American small-business owners are feeling bullish about the future. But what’s the secret to survival in a competitive market?
The mood on Main Street
How are small businesses faring?
In survey after survey, small-business owners say they’re more confident than they’ve been in years. Earlier this year, 64 percent of companies with 100 or fewer employees said that there’s never been a better time to own a small business, up from 53 percent in 2015, according to an Allstate/USA Today survey. More than 60 percent of small-business owners said they expect higher revenues this year, while about 40 percent have plans to add more workers, according to another survey, this one by the New York Federal Reserve. This bullish attitude is thanks in large part to an economy that finally looks to be recovered from the recession. But it’s also because many small-business owners expect President Trump and congressional Republicans to deliver on promises of fewer regulations and substantial tax cuts. The National Federation of Independent Business’s Index of Small Business Optimism has been hovering at near-record highs since the 2016 election. “Small businesses are definitely more upbeat than they have been in about a decade,” says Wells Fargo economist Mark Vitner.
Are more people starting businesses?
Surprisingly, no. Despite the favorable economic environment and the popularity of startup shows like ABC’s Shark Tank, the rate of new-business creation is near a 40-year low. There were 452,835 startups founded in 2014, according to the most recent U.S. Census data, far less than the 500,000 to 600,000 new firms that were created every year from the late 1970s to the mid- 2000s. Startup activity has been ticking up since the recession, but not enough to reverse the long-term decline in entrepreneurship.
What’s causing the decline?
Many economists point out that big businesses have been getting even bigger, sucking up resources and potential customers from their smaller competitors. Existing companies opened 50 percent more locations in 2011 than they did in 1978. Forty years ago, about 80 percent of “new establishments” were startups, compared with about 60 percent today, according to the Federal Reserve Bank of Cleveland. This could cause problems for the economy down the road. Small businesses have traditionally been the country’s main job creators, accounting for more than 60 percent of net new jobs in the private sector over the past two decades. But that’s changing. The number of new jobs created by companies less than one year old peaked at 4.7 million jobs in 1999, during the height of the dot-com boom, and fell to 3 million in 2015. “The bigger guys are creating a lot of jobs,” says Mark Zandi, chief economist of Moody’s Analytics. “We’re not getting the same juice from smaller companies and startups.”
How can small businesses stay competitive?
By finding their niche. In an economy increasingly dominated by mega-corporations, the more focused and personal a company can be, the better. The most profitable small businesses are often in service industries that require special expertise and one-on-one attention to clients; they also have low overhead. These firms aren’t always flashy. Accounting firms, such as bookkeepers and tax preparers, had the highest profit margins among small businesses over the past year, according to financial-data company Sageworks, followed by lessors of real estate and providers of legal services.
What other sectors are successful?
The plurality of small businesses are retailers, making up 14 percent of all small firms. These businesses can’t hope to compete with the likes of Amazon or Walmart on price or selection, but like other specialists, they can stay relevant by offering unique experiences, custom-made goods, or a connection to the local community. That’s been the key for independent bookstores, which have been on the rebound after surviving the initial onslaught from chains like Barnes & Noble and later the disruption wreaked by Amazon. The number of bookstores in the U.S., not including chains, increased by 25 percent to 1,757 over the past eight years, attracting customers with cocktail nights, meeting spaces, and quirky curation that Amazon’s algorithms can’t duplicate. “We still are competing with the ease of Amazon and their cheaper prices,” says Paul Ruppert, who opened Upshur Street Books in Washington, D.C., in 2014 after raising $20,000 on Kickstarter. “We need to step up our game and offer something that Amazon doesn’t in order to survive.”