Small Business Labs

The Swoosh Recovery Continues

Last year early in the recession, there was quite a debate about what shape the U.S. economy pandemic recovery would take. The two candidates that got the most support were a V-shaped recovery and a swoosh-shaped one.

A V-shaped recovery indicated a steep, but very short recession with a quick and robust recovery.

The swoosh-shaped recovery was named after the famous Nike logo. This shape indicates a steep decline followed by a gradual recovery.

As far back as last August it appeared the swoosh recovery was likely.  And the evidence now shows the swoosh is the winner.

The chart below (click to enlarge) is from the Oxford Economics Recovery Tracker, and shows the swoosh pattern.

The chart showing total U.S. non-farm employment *blow) is even more swoosh like.

It seems like one of the lessons from this recession is it's easier to shut down an economy than it is to restart it. 

But the good news is that the economy is clearly recovering.

One-Third of Businesses Surveyed Plan to Increase Their Use of Nonemployee Labor Over the Next 18-24 Months

Deloitte and the MIT Sloan Management Review recently released Workforce Ecosystems: A New Strategic Approach to the Future of Work.   

This research study found that most executives and managers today "consider employees and other workers who create value for the enterprise — including contractors, service providers, gig workers, and even software bots — to be part of their workforce."

They also found about 1/3rd (34%) of the firms surveyed plan to increase their use of external nonemployee labor (freelancers, etc.) over the next 18-24 months.

An interesting study finding is that small businesses are more likely to say they plan on increasing their use of non-employee labor than large corporations.

The chart below uses data from an interactive tool provided as part of the Workforce Ecosystem study.

While interesting, it's not surprising. The use of nonemployee contract labor by SMBs has been rapidly growing for over a decade.

SMBs tend to be more flexible and less bureaucratic around the use of nonemployee labor than bigger corporations.  And so while both large and small firms have been increasing their use of nonemployee labor, SMBs have been doing so at a faster rate.

We expect this trend to continue.

The Long Term Shift to Contract Labor by Small Businesses

Data from the IRS shows that sole proprietor small businesses spent $69.2 billion on contract labor in 2018 (the most recent data available).  Contract labor refers to nonemployee labor, such as freelancers, gig workers, etc.

This is up from $64.8 billion in 2017 and just $34.4 billion in 2010. Over the period from 2010 to 2018, contract labor spend by sole proprietors increased by an annual growth rate of 9.1%.

Spending on salaries and wages grew from $73.7 billion in 2010 to $97.9 billion in 2018, or an annual growth rate of 3.61%.

In other words, spending on contract labor increased at 2.5x the spending on traditional employee salaries and wages from 2010 to 2018.

In 2003, contract labor was about 20% of total labor costs of sole proprietors. By 2010 it had risen to 31%, and in 2018 it reached 41%.

We expect the trend towards contract labor use by small businesses to continue.

The Rising Net Worth of the Less Affluent

Bloomberg's The Comeback of the Bottom Half covers Federal Reserve data showing that the less-affluent 50% of Americans saw their net worth rise the fastest over the past decade.

Key quote:

The rich had a great run, but they didn’t even come close to the percentage gains in real wealth seen by the bottom 50%. These amounted to 21.9% over the past year, 125.6% over five years and 526.2% over 10 years, compared with the one-percenters’ 10.3%, 33.8% and 83.9%.

The article chart below shows the dramatic increase in the bottom 50%'s wealth since the Great Recession.

While very good news, the article points out there is still long way to go.  The strong decade of growth only gets the lower 50%'s share of household wealth back to about half of where it was in 1992.

The rise in wealth for the lower 50% over the past decade is certainly good news and, hopefully, it will continue.

JungleScout's State of the Amazon Seller

JungleScout provides a platform that helps small businesses find, launch, and sell products on Amazon.  They recently released their 2021 State of the Amazon Seller Report.

This report covers who Amazon's small business sellers are, what and how they’re selling, how they are responding to the pandemic induced increase in ecommerce and their future plans.

Amazon has about 2.4 million active global sellers on their platform and they generate roughly $208 billion in revenue, which is about 54% of Amazon's total revenue.  Of the 2.4 million sellers, almost half (49%) are based in the U.S.

And according to the report, most sellers (73%) are solopreneurs.  Only 27% report having one or more traditional employees.  

Also interesting is 36% of sellers report having a full-time job in addition to their Amazon activities.  In other words, over one-third of small business sellers selling on Amazon are side giggers.

Over half of the sellers report selling their goods on other platforms (eBay, Etsy, etc.), in stores, or on their own ecommerce site.

We found the data on how they plan to expand quite interesting.  

As the report chart below shows, Walmart is the top platform they plan to expand to.

   

Roughly 1 in 5 (21%) also reported they plan to start their own ecommerce site.  

Having a proprietary ecommerce site and not being beholden to the large platform companies is an increasingly popular option.  

This is one reason why Shopify has become so successful.

Shopify gives merchants access to services such as payments and fulfillment, but lets them maintain more control of their branding and customer relationships.  Shopify's fees are also generally lower than Amazon's.

Having your own site is too valuable not to do it - if you can make it work.  And increasingly, small businesses are making it work.

The Demographics of Nonemployer Business Owners

The U.S. Census has released new demographic data on nonemployer businesses.  

Nonemployers are businesses that have an owner but don't have paid traditional full or part-time employees (W2 employees). The data comes from tax records, and you can think of nonemployers as solopreneur businesses (freelancers, independent contractors. gig workers, etc.)

The new data provides information by owner demographics such as sex, race, ethnicity and veteran status, geography, industry, receipt size class, and legal form of organization.

The Census chart below (click to enlarge) illustrates some of the demographics of nonemployers for 2017.  Census is planning on updating this for 2018 (the most recent year the non-demographic data is available) in the near future.

The nonemployer dataset gets less attention than other government data on self-employment. There have been two reasons for this.

The first is until fairly recently, there was little interest in self-employment data.  The rise of the gig economy has changed this.

And second, the nonemployer dataset is messy and includes a hodgepodge of business entities - passive businesses, firms no longer in business, LLCs owned by major corporations, etc. - that aren't active solopreneur businesses. 

But despite these issues, we find the nonemployer data to be a useful indicator of the overall size and growth - and now, also the demographics - of U.S. self-employment.  

Because this dataset is getting more attention, the Census is working to make it more complete and timely.  The addition of demographic data is an example of these efforts. 

Side Gigs for Restaurants

The New York Times article You’ve Heard of Ghost Kitchens. Meet the Ghost Franchises covers the growing number of companies franchising food concepts to existing restaurants.

The restaurants that take on these franchises continue to serve their regular food and make the franchise food for delivery only.

Key quote from the NYT article on the burger franchise MrBeast Burger, which takes its name from the well-known celebrity YouTube star MrBeast:

MrBeast Burger is not quite what most of us think of as a chain, or even a restaurant. In exchange for a cut of sales revenue, the brand supplies the name, logo, menu, recipes and publicity images to any restaurant owner with the space and staff to make burgers as a side hustle. When a customer orders from the MrBeast Burger in Midvale, Utah, the food is prepared at a location of the red-sauce chain Buca di Beppo, following a standardized MrBeast recipe.

And yes, we've never heard of MrBeast.

And after looking at his videos, we don't get why he's a star. 

But his burger target market (teenagers and young adults) loves his videos. So they buy his burgers.  

Or we should say they buy the burgers from the franchise company, Virtual Dining Concepts. 

MrBeast's contribution is his name and his promotional activity.

Virtual Dining Concepts has 9 different restaurant concepts, including, of course, MrBeast Burger.  

The franchise fees are not cheap.  Most ghost franchises charge 35%-45% of sales.

But in most cases, the fees include delivery charges, which can be as high as 30%.

The franchising companies also spend a lot of money getting good placements on the delivery apps and search engines.  This is something a small restaurant chain would be unlikely to accomplish on its own.

Ghost kitchens have been around for several years and the pandemic has accelerated their growth.  

Since food delivery will likely continue to grow post pandemic, we expect ghost franchises to continue to grow.

Whatnot - A Live Streaming Person-to-Person Collectibles Marketplace

Whatnot, which bills itself as the best marketplace for collectors and enthusiasts on the internet, recently raised a $20 million funding round led by A list VC Andreessen Horowitz.

According to TechCrunch's Whatnot raises $20M for its livestreaming platform built for selling Pokémon cards and other collectibles:

"The company currently focuses primarily on Pokémon cards, Funko Pops, FigPins and sports cards, but they mention things like comic books, video games and vintage hardware as natural fits."

And yes, we have no idea what "Funko Pops" or "FigPins" are, but they must be collectible.

The company says the online marketplace targets person-to-person commerce.  Key quote from one of their press releases:

Instead of focusing on the retailer-to-consumer relationship, Whatnot builds peer-to-peer connections within existing communities, driving high adoption and conversion. While some sellers on Whatnot are small businesses, 90+% of Whatnot sellers are enthusiasts who buy and sell their favorite items as a hobby or side-hustle.

In addition to a traditional online marketplace, Whatnot also offers livestreaming.  

 

Think of it as the TV shopping network meets the iPhone, with the video coming from people at home streaming their sales pitches for their collectibles.  

There's been a surge in interest in collectibles since the beginning of the pandemic.  While this surge will likely subside once the pandemic is over, the collectibles market is large and will continue to grow.

Whatnot is yet another example of an online marketplace helping people turn their interests and passions into side businesses.

eBay also started as a person-to-person marketplace but evolved into a site dominated by businesses.  It will be interesting to see how Whatnot evolves.  

Barlow Research on Small Business Exporters

Barlow Research is one of our go-to sources on all things related to small business use of financial services.

Their article Five Truths about International Business in the Middle Market covers survey research on the exporting and importing by U.S. firms with between $10 million and $500 million in sales (midmarket companies).

As shown in the Barlow chart below (click to enlarge), the key finding is that about one-third of firms in this size category conduct business internationally.

As we pointed out in a previous article, about 28% of microbusinesses - firms with fewer than 4 employees including the owner  - conduct business internationally.  

Barlow doesn't include historical data in their article.  But microbusiness exports have risen rapidly over the past decade, with the share of microbusiness exporters doubling.  

This is primarily due to online marketplaces like Amazon and Etsy, and improvements in outsourced logistics services.  

One of the most interesting parts of the Barlow article are the export challenges faced by midmarket companies.

What's so interesting to us is microbusinesses report fewer challenges than midmarket firms do.  

Shipping is still an issue, as is regulation.  But none of the other challenges reported by midmarket companies even blip with microbusinesses.

This is likely because they outsource most tasks to online marketplaces and logistics firms, while most midmarket exporters sell directly into foreign markets.

Historically, one of the huge advantages larger firms have had over smaller firms is the operational scale to export.  

Thanks to online marketplaces and other services, that advantage has clearly narrowed.

More research needs to be done on this topic and we're adding this to our "to-do" list.

New Business Applications Surged Again in January

Over the past 6 months new business applications have surged. 

As the U.S. Census chart below shows (click to enlarge), the surge is continuing with 492,000 applications filed in January. This us up 73% compared with last January. 

Most of the applications are what the Census calls "applications other than high propensity" (grey in the chart).  These are applications from businesses that are unlikely to have employees, such as freelancers, independent contractors and other types of solopreneurs.

But employer small business applications (high propensity applications) have also surged.  

The business applications data comes from IRS Employment Identification Numbers (EIN) applications.  EIN's are the tax id number that identifies a business. 

Not all small/solopreneur businesses have EINs. Some, and especially independent workers working part-time, use their social security numbers instead.  But almost all employer businesses have EINs.  

While only about 15%-20% of applications have historically turned into actual small businesses, the surge indicates we should see strong growth in the number of independent workers and employer small businesses over the next 2 years.  

See our prior posts on the surge in new business applications for more details on the surge.

See the U.S. Census Business Formation Statistics site for more data.