Small Business Confronts Extinction in Europe’s Battered Economy

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Small Business Confronts Extinction in Europe’s Battered Economy

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(Bloomberg)-19/11/2020

European small businesses that survived the first coronavirus lockdowns are getting creative to weather the second wave and the long-term fallout from the pandemic.

Faced with the prospects of another recession and uncertainty over how long the crisis may last, firms are fighting to retain existing customers and hunting for new ones to stay afloat. Many have learned from the painful experience of the first lockdown to navigate some of the drastic long-term changes to work and consumer behavior brought about by the virus.

In Brussels, Laurent Gerbaud was determined not to be caught out again after his downtown tea room had to close during the initial outbreak. His plan amid the pandemic-induced recession was simple, if unexpected: expand.

With fewer tourists and office workers in the city center, he opened a second shop in a residential neighborhood to capture more business from the work-from-home crowd, responding to one of the big changes of 2020, and one that may persist.

Not Working

European are staying away from their traditional place of work

Source: Google mobility data, 7-day moving average

“It’s very different from the first confinement. We are much more ready,” Gerbaud said.

While the current round of restrictions are expected to cause the euro-area economy to shrink this quarter, they’re less severe than the blanket lockdown imposed in March. The wide usage of masks, better testing, and social distancing rules are allowing more businesses to stay open.

For many, however, it’s about damage limitation until a vaccine arrives. That won’t be easy.

A report by McKinsey last month showed that one in five small business owners fear they’ll default on a loan. More than half worried their business wouldn’t survive longer than five months.

Second Hit

Second round of restrictions will be less damaging than first lockdown

In response, lobby groups are demanding more government support. Cesare Fumagalli, the head of Italy’s trade association for artisans and small businesses, this week pushed the government to widen protection, saying it “needs to fund all the businesses that have suffered grave revenue losses.”

The future of small businesses is vital for the euro area. They constitute the backbone of the region’s economy, accounting for about half of employment. Companies employing less than 50 people account for 99% of all non-financial enterprises in Europe.

Uneven Distribution

Small and micro enterprises employ half the people in the EU

One sector doing well is manufacturing, which helped to lead Europe’s economic recovery in recent months as services — particularly hotels and restaurants — faced setbacks.

But even there it’s far from all clear. A survey by German industry body DIHK found that one in five engineering firms faces a liquidity squeeze. Nearly half were scaling back investment, unwilling to commit much-needed funds at a time of heightened uncertainty.

That caution is on display at German industrial fan-maker EBM Papst, even though it didn’t need government loans and no longer has staff on furlough programs.

We are “keeping investments and expenditures down, because we don’t know yet how sustainable business levels are,” said Chief Executive Officer Stefan Brandl.

For retailers, the immediate worry is the Christmas season, when they make a huge chunk of annual revenue.  While economists at JPMorgan Chase & Co. have said they expect activity to bounce back ahead of the holiday season, governments aren’t so sure.  France will only gradually lift its lockdown, with bars and restaurants remaining closed beyond the initial Dec. 1 end date, and Italy will continue its regional lockdown system, with various levels, through the winter.

Retail Retreat

The pandemic has hit non-essential stores across Europe

Source: Google mobility data, 7-day moving average

In Rome, Sarah Petrucci is busy putting together contingency plans.

Her toy store Il Pesciolino Rosso is on a small cobbled street near the Spanish Steps, an area normally packed with tourists. That business is gone, while the semi-lockdown has wiped out much of the local trade too.

To combat an exodus of clients to larger online shopping sites, Petrucci is pushing a personalized approach and using food delivery app Glovo to hold onto clients. The store sends emails with photos of new toys and special offers. All it takes is a few clicks and the toys are wrapped and packed, handed to a Glovo runner and sent across town.

“We try to innovate,” said Petrucci. “If a client is close I deliver personally. If they want to see new things in the store I can videoconference with them and show them around so they can pick things they like.”

But for some businesses, the options to adapt are limited because they can’t survive without customers coming in the door. The optimism that Spanish businesswoman Maria Teresa Coris tried to hold onto earlier this year has vanished, just like the tourists on the Mediterranean coast where she runs a 24-room hotel in the town of Tossa de Mar.

Coris is wary of tapping more government-backed loans state because she doesn’t want to keep accumulating debt.

“Companies can try to do all they can to survive, but they might still end up in ruin,” she said. “That’s the dark cloud we all have hanging over us.”