State of play: Small business recovery after the pandemic
The software and hardware small businesses are using to stay afloat — and the challenges ahead.
Imagine your average Tuesday in February. Perhaps you battled through a crowded subway to get to work, bought a coffee from a bustling cafe before heading into a busy office, grabbed a sandwich from the nearby deli for lunch, got a drink at a bar with a few colleagues after work, then bought a few things at the grocery store before heading home.
You probably haven't done any of that recently.
The pandemic has struck every industry, but perhaps none more so than the industries that need people to go out and do things or buy things in the real world. Restaurants, shops and other small businesses across the U.S. have been shuttered or are operating at drastically reduced capacities for months now, with no clear end in sight. Businesses have had to evolve to survive, turning to technology to reach and then safely serve their customers.
Protocol spoke with leaders across the retail industry, as well as small- and medium-sized businesses, to discover the technology they're relying on to see themselves through the pandemic. They say that much of the transformation that's happened over the last few months will likely stick around long after life returns to normal, with four major areas to watch:
Before March, takeout and delivery was an ancillary business for most restaurants, and online sale fulfillment wasn't the top priority for many boutique stores. In both cases, these businesses tended to make their names by being places where locals wanted to go.
More or less overnight, businesses had to think about how to get their products to customers online. That brought new headaches, like order fulfillment, shipping and ecommerce websites. For some businesses, that also meant turning their spaces into makeshift warehouses: pilling up tables, chairs and display cases to make space for additional inventory and boxes for shipping.
And many businesses had to look to Shopify for help. Even before the pandemic, Shopify had been credited with creating a service that allows small businesses to compete against the digital behemoths online. The Canadian company offers POS systems, website hosting, ecommerce, fulfillment and marketing software, intending to be a one-stop shop for small businesses looking to make the jump into digital. It has well over 1 million merchants signed up to date.
Ian Black, Shopify's director of retail, said it became "very obvious" as early as March that "merchant behaviors were going to change dramatically." The company stopped working on anything that wasn't related to helping merchants get through the pandemic, and Black says it has shipped 10 products for merchants remotely during the pandemic. That includes allowing merchants to sell directly through email messages and a new POS system with curbside pickup and delivery function tie-ins, as well as access to funding.
Black said that businesses using Shopify's tools saw a massive drop-off in in-store sales in March. But about six weeks after the U.S. lockdown began, he said, roughly 94% of that revenue had returned through online channels. At the same time, Black said, Shopify saw a 71% increase in new stores created on Shopify in the second quarter of the year versus the first.
He said that businesses that have either started up in ecommerce or bolstered their existing offerings have mostly followed a similar evolution. Shopify aims to make simple selling online possible for anyone, regardless of technical prowess, Black said, but then once businesses are up and running, they tend to look for what more software can offer them. They'll start experimenting with email or social marketing, or looking to sell on bigger platforms, like Amazon. "The tools that get unlocked over time become really powerful," Black said. "Those are the pieces of technology that the biggest, most sophisticated retailers in the world have relied on to drive their recovery, and we're making them available to the small local beer store."
"Entrepreneurship is a messy, difficult process, and it's one that people learn through experience and learn through doing," he said.
Black said that traditionally, ecommerce has been a tool that businesses have leveraged to be able to scale nationally, punching above their weight with the capabilities of a company like Shopify behind them. But since the pandemic, consumers have been increasingly using ecommerce solutions to find and buy from businesses in their community. That's partially out of necessity, but Black said he anticipates many more consumers staying with online buying even when the pandemic subsides. As a result, businesses need to think through how they're going to be structured moving forward. Once their shops are open again, where will they store cardboard boxes and shipping materials?
It's something Shopify is concerning itself with now, as the horizon of the pandemic continues to expand. "That's something that we think will really accelerate, or certainly kind of continue with us as local retailers learn how to use the power of [their] local brand and customer base to stay connected with them, but still do most of [their] sales online," Black said. In April, Shopify unveiled its Shop app, which is meant to be a hub for consumers to track orders from businesses that use Shopify. It's also becoming a place to connect with other stores in local areas, with a new discovery feature highlighting businesses that are close to where people are. It's a feature that highlights what is likely the near-to-mid-term future for most businesses, blending digital commerce options with support from the local community.
And there are also companies looking to redefine what a local business means in 2020. FastAF, a new app that launched last week from the team at Darkstore, aims to connect small and massive brands alike with consumers through a network of dark stores (more on those later this week) and two-hour delivery windows. The app, which launched in Los Angeles with the likes of Nike and Aesop, as well as local retailers like Canyon Coffee and Compartes, removes the need for costs associated with stores — like real estate, maintenance and sales staff. Products are stored locally at a dark store, packaged in a branded tote, and then delivered by DoorDash when a customer places an order. "COVID definitely accelerated the need for this," founder Lee Hnetinka told Protocol.
It's still too early to tell whether the pandemic will forever change the U.S. consumer's relationship with physical retail, but few believe that things will go back to the way they were before.
"I do feel that this whole effort to stay away from stores, especially in the discretionary [spending] categories, did open up a lot of people to online shopping who weren't doing it before," CB Insights' Senior Lead Analyst Laura Kennedy said. But that revolution needs to be put in perspective, she argued, as most reports peg ecommerce retail sales at only around 30% of total sales right now. "If people move forward with a portfolio of ways to shop that includes more online sources, that means the retailers have to find a way to sell more online, because they are in theory still getting 70% of their sales from a store," Kennedy said.
The specter of Amazon
The entire ecommerce industry has had to thrive under the shadow of Amazon. For small businesses and independent sellers, that's meant either fighting against Amazon or partnering with it. Some stick to platforms like Shopify to maintain some control over how their products are sold and the relationship they have with consumers. But for others, the pull of Amazon is just too strong: Products have the potential to be seen by tens of millions of people each month. In a recent report on small and medium businesses, Amazon said that the average annual revenue for retailers listing on its site shot up from $100,000 to $160,000. Some 3,700 U.S. retailers on the platform surpassed $1 million in sales for the first time last year, according to the report.
Although working with Amazon can lead to small businesses making some steady income, the benefit of opening up to the U.S.' largest online retailer to handle fulfillment and sales doesn't always come cheap. "Amazon charges storage fees every month based on the physical size of your product and how many units you've sent them, a set fee per unit fulfilled, and another fee based on the item's weight. That's on top of their standard commission for third-party items, which varies by category," Thomas Smith, the co-founder of Gado Images and inventor of a comb to clean dog's eyes, wrote on OneZero earlier this month. Smith said that for each comb he sold for $11.99, he paid Amazon $4.28 in fees, while netting just $4.25 himself. That means that small business have to be very sure about unit economics before making the leap into the big leagues.
When businesses sell on Amazon, there's no guarantee that designs won't get copied into oblivion, by Amazon or others. There are reports of Amazon meeting with companies to invest in them — or even actually investing in them — and then rolling out products similar to the ones the companies make. There are also reports of Amazon using data on what's sold well on its site to launch similar, cheaper products, usually under its AmazonBasics line.
Then there's the constant fear that Amazon will just decimate an entire industry. Shares in major pharmacy chains tanked the day Amazon announced it was buying PillPack, in much the same way grocery store stocks plummeted when it bought Whole Foods. Steve Rowen, a managing partner at Retail Systems Research, said that momentum is likely to continue throughout the pandemic. "This is a leapfrog moment for you," Rowen said of the grocery industry's reaction to the pandemic. "If you don't [invest], be sure that Amazon is finally going to continue their march to take over your industry as well."
Redefining the customer experience
It's been a difficult summer to go out and enjoy, but millions have still managed to find ways to spend time at restaurants, bars, and events in outdoor spaces. And many more have braved the world to get necessities like groceries and prescriptions — not to mention the millions of workers who staff the stores that haven't closed during the pandemic.
Toast, a restaurant management platform, told Protocol that revenue at restaurants across the U.S. was down 23% year-over-year, with New York state hurting the most, with revenue down 45% there. Nearly 90% of restaurants in New York City couldn't pay full rent in August. Businesses have had to find new ways to survive, with reduced capacities, new ways of working with customers, and new tools that they might not have been using before the pandemic began.
"The transition hasn't been without its bumps and bruises … there's skills that we don't possess internally that we're quickly either adapting or figuring out," Josh Stylman, co-founder of a Brooklyn-based brewery called Threes Brewing, told Protocol earlier this summer. The brewery started offering delivery at the start of the pandemic, and recently reopened its beer hall, requiring customers to wear masks and make reservations to drink in person.
Businesses across the U.S. are having to deal with similar changes to their customers' experience. Changes have invariably meant things like ensuring staff and customers wear masks (unless they're eating or 6 feet apart, for the most part), hand sanitizing like crazy, and probably installing a plexiglass shield or two. But the actual process of serving customers has had to change dramatically as well.
Upserve, another management platform, has long had an online-ordering function, CEO Sheryl Hoskins told Protocol, but the company had to remind many customers who might've just used Upserve for its point-of-sale or inventory-management services, that they can turn the service on. "We took our development team and had them focus on how we help our customers be online faster than what they traditionally have."
To ease businesses into online ordering, Upserve offered a free year of its service to any restaurant, even throwing in $100 of credits for Instagram ads, to help them find their footing in their local online community. "Since early March, our customer adoption of online ordering increased 400%, and the sales our customers were generating online ordering increased a little over 700%," Hoskins said.
Many restaurants offering delivery might have chosen a smaller menu of dishes, but using the analytics built into Upserve's POS, they can actually see what's most popular, including when and where it's popular. That analytical insight has helped businesses figure out how to weather this difficult time, according to Upserve's product management director, Adoniram Sides. Upserve's historical data can be used to figure out what items make sense for delivery, based on what's most ordered, or what leads to the largest bills. And some things just aren't going to translate. "The cheeseburger that you sell in-room is going to do pretty well online," Sides said, "but the oysters on the raw [bar], probably not."
Whenever customers start to feel more comfortable going out to stores and restaurants again, experts argue that, at the very least, they're going to want to get through the checkout process faster, to limit any possibility of exposure. "It's been a bottleneck forever," CB Insights' Kennedy, said, but businesses now have a greater impetus to solve the problem, as a result of the pandemic.
Beyond the technology helping businesses get orders to their customers, there's a whole other industry that's sprung up trying to keep customers safe. Different businesses are taking various precautions, such as plastic screens in front of cashiers and floor markings to ensure people stay 6 feet apart. But businesses have also turned to technology to help customers feel safer.
Around the country, QR codes have seen a resurgence at levels not found since the series finale of "Lost" was on everyone's new iPads. The scannable codes have become a simple way to get rid of menus passed around from person to person that also allow customers to order directly from a businesses' POS or inventory-management system, further cutting down the need to interact with staff. Companies like Toast and Upserve have introduced QR-code setups that can be printed on laminated signs and link directly to a business' site, allowing customers to order and pay without having to talk to another person.
Some businesses, primarily ones where people are going to be in a confined space for a while like restaurants or bars, or small production facilities, have also invested in thermal scanners. Those can be simple handheld devices that can measure a person's skin temperature, or stationary products that can scan an entire crowd of people at once. But these devices can be inefficiently used if people are coming in from hot or cold environments that might momentarily raise their temperature, and they can't pick up people who are asymptomatic and don't have elevated temperatures. "There's no marker that a piece of technology could pick up on," Michael Angarone, an infectious diseases professor at Northwestern's medical school, told Protocol earlier this summer.
Contactless payment terminals, which the U.S. has been slow to adopt, have found new importance during the pandemic, as people look for more ways to cut down on close contact with others. A study by the National Retail Federation and Forrester last month found that 67% of the retailers they surveyed now accepted some form of touch-free payment option; 58% accepted contactless payments, the survey said, which was a jump over 40% that did last year. Some 57% of businesses surveyed also said they'd likely keep their contactless payment option after the pandemic subsides.
"Frankly, printing menus every two weeks is expensive," Upserve's Sides said.
Getting the word out through community
There are few things that can replace in-person, face-to-face contact with your customers, but businesses have turned to the internet to try to capture some of that community feeling online.
For some companies, that's meant turning to Instagram and other social media to keep the conversation going. Facebook has pledged $1 billion in "direct support, tools and resources" to small businesses and has launched an advertising push around using the platforms it controls as hubs to stay up to date on consumers' local communities. Facebook shared two examples of grants it's already awarded to small businesses: ICE Safety Solutions, a safety services company in Fremont, and Cultural Innovation Group, a small consultancy firm in New York City. Cultural Innovation will use its funding to move more of its business online and to support a new video series. ICE uses VR in its safety training, and had invested in some Oculus headsets right before the pandemic; its grant will help with that investment cost as well as advertising the service online. Facebook has pledged to directly invest $100 million in Black-owned small businesses.
Facebook has also built functionality into Instagram to allow businesses to sell gift cards from their profile pages, as well put stickers on Stories that link directly to a delivery partner, chat with businesses on WhatsApp, and an ecommerce function for Facebook called Shops. It also extended its fundraising platform to any small business looking for support from locals, and launched a program on Facebook called "businesses nearby," where people can search for businesses in their area to support without having to leave the app.
For some businesses, investing more time in social became an extension of how they already marketed themselves. But for others, they either were dipping their feet into the web for the first time or were just trepidatiously moving beyond first steps in marketing on email or social. Many companies will ask customers for email addresses so they can stay up to date on new products, but during the pandemic, email lists have also become a useful way to communicate changes to the ways businesses are operating — and to funnel loyal customers into ecommerce or delivery systems.
Businesses have also started to look more into marketing channels that they can control themselves, either to help with selling products online or just to find and retain customers. "A lot of businesses began to think, 'Alright, I'm going to need to go online,'" John Foreman, the chief product officer at Mailchimp, told Protocol. "We saw huge spikes in things like our domain sales in April, people building websites, things like that."
During the first few months of the pandemic, businesses made that switch like never before, with 60% of new websites built on Mailchimp's tool coming from new users. In April, the average time it took businesses to publish their first website fell by over 50%, Foreman said. "So you knew immediately there's a fire under everyone's butt to get online right now," he added.
Those customers also turned to email as a way to stay connected to customers. "We were in Black Friday levels of email volume, multibillion email sends a day," Foreman said. But unlike during the busy shopping season, where consumers are inundated with marketing messages and Mailchimp tends to see far lower engagement per email, things like click-through rates on emails during the pandemic have also skyrocketed, according to Foreman. "Customer bases were looking for information, while these businesses were trying to get it out."
Mailchimp decided to build a new survey product as a result of the pandemic to help businesses figure out what their customers wanted from them during this rapidly evolving time. If a restaurant wanted to know whether customers would prefer meal kits or regular takeout, or if a brewery's customers would be willing to come back in if staff were wearing PPE, they could now ask on all their marketing channels. "Folks need to talk to their customers and have their customers talk back to them," Foreman said.
The company has also been working on automating emails that businesses can send to customers at various parts of their consumer journeys. Hairdressers looking to start back up can have an email go out with instructions on what a person should wear and do after making an appointment on their site; retailers starting out with ecommerce can build correspondence to turn an abandoned cart into a sale. This is Mailchimp's bread and butter, but during a pandemic, when overheads are so low and there's so much else to worry about, it can help business owners concentrate on running their business, while still maintaining a connection with each customer.
"They're doing all the marketing themselves, and they're on the verge of losing it all the time, you can't help but sympathize with a small-business owner," Foreman said. "And then you have a catastrophe like this hit."
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