The global health crisis has disrupted businesses around the world in vastly different ways. Many closed their doors temporarily and others for good, while some saw unprecedented growth. The stresses and successes of businesses around the world varied based on circumstances within and outside their control. Disruption also bred innovation, as a host of new digital businesses were created to meet evolving needs and new market opportunities.
Developed by the Mastercard Economics Institute, this report focuses on the impacts to small- and medium-sized businesses (SMBs), which make up 90% of businesses and more than half of jobs around the world. 1 The report draws on proprietary analysis and aggregated and anonymized sales activity within the Mastercard network, including the newly created Mastercard Small Business Performance Index (see methodology sidebar), as well as third-party data sets, and focuses specifically on businesses that accept card payments.
While each small business-and business owner-has a unique story of how they've navigated the pandemic, our research digs into a number of key trends that demonstrate the impact to the broader SMB landscape:
How we measure small and medium-sized businesses
Small businesses are not hard to recognize. Think of your favorite local restaurant, dry cleaner, grocery store, hair salon or clothing boutique. However, a criterion to systematically classify a small or medium-sized business (SMB) is more difficult. What defines an SMB can vary from country to country or sector to sector, so a classification system relative to these dimensions is important.
Drawing on our unique analytics and decades-long experience working with businesses of all sizes, we developed a more universal classification for SMBs using a set of distinct indicators and comprehensive AI-driven algorithms. We classified SMBs through metrics like their number of locations, sales volume, number of transactions and average transaction size. The result is the Mastercard Small Business Performance Index, a measurement of relative sales performance at SMBs versus large businesses. In this report, we showcase the Small Business Performance Index across 19 markets and 5 industries where SMBs are most prevalent.
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Globally, small and medium-sized businesses that closed in the early days of the pandemic were about three times as likely as large businesses to remain closed long term.
The economic scope of small businesses is significant. According to the World Bank, seven out of 10 formal jobs in emerging markets have been created by small businesses, accounting for up to 40% of their GDP. Thus, the economic impact when small businesses close their doors or cut staff is consequential, creating a long-term ripple effect across a local economy.
Since the start of the pandemic and into 2021, small and medium retailers have underperformed compared to larger companies-particularly during periods when lockdowns forced brick-and-mortar closures. When looking at year-over-year sales growth during the height of the crisis, retail sales at SMB retailers around the globe underperformed by roughly 10 percentage points relative to large companies, according to the Mastercard Small Business Performance Index.
The gap between spending growth at SMBs versus large businesses grew to 20 percentage points as 2021 started with tighter mobility restrictions, colder weather in the Northern Hemisphere (typically supportive of online spend). The challenges lingered but improved in mid-2021, with the SMB underperformance gap shrinking to around 12 percentage points.
These challenges pushed many small businesses to take down their store shingles, some for the long term. According to our analysis, about one-third of small businesses around the world that closed in April 2020 remained closed after six months, and about one-fifth remained closed after 12 months. 2 Globally, that meant that SMBs were three times as likely as large businesses to remain closed long term.
Locally, the situation varied but followed a similar pattern of outsized impact. In the United States, roughly 1 in 4 small retailers that closed in April 2020 remained closed after 6 months, versus roughly 1 in 12 large retailers. In Germany, roughly 1 in 3 small retailers remained closed after 6 months, compared to 5% of large retailers. And in Mexico, small businesses were more than three times as likely to fail during this period.
Some of the outsized impact SMBs have experienced has a lot to do with their dependency on local markets and supply chains as well as tighter cash flows. Big businesses generally have deeper pockets, easier access to credit and a broader omnichannel presence. Despite government policies around the globe aimed to address the small business funding gaps-and create a positive business climate-fluctuating brick-and-mortar shutdowns put SMBs at risk as they used up their cash reserves.
With in-store sales restricted, having a digital presence became critical to generate sales. However, resource gaps for smaller companies meant they were less likely to invest in digital channels, such as e-commerce stores, than their larger counterparts. SMBs that did not have a well-established digital presence before the pandemic suffered financially and were slower to see the upside from the shift to digital that led to an incremental $900 billion spent online in 2020. 3
But having the means to shift to digital was irrelevant for those businesses whose goods and services could not be sold online, such as barbers, gas stations and restaurants. This reliance on in-person sales further challenged their survival.
The number of SMBs going online tripled between pre-pandemic and 2021, while new SMB creation was double that of large businesses.
While the health crisis was a harsh reality for many small businesses, it also created incredible opportunities for those that could innovate and take advantage of the expansive reach of digital channels. Existing businesses started to go online for the first time in record numbers shortly after stay-at-home orders began to ease in 2020. The number of brick-and-mortar-only businesses that went digital for the first time each month was approximately more than three times the normal amount - and they were mostly SMBs. 4
According to our analysis, in July 2020, the number of existing businesses that made the shift online for the first time tripled compared to the typical pre-pandemic level-reflecting increased demand by SMBs for an online sales channel, as well as the slight lag after lockdowns began to bring it into reality. The rate of existing businesses expanding into digital for the first time has persisted at an elevated level globally ever since.
This increased shift to online acceptance was mirrored around the world, though to varying degrees. In Brazil, for instance, the number of existing businesses that made the shift online for the first time in 2020 vs. 2019 grew 208%, whereas the growth rate in Germany was 38% year-over-year.
The rate of businesses going online for the first time
tripled in 2020
Source: Mastercard Economics Institute
As of August 30, 2021
The shift to digital paid off for businesses that were able to go digital. According to an analysis by Mastercard Test and Learn®, 5 which used a test and control methodology to understand how accepting e-commerce payments impacted sales during the pandemic, SMBs attracted more customers and boosted revenue. Digitally enabled SMBs saw a 5.0% increase in customer spending and a 4.5% increase in transactions compared to their peers. They also attracted more revenue from new customers than their peers (6.4% increase in spending). The analysis also found that 34% of SMB e-commerce sales were purely incremental and would not have occurred with brick-and-mortar alone. 6
| UNITED KINGDOM | + 101% |
| UNITED STATES | + 86% |
| AUSTRALIA | + 73% |
| GERMANY | + 62% |
| CANADA | + 58% |
| ITALY | + 44% |
| FRANCE | + 40% |
| JAPAN | + 38% |
| BRAZIL | + 35% |
| Global Estimate | + 32% |
| THAILAND | + 29% |
| MEXICO | + 13% |
| SOUTH AFRICA | + 13% |
| POLAND | + 5% |
| INDONESIA | -2% |
| ROMANIA | -10% |
| RUSSIAN FEDERATION | -10% |
| TURKEY | -21% |
| PHILIPPINES | -30% |
| Source: Mastercard Economics Institute | |
| * Excludes cash-only businesses |
Competition among online retailers has undoubtedly been intense. Given the low cost to entry compared to traditional channels, online platforms, drop shipping and other new direct-to-consumer channels have never been easier to set up. This led to not only increased competition among existing SMB retailers that went digital but also competition from a wave of new arrivals born out of the crisis.
According to our analysis, roughly 32% more SMB retailers were launched in 2020 in the 19 markets compared to 2019. 7 This is nearly eight times the entry rate of large firms, which grew 4% during the same period. In many markets around the world, there was considerable formation of small businesses in 2020 compared to 2019 levels: Australia (+73%), Brazil (+35%), Germany (+62%), South Africa (+13%) and the U.S. (+86%).
This highly competitive landscape meant entrepreneurs had to get extremely creative with their approaches to products, sales and marketing. Large, established businesses, in many cases, are at an advantage with their economies of scale, allowing them to compete on lowest prices. In response, many small businesses had to carve out a niche with highly unique and personalized brands.
This has paid off as we found that across the 19 markets included in our study, sales at retail small businesses-while still lagging larger businesses-grew 4.5% through August 2021 year-to-date compared to the same period in 2020. Notably, e-commerce sales at retail small businesses were up 31.4% during that same period.
For a small business, going online during the pandemic meant investing dollars and resources in a viable online presence. But it also means the potential to compete on a global scale. Increasingly, small businesses aren't just shifting digital-they're starting digital, minimizing start-up costs and risks as digital-first companies.
Size, location and season mattered in performance of small versus large in certain sectors.
Throughout the pandemic, evolving consumer needs and preferences defined spending at businesses of all sizes. With people spending more time-including work hours-at home, furniture and furnishing purchases saw significant growth, while travel took a backseat.
Food budgets shifted in large part from restaurants to grocery, and discretionary spending like apparel and jewelry slowed. While we see the pendulum swinging back as economies reopen and consumers return to in-person activities, the impact to these sectors over the past year-plus is worth a second look-particularly in how SMBs fared compared to their larger counterparts.
Eating Places
Demand for eating out, especially for outdoor dining, has grown quickly since economies have reopened. For some restaurants, outdoor dining expanded their physical footprint, allowing them to serve more customers and generate more sales.
But many consumers are still eating at home-even if they're ordering takeout. Small businesses have struggled to pivot to a takeout format, with packaging, labor costs and establishing the right online platforms serving as barriers. All told, growth of SMB eateries is significantly underperforming large ones globally by roughly 17 percentage points in 2021 year-to-date, according to the Mastercard Small Business Performance Index, a marginal improvement from 2020.
Nevertheless, in the UK, there was a noticeable shift during the "eat-out-to-help-out program" in August 2020, when in-person spending on SMB eateries outperformed large eateries. Unfortunately, the boom was short-lived as the country re-introduced restrictions to in-person dining.
Small vs. Large Differential (Q4 2019 = 100)
Source: Mastercard Economics Institute
As of August 30, 2021
Lodging
During the summers of 2020 and 2021, smaller lodging businesses outperformed by a wide margin as people traveled locally. Limited leisure and business travel to big cities-and their big hotels-contributed to this relative shift.
Looking more closely at each of the regions, the lodging landscape varies widely as consumer preferences win out. In most European countries, small hotels, motels and homestay rentals outperformed big hotel chains by nearly 50%. This is partially due to a greater consumer preference in Europe for smaller hostels over large chain hotels.
By contrast, in North America, the prevalence of large hotel chains gives them an advantage over smaller lodging establishments. Because of this, the lows were lower for small businesses. Like Europe, there was relative outperformance of smaller accommodations during the summer in North America; however, the gap was closer to 30%.
Small vs. Large Differential (Q4 2019 = 100)
Source: Mastercard Economics Institute
As of August 30, 2021
Grocery
With less spending happening at restaurants, coupled with consumers stocking up on essentials, both small and large grocers did well during the pandemic relative to other industries. For a sector traditionally brick-and-mortar, there was a sizable shift to digital ordering--both large and small grocers are seeing spending more than 50% above pre-pandemic levels.
For small grocers, the shift online in 2020 at the onset of the pandemic was immense, nearly doubling in sales volume in less than a month. By comparison, large grocers that had a greater share of e-commerce sales prior to the pandemic saw a smaller shift during the first wave.
We saw a clear outperformance of larger grocers vs. small in the online spending, though the opposite was generally the case for in-store grocery spending.
Small vs. Large Differential (Q4 2019 = 100)
Source: Mastercard Economics Institute
As of August 30, 2021
Home Furnishings
Products to furnish and decorate living spaces surged with people working from home and some purchasing larger houses in more suburban and rural areas. The impact to furniture stores of all sizes varied greatly by channel, as in-store sales showed remarkable sensitivity to mobility restrictions and shutdowns. Specifically, both small and large businesses experienced an 80% decline in in-store sales at the height of the pandemic in April 2020, though online sales helped buoy the sector.
While the industry saw tremendous growth in 2020, that slowed in 2021, except for the United States, where the government's Economic Impact Payments provided a boost in Q1 and Q2 for in-person sales.
For online sales, many developed markets have shown disproportionate growth and large businesses typically have outperformed, especially during the holiday season. This is likely driven by the lower cost of goods for large businesses due to economies of scale, driving a lower cost to the consumer - which is where SMBs often struggle to compete.
Small vs. Large Differential (Q4 2019 = 100)
Source: Mastercard Economics Institute
As of August 30, 2021
Apparel
Globally, e-commerce typically accounted for about 30% of sales for large apparel businesses prior to the pandemic, with e-commerce making up roughly half of that (16%) for SMB apparel retailers. That has seen a double-digit jump for apparel firms of all sizes, with SMB apparel retailers notably now hitting big firms' pre-pandemic levels-though still lagging well behind where they are today.
Small vs. Large Differential (Q4 2019 = 100)
Source: Mastercard Economics Institute
As of August 30, 2021
SMB spending in central business districts remains roughly at two-thirds of pre-pandemic levels as of August 2021. 8
Digital as a location was a clear winner for SMBs that could successfully make the shift, but a business' physical location was also of significant importance. With many office workers and tourists staying home, businesses in central business districts - the commercial and business center of a city - suffered, while those in residential areas largely saw their sales grow.
To better understand Covid's impact on small businesses in business districts, we developed a "Back to Work Index" to act as a proxy for spending trends when workers returned to their offices. In creating the index, we looked at in-person spending, which typically happens at SMBs such as coffee shops, tailors, laundry and dry cleaners, shoe repair shops, luncheonettes and salons and barber shops. This measure is most relevant for larger cities with business districts located centrally and near airports.
In April 2020, for instance, SMBs in New York City's business districts were roughly one-third of 2019 levels, according to the Back to Work Index. While spending at small businesses in NYC business districts-such as midtown and the Financial District-saw improvements post-lockdowns, sales were still down (73% of 2019 levels) in August 2021. Comparatively, SMBs in the outer city-neighborhoods including Upper East Side, Harlem and Brooklyn-were at 85% of 2019 levels in April 2020 and saw strong growth (124% of 2019 levels) in August 2021. This trend continues in the cities we studied around the world.
Globally, spending at small and medium businesses in central business districts and near airports remained at roughly at two-thirds of pre-pandemic levels as of August 2021. We take a closer look at major cities around the world at a postal code level to understand how their SMBs have been impacted.
What we see around the world is that individual environments matter for SMBs. From the coffee shop in New York to the café in Paris and the custom shirt tailor in Singapore, lockdowns have been impactful. In many places, governments have stepped in to help cushion the blow, while in other areas there was little help. We also saw starts and stops to reopenings that were particularly challenging for those needing to stock up on perishable goods only to be told to close shop soon after.
However, small businesses have shown a great sense of digital ingenuity and the ability to reset. What we have since seen is a surge in small business creation (digital first, physical second) that lends itself to prosper in an economy with irregular foot traffic as we all wait for the global economy to fully reopen.
1:According to analysis by World Bank, Small and Medium Enterprises Finance
2:According to an analysis by Mastercard Economics Institute evaluating permanent closures of businesses across the network
3: Mastercard Commerce E-volution, April 2021
4: According to an analysis by Mastercard Economics Institute evaluating the number of existing firms who went online for the first time.
5: Analysis measured the impact of accepting e-commerce transactions to 7,935 single location SMBs within the US. These SMBs were measured against SMBs within the same industry that had similar sales patterns that never accepted an e-commerce payment.
6: Analysis measured the impact of accepting e-commerce transactions for 7,935 single-location SMBs within the US. These SMBs were measured against SMBs within the same industry that had similar sales patterns that never accepted e-commerce payments.
7: Analysis by Mastercard Economics Institute, which evaluated the number of new businesses in the Mastercard global acceptance network by firm size.
8: Relative to 2019 levels.
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.
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