Heather Ulichney walked in the door last night to tough news: Crave, one of the pioneering restaurants in Akron, had set up a GoFundMe to raise $15,000.
“The dominoes are starting to fall,” said Ulichney, who owns a tiny newcomer to the Akron, Ohio, dining scene, Square Scullery, with her husband, Matt. “This is just beginning.”
The Ulichneys had been in touch with Crave’s owners throughout the pandemic: With limited outdoor seating, the fine dining restaurant hadn’t been able to recover sales during the summer. They tried Door Dash, but the platform takes 30% of sales. Now the general manager said, the restaurant might not have a future.
“We’re talking about a restaurant that’s been in Akron for 15 years. They have gone through the (federal aid),” she said. “We’re not even in the hardest months yet.”
As the long winter sets in, and with little prospect of a rebound in sales, tens of thousands of small business owners, including many restaurants that are substantial employers, are throwing in the towel. Over the next six months, the United States could lose several million more small businesses, on top of 1 million that are estimated to have already closed.
“A lot of the underlying assumptions that business owners made when taking the PPP funding, or even local or state money, was that people would be in restaurants and shopping,” said Michael Goldberg, associate professor in the department of design and innovation at Case Western University. “All indications are that as we move into fall and winter, it’s going to be even harder.”
Closures Would Ricochet Through The Economy
The closures could devastate the U.S. economy in the short term and damage it in the long term. Economists believe the large number of entrepreneurs in the United States, from hair salons to high-tech founders, helps explain the dynamism of the U.S. economy. Startups supply all the economy’s new jobs. Small businesses provide important competition in the labor market, and drive innovation in unexpected ways.
Small business owners are also economic pillars of their communities, providing middle ground across the country’s political spectrum.
The pandemic is throwing their importance to the economy into sharp relief, after decades during which their importance in the political landscape faded.
“We actually don’t know very much about the land of small business and we don’t know much about funding small business,” Mills, the author of Fintech, Small Business & The American Dream., told Times of Entrepreneurship in an interview in March. “But time is of the essence. They’ve probably running out of money.”
She turned out to be right: In a working paper, economist Robert W. Fairlie found that 3.3 million businesses closed in the first three months of the pandemic, February to April; the number partially rebounded in the summer, so the loss is 1 million permanently closed. An industry group, the Independent Restaurant Coalition, reported that 85% of independent restaurants may close.
The first wave of closures was likely among the most vulnerable businesses, with the least amount of capital and few or no employees. This wave could affect businesses that were able to weather the early months, counting on a rebound that looks likely to dwindle in the winter. The storefront businesses who are on the frontlines help drive many more small operations, the suppliers, tech companies, drivers and others who work for them in the b-to-b economy. The total number of small businesses before the pandemic was estimated at 24 million.
The remaining owners are doing mental calculations now.
“Usually in May and June, you make up for the winter and save for what’s ahead. But this year, those reserves aren’t what they were,” Ulichney said. “A downward spiral could happen very quickly.”
“With most restaurants currently operating at 25-50% capacity indoors, the loss of patios will be incredibly difficult. The likelihood that a restaurant, especially an independent, can survive on these figures long term without having normal winter reserves, is very slim. This leaves owners in incredibly tough positions with really hard decisions,” she added later by email.
Celebrity Chefs Are Not Immune
Chicago’s Boka Restaurant Group, including celebrity chef Stephanie Izard’s four restaurants, said it would lay off an additional 241 workers this winter, bringing the total to 500, about a quarter of its staff.
If millions more small businesses close, the devastation in the economy could be extreme. If three million more small businesses close, employing an average of three-five people including the owner, that would add 9-15 million more people to the unemployment rolls over the fall. There are currently about 30 million people receiving unemployment, though there is uncertainty about the exact number.
Damage from closures could spread to real estate investors and banks, as small businesses declare bankruptcy and default on loans. Municipal budgets will develop even larger gaping holes. Community development financial institutions, for instance, expect a 20% default rate, 10 times the usual level.
In Washington, D.C., a compromise floated by the Problem Solvers Coalition that would renew aid programs showed some signs of traction, with signs both from Speaker of the House Nancy Pelosi and White House Chief of Staff Mark Meadows that a $1.5 trillion measure could be acceptable to both sides, Reuters reported. But the federal aid programs that passed in the spring focused on businesses’ roles as employers, not on keeping them afloat. Previous measures were tied to a business’s number of employees, instead of to the hard costs – rent is the main one – that may make it untenable for storefront businesses to stay open.
Small Miracle In Akron
Ulichney and her chef husband sold their food truck for a few tens of thousands to create a cash reserve for their company. They are a “ghost restaurant,” existing only for carryout and delivery. They’d signed a lease to expand to a sit-down space starting in March, but miraculously, the landlord, another small business owner, allowed them to bow out of the sublet. Now, he’s facing tough times, himself.
Small businesses that manage to hang on will still face a challenge: Big businesses, with their deeper pockets, will be able to bid higher for talent. “There’s nothing worse for a small business owner if you don’t have the underlying revenue to keep and retain people,” Goldberg said.
It’s easy to underestimate the impact of grassroots entrepreneurs on the economy, especially in a country that’s become consumed by the fast-growth, high-tech narrative. But recent World Bank research found that it’s almost impossible to predict which companies will turn into the “gazelles” that people want to see, producing hundreds or thousands of jobs. High-growth firms in emerging markets and in the United States aren’t necessarily in high-tech sectors (though some are). Nor are they likely to be startups in the classic sense. Rather, they are apt to be firms between 1-5 years old, and they’re found in many sectors, said World Bank senior economist Marcio Cruz. Likewise, thought we tend to think of high-tech firms as innovative, innovations happen in kitchens and crime labs as well as in a software coder’s head.
Meanwhile, the role of independents as community builders is being lost, says Ulichney. She and her husband opened Square Scullery in 2015. He’d just grown tired of making other people’s recipes. They started with no employees and now have seven – all still on staff.
“You see big companies, doing great. Then, here’s little guys like us – we paid rent this month, high five.”
She says with no debt and low overhead, they’ll make it through the winter. Not so, many of their friends. “The loss of Crave would be huge,” she said. “They have been one of the first restaurants in the area that pushed different menus. They were kind of the game changers for the generation behind them.”
This story and others on New Builders Dispatch are made possible by a sponsorship from the Ewing Marion Kauffman Foundation. The Ewing Marion Kauffman Foundation is a private, nonpartisan foundation that provides access to opportunities that help people achieve financial stability, upward mobility, and economic prosperity – regardless of race, gender, or geography. The Kansas City, Mo.-based foundation uses its grantmaking, research, programs, and initiatives to support the start and growth of new businesses, a more prepared workforce, and stronger communities. For more information, visit www.kauffman.org and connect with www.twitter.com/kauffmanfdn and www.facebook.com/kauffmanfdn.