Why Small Businesses Need to Make the Pivot to Online

As the U.S enters the busiest time of the year for retailers, Amazon (AMZN) is thriving, saying on Dec. 1 that 2020 “has been the largest holiday shopping season so far in the company’s history.” Walmart (WMT) is seeing big gains in its online sales as well. And Target (TGT) reported a 155% surge in online sales in the third quarter.

But for many small businesses, the story is much different.

Uncertainty among small business in November was at its highest point in four years, according to the National Federation of Small Businesses. That’s due in part to consumers’ rapid shift to online shopping.

In the annual “U.S. Retail Index Study,” IBM data shows the pandemic has accelerated the shift from brick and mortar stores to online shopping by roughly five years. And that’s leaving many small businesses that have relied principally on foot traffic behind.

“The ones who have gotten taken to the cleaners are the small retailers who have a physical store presence or have a product that’s sold heavily through department stores,” says Daniel McCarthy, assistant professor of marketing at Emory University’s Goizueta School of Business. “If they haven’t established themselves as a digital business pre-COVID, they don’t have the brand name – they don’t have any brand awareness – and so they’d have to pay a lot of money to buy impressions off of Facebook and Google and other websites.”

The digital presence of small businesses often ties back to when they were founded. Many newer companies are almost entirely online, having been built with the digital economy in mind. But a significant number of legacy ones are lagging. A February survey by Visual Objects, a portfolio website, found that nearly one-third of small businesses said they planned to just begin to use a website this year.

There are some shortcuts for small companies, though. The growth of online “middlemen” for independent retailers, such as Shopify (SHOP) and Etsy (ETSY), has given a significant online presence to companies that otherwise would likely remain unknown.

There’s a price to those services, though, which lowers margins for entrepreneurs. Etsy charges a 5% transaction fee on the sale price – and takes a 3% processing fee if payment is made through Etsy Payments. Shopify has rates ranging from $29 per month to $2,000 per month, with transaction fees of up to 2.9%, depending on the pricing category the company chooses.

That’s a bite, but it’s nothing compared to what some facilitators in the food service industry are charging. Many restaurants that don’t have in-house delivery services have been dependent on companies like DoorDash and GrubHub to stay afloat as customers shy away from dining out. However, commission fees for those services run as high as 30% – which can severely impair the restaurant’s margin, especially with the loss of alcohol sales (where food service companies often make a big chunk of their profits).

While Uber Eats in July waved restaurant fees for the remainder of 2020, this likely won’t be a permanent waiver.

Small brewers face a similar problem. Foot traffic to tap rooms, where the majority of their income is made, has fallen off significantly in 2020. Take-out business has helped and a few states have allowed direct shipping to customers, but the industry traditionally sees sales dips in winter, so brewers need to look for alternative sales strategies.

That’s helped Tavour, a beer shipping service, experience rapid growth this year. The service lets beer lovers find brands that normally aren’t distributed in their region, and so far this year, it has added 118 new brewers to its customer base.

“We have more than tripled our business since the start of this year, and are excited to continue to invest in our future and the future of craft beer,” says Kathryn Preissinger, public relations and social media manager at Tavour.

Even the promise of vaccines in the coming months isn’t likely to bring a return to pre-pandemic shopping habits, warns McCarthy. For the time being, small businesses have to survive the 2020 holiday season – and the winter of 2021. Many won’t be able to do that without assistance.

“For many of them, this is the only time of the year when they make any profit, so if they don’t make profit in this season, they’re not making any money until next year at this time,” he says. “And that, for many businesses, is too long. They won’t have the balance sheets to stay afloat that long.”

And beyond that? Small businesses will face even greater competition from retail giants, and need to prepare now.

“It’s a secular shift,” he says. “Small businesses are going to have to invest heavily in digital if they want to survive. The Targets of the world – the big brick and mortar 800-pound gorillas – have all been making unprecedented investments in their e-commerce capabilities. Just to keep up with that, small businesses are going to have to do something.”

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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