Editor’s note: A version of this piece was originally published on Sept. 21, 2023 in Fast Company.

This is the first in a series of blogs that uses aggregated and anonymized Mastercard insights to spotlight small and medium businesses in the US.


October 10, 2023

Small business growth has been spurred by the pace of business creation, the rise of online marketplaces and resilience in consumer spending. What’s next?


When they’re first starting, most new businesses are small businesses -- and the pandemic was a boon for the creation of millions of them even after accounting for the pandemic-related closures. The pre-pandemic pace of new business applications was 3.5 million per year, but in 2022 alone, there were 5.1 million business applications.1 Small business growth and business creation lead to job creation, and small businesses have been responsible for more than half of the jobs created since the pandemic.2

Business creation and small business growth offer new avenues for consumers to access the goods and services they demand. We therefore track the health of small and medium-sized enterprises (SMEs) by examining consumer card spending trends using a unique measurement to segment merchants into business type – small/medium, large and online marketplaces – based on various financial and operational attributes (see methodology at the bottom of this blog for more details).

Here are our big-picture takeaways:

  • Consumer card spending at small and medium-sized retailers has increased by 63% from the pre-pandemic period compared to the 44% gain for large retailers (comparing the change from the first half of 2019 to the first half of 2023), owing to several factors including the rapid rate of new business creation and the embrace of new digital and mobile technologies.
  • The presence of online marketplaces — which we define as a collection of merchants for which almost all transactions are conducted online — have helped SMEs grow by providing a new outlet to reach consumers. Spending at online marketplaces is up 160% since the pre-pandemic period.
  • We see areas of opportunity for continued small business growth and new business creation, particularly for those offering “experiences” such as travel and recreation, where consumer demand remains robust.

These consumer spending trends allow economic entities, such as policymakers, card issuers, businesses and households, to track the financial success of small businesses, identify areas for potential expansion and gain perspective about the benefits of online retailing.
Consumers have disproportionately spent at small and medium-sized businesses

Consumer spending growth at SMEs has outperformed large businesses, with spectacular trends for online marketplaces. As shown by the Bureau of Economic Analysis, growth in the economy has been moderating over the pandemic recovery—with cooling inflation—but the chart below shows that spending at small businesses ran at a solid 8% year-over-year pace in 2Q (compared to 6% for large).3

The ability to invest in online capabilities was likely an important differentiator of spending trends at the start of the pandemic and may have been a factor explaining the bigger decline in consumer spending at SMEs at that time. But once smaller businesses were able to advance their digital presence and physical stores reopened, we saw a large rebound in spending at SMEs. Looking past the pandemic volatility, annual growth in spending at large businesses averaged 9% from January 2022 to June 2023, while small business growth was 14% over the same period.

The importance of digitalization is also clear from the incredible expansion of online marketplaces which enable small businesses to sell online to more people and better compete with large businesses. Spending at online marketplaces increased by 36% in 2020 as the pandemic hit, then advanced another 41% in 2021, due in part to the sharp rise in inflation.

"During the pandemic, my storefront endured a six-month closure forcing me to rely more on our ecommerce. Since focusing more on our digital platform, we have experienced a 30% -50% increase in sales, especially when experiencing slow foot-traffic in shop." - Michelle Cadore, Designer and Founder of YES I AM INC, a clothing brand, and Owner and Co-Founder of Da Spot, a retail space

In addition to the digital presence, we see a variety of other factors that have worked in favor of a rebound in spending at SMEs in 2021 through 2022. One key factor was the sharp rise in business creation which may reflect the sizeable excess savings which supported formations along with more flexible working arrangements.

What do we expect? Spending growth at stand-alone SMEs and large businesses should eventually converge to rates consistent with economic growth in a stable inflation environment. To put this into perspective, retail sales (excluding autos and gas) grew at an average annual rate of 3.9% over the five years prior to the pandemic. SMEs are likely disproportionately dealing with challenges from tighter credit, higher cost of capital, the tight labor supply and less pricing power. That said, SMEs will have the continued tailwinds of flexible working arrangements and the expansion of online marketplaces which provide them with an important conduit to continue to reach the consumer. Given these factors, the gap between sales growth at small and large retailers is likely to narrow further following strong outperformance by the former in 2021 and 2022.

Small and medium-sized businesses lost share in the services sector but gained share in goods

Spending on goods rebounded strongly at the start of the pandemic, while spending on services remained depressed owing to the lockdowns. As the economy normalized and spending on goods flattened, the “experience economy” rebounded as households made up for lost time by going to concerts, sporting events, booking travel and eating out. These bifurcated industry trends are also reflected in spending trends and business formations. The chart below shows the share of spending at SMEs by industry in 2023 and 2019. SMEs gained share in goods sectors that were faster to recover and lost in some services, which lagged.



Compared to 2019, SMEs account for a larger share of card spending in many goods industries. For example, SMEs were able to grow market share the most at sporting and toy stores and clothing stores by six percentage points each.

In services sectors such as transportation (excluding airlines), recreation and professional and personal services, SMEs account for a smaller share of card spending in 2023 than in 2019. These sectors involve mostly in-person businesses, which were forced to shut down at the pandemic’s peak. As the economy continues to normalize, small businesses in these affected services sectors can expand and recapture market share, especially if demand for the experiences economy remains as robust as we expect.

"The pandemic has been a rollercoaster for Blackbird, as a space centered on women of color and allies gathering in person to tell stories — a shutdown was not in our business plan. We have been able to navigate the challenges by doubling down on our mission and purpose to create a safe space, expanding to a hybrid virtual/in-person experience, and partnering with aligned partners with whom we curate programming that supports future equity, equality and equanimity." - Brigid Coulter Cheadle, Founder of Blackbird Collective, a creative co-working and event space

However, not all SMEs lost in services and gained in goods. SMEs account for over half of card spending in restaurants and bars. And the SME presence grew for hotels and motels, potentially reflecting more local travel before consumers became more comfortable traveling farther by plane.

"After the shutdowns, we experienced a boom with our catering, special events and three great farmer's markets. It is there that we see people clamoring for experiences. Engagement has always been a critical component of our employee requirement but now even more so as people want to learn more and are curious about what we have.” - Ken and Jeannette Flores Katz, Owners of La Bodega at the Met, a Latin-centric pop-up kitchen and corner store

Data on business applications from the Census Bureau reveals a similar story about industry dynamics. For many goods industries – take manufacturing, for example – applications for new businesses are down after jumping post-pandemic. Conversely, business applications in the services economy, such as professional services and arts, entertainment and recreation, are now near all-time highs.

What does it all mean for small business growth?

Small businesses have weathered the challenges posed by the pandemic, as reflected in the strong rebound in sales and sustained growth between 2021 and 2023. This reflects a resilient consumer and a SME community that has embraced online retailing and US entrepreneurial dynamism. There are both tailwinds and headwinds for SMEs. The momentum in the labor market, the health of household balance sheets and the persistence of the business cycle are all supportive forces. But the headwinds from reduced pricing power, higher cost of capital and tightening of credit standards are not to be ignored; these threaten to create greater speedbumps for SMEs than large businesses. As we look into the rest of the year and 2024, SMEs along with large companies will have to navigate carefully while considering their choices and investing in technology to stay competitive.

Our analysis indicates that there are opportunities for SMEs in primarily in-person sectors most adversely impacted by the Covid lockdowns to recover and recapture market share. These sectors, especially those closely tied to recreation, travel and entertainment, are also benefiting from strong consumer demand and experiencing a resurgence in business application growth.

Understanding consumer spending trends at small businesses is important for businesses, households, policymakers and financial issuers. These trends allow economic entities to make well-informed investment and spending decisions. They provide insights into the dynamism of spending at SMEs, areas for potential small business growth, areas that may need additional support and the efficiencies of online capabilities that significantly improve resiliency. More importantly, they highlight the influence of small businesses on local communities and the importance of initiatives that allow them to thrive.

To learn more about small business growth and insights from the Mastercard Economics Institute, contact your Mastercard representative or request a demo. request a demo

Methodology

The Mastercard Economics Institute (MEI) developed a unique measurement to segment merchants into small/medium and large based on various financial and operational attributes. MEI also developed a classification for online marketplaces to identify merchants where almost all transactions are conducted online. Transactions at these online marketplaces reflect a mix of transactions for both small/medium and large businesses and have served as a support for new business formation, providing an efficient mechanism for reaching consumers. In our analysis, the classifications for merchants – small/medium, large, online – are mutually exclusive. By being able to extract online marketplaces and identify business size, we can explore spending trends across different dimensions including geography, industry, and modes of spending (in person vs. online). We expect that these unique measures will continue to fill a much-needed gap in small business research as publicly available data on small business activity are sparse and, when available, tend to be published infrequently.

Notes & Disclaimer

Footnotes

1 Census Bureau’s Business Formation Statistics

2 Based on estimates from the Bureau of Labor Statistics’ Business Employment Dynamics Report, small businesses are responsible for 58% of the jobs recovered since the pandemic.

3 https://www.bea.gov/news/2023/gross-domestic-product-third-estimate-corporate-profits-revised-estimate-second-quarter

About the Mastercard Economics Institute

Mastercard Economics Institute launched in 2020 to analyze macroeconomic trends through the lens of the consumer. A team of economists, analysts and data scientists draws on Mastercard insights - including Mastercard SpendingPulse™ - and third-party data to deliver regular reporting on economic issues for key customers, partners and policymakers.

Disclaimer

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