Successful Scottish SMEs are not waiting for the future, they are shaping it.

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Time for action

By now we all know that this crisis is unique. We are facing the usual supply and demand constraints that usually affect business in a recession, but the complete halt of economic activity to help prevent the worst outcomes of a public health crisis has never happened before. Now that the public health crisis is largely under control in Scotland, we face the challenge of reopening and restarting our economy in an environment that is different in fundamental ways compared to before the crisis. Many of the changes in the private sector are structural and irreversible, the acceleration of the online sales channel is one example of this. The Government has stepped in to provide support to the private sector, but these are short-term measures designed to keep businesses afloat during the lockdown and the acute phase of the economic crisis. As we move forward the businesses that thrive will be the ones that find opportunities in the disruption, build new sales, reach new customers, and adapt to the structural changes around them. This will look different industry to industry, but the key point is that they are not waiting to see how things unfold, but rather trying to shape it.

SMEs are vulnerable to the current shock for several reasons. Some are in industries that have been forced to close and remain subject to strict social distancing rules that prevent them from operating at full capacity, such as food & drink and tourism. Others are vulnerable because they lack resilience in the form of cash reserves or access to external finance. The most vulnerable businesses face tough financial conditions and are in industries heavily impacted by COVID-19. Using data from the ONS’s Business Impact of COVID-19 Survey (BICS) we have mapped out which industries have been affected the most and which ones are the most resilient to the continuing shock, for the UK as a whole (Figure 1). Scottish SMEs were more likely to report that their turnover had been negatively impacted.

This is not a perfect map of which sectors are most vulnerable, but it helps to understand what is happening now. To help categorise the impact further we can split up the challenges faced into three broad categories:

Liquidity issues: Many businesses are already having difficulties meeting payment obligations, and these will become more acute as the crisis unfolds. The most recent ONS statistics show that 4.3% of businesses surveyed had no cash reserves, and 3.8% had less than three months reserves.[1] In previous crises access to external finance became constrained for SMEs. High levels of uncertainty make banks unwilling to take risk on to their balance sheets, while also discouraging SMEs from taking out loans. The Job Retention Scheme (JRS) will have alleviated some pressure on liquidity for SMEs, while the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS) are aimed at making banks more willing to lend by assuming most, or all, of the risk. The ONS data show that take-up of these schemes has been widespread.
Demand: In June, Scottish retail sales fell 18.6% YOY. This is an improvement on previous months, and the UK as a whole saw retail sales up 3.4% YOY in June, suggesting the release of pent-up demand, which will be captured in the July figures for Scotland. Over the next few months, consumer spending will continue to recover, but this is largely down to the scale of the shock during the lockdown sending it so low. Making predictions of how fast demand will recover is impossible given how much uncertainty there is. The most vulnerable sectors are ones where consumers may still be unwilling to shop in person, or where the consumer must be physically present.
Structural changes: COVID-19 is a unique crisis that has changed the way people spend, the way business is done, and the way people interact with each other. The main uncertainty is that we do not know to what degree these changes will remain entrenched. As we come out of the lockdown and restrictions are lifted, we will start to see how patterns of demand have shifted, and whether purchasing patterns from the lockdown remain. We have already seen online sales grow, and businesses in sectors that could still operate adapt to these new conditions. We will soon see how offices reopen and whether people continue to work from home, which has the potential to fundamentally change where business is done and how businesses operate. Most of these changes, and how entrenched they become, are contingent upon how safe people feel travelling to work or city centres, and how successfully governments suppress the virus until a vaccine or other treatment is available.

Scotland

To understand what this means for Scottish SMEs we can dive into specific sectors. We will look at tourism, construction, and food & drink as these sectors make up large sections of the Scottish economy.

Scottish tourism

The tourism industry is hugely important, especially for regional economies, and faces one of its toughest challenges in the immediate future. It is likely the hardest impacted sector, as the lockdown completely shut down operations for most businesses, and offering alternative services was near impossible. Many businesses in the sector also have small cash reserves. On top of these immediate liquidity issues, demand is constrained coming out of the lockdown as accommodation providers must adhere to new rules that limit how many guests they can accommodate as well as increasing operation costs, particularly around cleaning. We wrote earlier in the year that the tourism industry faces structural changes as people ‘staycation’, and that parts of Scotland are likely to benefit. This structural change suggests that through the initial liquidity issues, demand will recover and, due to structural changes in tourism, there is a reason to be optimistic.

Scotland construction

The construction industry is also under huge stress with many businesses having small cash reserves, and the industry operating on very thin margins before the crisis. Demand in the sector will struggle in the immediate future, however, the National Government and the Scottish government can prime the pump by investing in infrastructure projects, and making funds available to local government for projects, which would be a big benefit to SMEs in the construction industry. Structural changes to the industry are unlikely to be as deep for construction as work cannot be done remotely. However, international supply chains face uncertainty from both the pandemic and Brexit, and companies may be forced to source materials from local producers.

Scotland food & drink

The recent reopening of the hospitality sector will help solve short-term cash flow problems to an extent, but with social distancing restrictions in place many businesses are not operating at capacity, and some customers are probably staying away from restaurants, pubs, and cafes until they feel safe. This will help food suppliers who rely on this sector to reach customers.

We wrote earlier this year about the industry and saw that many businesses had found creative and innovative ways to continue to serve their customers and reach new customers. Many of these businesses are early adopters and trendsetters with their competitors rushing to catch up to the changes in the way people order food and interact with restaurants. Many of these changes are likely to remain and if social distancing rules remain in place for a long time, the hospitality sector will have to adapt to operate in larger premises and change price points to stay viable. International markets, and access to these markets, is highly uncertain for food and drink producers. With the public health crisis not yet under control in the US, the Trump administration’s implementation of tariffs, and Brexit all contributing factors. Structural shifts in this market will almost certainly force them to sell to local markets.

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About Where Now Consulting Ltd: Where Now Consulting is a management consulting company that focuses on helping its clients to grow and compete. The company offers a range of consulting services, including business turnaround and performance improvement, formulating market entry strategies, mergers and acquisitions, joint ventures and alliances, and sales and distribution strategy and management.

For more, please visit Our Services page.

[1] https://www.ons.gov.uk/economy/economicoutputandproductivity/output/datasets/businessimpactofcovid19surveybicsresults