Small-business confidence plunged in March to near its lowest levels in the past seven years, as business owners grappled with the effects of the novel coronavirus on their companies and the broader economy.
Owners of businesses from restaurants and yoga studios to marketing and manufacturing firms are already making tough choices, as the fallout spreads from industries dependent on Chinese manufacturers to the broader U.S. economy.
“We’re going into a period no one has been through before,” said Jay Foreman, chief executive of Basic Fun Inc., a small Boca Raton, Fla., toy maker. “It feels like 9/11, Katrina and the financial crisis all in one.”
The company last week laid off about 10% of its 175 employees to conserve cash, after its bank advised Mr. Foreman to reduce overhead to avoid violating the terms of its loan agreements. “They have been working with us; they are telling us the realities,” Mr. Foreman said. “If you think your income will be reduced, you need to reduce your expenses.”
The pain began in February, when the Chinese government ordered factories to remain closed after the traditional Lunar New Year holiday and restricted the movement of workers, disrupting the toy company’s supply chain. Chinese production is now coming back online, but Mr. Foreman fears the pandemic will mean fewer sales of its Tonka trucks, Lite Brite, Lincoln Logs and other offerings.
Companies with fewer than 500 workers employ roughly 60 million people, or about 47% of the private sector workforce, according to the Small Business Administration. The challenges these businesses face and the steps they take in response, such as furloughing or laying off workers or pulling back on investment, will quickly ripple through the broader economy.
The coronavirus outbreak is likely to be particularly challenging for small companies because they tend to operate on thinner margins and with smaller cash reserves. A 2019 report by the JPMorgan Chase Institute looked at 1.4 million small businesses with a business banking deposit account at the bank and found 29% of businesses in a typical community were unprofitable, and 47% had less than two weeks of cash liquidity.
Many of them simply can’t afford to follow much larger companies like Apple Inc., which said it would close all its retail stores outside Greater China for the next two weeks and continue to pay its hourly workers.
The March drop in small-business confidence reversed four months of gains. More than twice as many business owners said they expected the economy would weaken rather than improve in the coming year, according to a monthly survey of more than 900 businesses with $1 million to $20 million in revenue for The Wall Street Journal by Vistage Worldwide Inc., a business coaching and peer-advisory firm.
The outlook dimmed over the course of the weeklong poll, with 38% of business owners who responded on March 9 reporting that overall economic conditions in the U.S. had worsened compared with a year earlier, up from 25% on March 2 when the survey began. The portion of companies that expect sales to increase in the next 12 months dropped to 57% from 70% over the week.
Small-business confidence will likely decline further as the impact of the virus intensifies, said Richard Curtin, a University of Michigan economist who analyzed the data. “The policy options to contain the virus will make the economy worse,” he said. “I think small businesses are really caught in the middle.”
MBX Systems, a 180-person manufacturer of custom-computing hardware, recently reviewed each area of its business to determine minimum staffing levels, figure out who is cross-trained and determine who can be taught additional skills in case they need to cover for someone else.
MBX has told the 50% of workers who can work remotely to do so, increased paid time off to 15 days from 10, and largely walled off its Libertyville, Ill., facility. “For the most part, we are not having [visitors] come in unless there is something like an audit or something required for us to sustain our business,” said Justin Formella, chief strategy officer.
Businesses that rely on steady customer traffic are getting hit especially hard. At Bonanno Concepts, a Denver restaurant operator with 500 employees, customers began canceling private parties and other events when conferences started getting called off and travel was restricted. Then on Tuesday, traffic to the company’s 10 restaurants began falling.
“We are writing schedules for everything from only doing 30% of business to 50% of business,” said co-owner Frank Bonanno, who now doesn’t go to bed until he receives the day’s reports from each manager.
Mr. Bonanno and his wife Jacqueline, a co-owner, are encouraging employees to work together to split up shifts to reduce the need for layoffs. They have begun making their own hand sanitizer and now ring a cow bell every half-hour to remind employees to wash their hands.
Magda Sayeg, the owner of Magdalene, a month-old restaurant and cocktail bar in Brooklyn, N.Y., said several of her employees have offered to work just for tips, but her attorney said that would violate the law. “I just opened a restaurant. I don’t think there is anything that will help me, government-wise,” she said.
Ms. Sayeg said she is still feeding younger diners who have cabin fever and want to support the local eatery. But the decline in traffic has forced her to pare her staff to six from 20, cutting anyone working just one or two shifts.
“I have had to take some drastic measures,” she said. “I put myself a lot more on the schedule, put my 22-year-old son and my 17-year-old daughter on the schedule, to help us pay really essential employees.”
Indigo Yoga Inc., which operates two yoga studios in Fort Worth, Texas, said Friday it would reduce capacity by nearly 60% to 50 students per class. The company, which has a staff of 50, has invested about $10,000 in software and equipment so it can begin live-streaming 72 classes a week from its flagship studio. It also plans to set up ways for instructors who can’t come into the studio to teach from home.
“One hundred percent of our revenue is at the will of our customers,” said Indigo president John Cornelsen. “If they choose not to come to yoga for 60 days, the hit to us would be more than significant,” he said.
For some firms, projections of sales growth have vanished.
24G LLC, a digital marketing, training and communications agency in Troy, Mich., first revised sales projections downward a month ago when shutdowns in China’s supply chain reduced demand for its Amazon.com Inc. marketing-services team. A few weeks later, conference cancellations and travel bans hit demand for the 108-person company’s mobile marketing displays. Though it expects to get a boost in its distance learning and virtual events business, 24G says sales are likely to be down slightly instead of growing 20% as it had planned for.
“It is really stunning how dimensional this is and how it is affecting every aspect of the business, even though we are so well-diversified,” said Chief Executive Scott Wiemels. The wave of event cancellations happened so fast, he added, “it’s like watching one of our division’s work dry up in a matter of days.”
Not everyone is hurting.
The Maintenance Management Group, in Livonia, Mich., which provides cleaning services to hospitals and other facilities and consultations on cleaning procedures, has received nearly three-dozen calls in the past two weeks from companies looking for advice on cleaning procedures. One hospital customer asked whether TMMG could lend workers if the hospital becomes understaffed. “If the last two weeks have been any indication, I think we are in great shape,” said Sean Murphy, chief executive of the 160-person company.
But even he is remaining cautious. With so much uncertainty, “we could double our business or we may have to shut down for a period,” he said. “We are trying to be prepared both ways.”