the flex streets program, says the city administrator is considering extending it another year as the pandemic subsides, and to evaluate which parts of the rules might be made permanent. The activation of public spaces has been successful in more pedestrian-oriented areas of the city, and one challenge will be making that possible everywhere.

“The vast majority of businesses that have utilized the program are in more resourced areas,” he notes, but less so in poorer neighborhoods with fewer pedestrian areas. One success he highlights is the Akoma Market in east Oakland. Developed by the Black Cultural Zone, a community partnership, the market features Black vendors, but also resources for people seeking to start new businesses, like help with licenses and permits. For Minor, that suggests a good route for government policy is exploring ways to improve traffic conditions or open more space for similar projects.

“For a lot of these vendors who are in our market, they’re emerging businesses,” Ndidi Okwelogu, the Black Cultural Zone’s economic development manager, told Oaklandside. “It’s a good place if you really want to see if that cake you make could be a business—you can come to the Akoma Market and test it out…People are coming to the Akoma Market to recruit for other markets, and that’s exactly what we want. We want our vendors to be competitive.”

Re-thinking what small business can be

Local governments “understand that the cavalry isn’t coming,” says Ilana Preuss, an economic development consultant in Washington, DC. “A lot of places are not going to be able to recruit some big business to save the day…there is a really strong value, and in fact a more resilient economy, to investing in their own people and their own places.”

For Preuss, the key sector to develop is small manufacturing, firms making products that can be replicated and packaged—think hot sauce, handbags, and hardware. These businesses, she argues, are poised to offer better-paying jobs than retailers that compete directly with online platforms, better utilize local real estate, and generate revenue from outside the community by selling wholesale and online.

The American Rescue Plan, enacted in March, includes $350 billion for state and local governments. Local economic development advocates are hopeful that some of that money will go to support entrepreneurs through training, financing, or redeveloping vacant buildings into shared kitchens or market halls.

The pandemic has given us a big reset button that we can push.

Creating space for independent businesses is a major part of how governments can support them, advocates say. Zoning rules that strictly separate residential, industrial, and commercial buildings, limit walkability, or require resources devoted to parking spaces can all make it harder for businesses to balance paying the rent with finding customers. Some cities have developed ordinances to limit “formula businesses,” large chains premised on identical offerings, or restricted development of new commercial space to force investment in vacant buildings.

That space also needs to be found in the digital arena. Independent businesses might have been able to skate by in the analog world pre-pandemic—two-thirds had no online presence at all—but in the last year necessity has forced them to take to social media and sales platforms to find and serve their customers. That means efforts like the Slurpalicious and the Delivery Co-op, but also digital platforms that allow local governments to buy goods from nearby producers. Advocates also say that the anti-competitive behavior of larger e-commerce platforms, Amazon in particular, demands the attention of federal regulators.

National chain leaders are salivating over the opportunities inherent in the small business closures over the last year. Dollar General CEO Todd Vasos says his firm will open more than 1,000 new locations this year. Independent business owners say that local communities have a similar opportunity.

“The pandemic has given us a big reset button that we can push,” Kennedy Smith, a researcher at the Institute for Local Self Reliance, says. “Wait a second, going forward, how do we want to do commercial development so it is better for the community?”

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