International shocks, disrupted supply chains and red tape have combined to rising operating costs. How can SMEs adapt to thrive?
Steff McGrath’s business, Something Wicked, is all about women’s empowerment. Edgy, kinky, luxury and leather. At the same time, McGrath is adamant that this shouldn’t mean the exploitation of women in another country, which is why her brand is all about being British as well. It uses a careful collection of suppliers across the supply chain, with the leather polish sourced from an award-winning beekeeper in London, stockings sourced from a rare surviving hosiery manufacturer, while a female saddler in St Albans makes handmade cuffs and collars.
Despite trying to keep the whole manufacturing process in the UK, Something Wicked is still the kind of small outfit that has suffered since Brexit, somehow evading the dividends pro-leave ministers promised from leaving the EU.
From going to trade shows in Paris and New York, selling wholesale and direct to consumer and migrating to a new ecommerce platform, Something Wicked was on the road to an exciting endeavour – but the Brexit “cliff edge” led to the end of EU orders.
McGrath’s is one of the many businesses in the UK and EU that incurred the wrath of Brexit red tape, many of which had supply chains that stretched beyond their own borders leading to higher costs, delays and increased bureaucracy. Throw in all kinds of unpredictable factors, such as the pandemic, global conflict and future uncertainty, and traditional business models are being continuously tested, especially when they have to import and export goods.
In response, business models have had to be adapted for survival but this might not be a bad thing. As well as re-envisioning how businesses operate, these upsets have caused business owners to build sustainability, business continuity and resilience into their operations, while staying ahead of the curve and trying to anticipate the next thing.
Assessments have clearly laid out the increased costs that new border arrangements have added to businesses following Britain’s exit from the EU. These might arise from paying intermediaries to complete paperwork; government or port fees; or correcting administrative errors due to unclear new rules and procedures.
Smaller businesses lack the same resources, staffing power and financial stability to respond to these administrative burdens as larger enterprises, which can relocate and leverage more financial assistance. Brexit’s impact on small businesses has thus been seemingly disproportionate as they find it harder to export to the EU and whose business performance is hindered by burdensome regulation.
“A fifth of small firms currently export – the lowest point since the spring of 2020 when restrictions aimed at halting the spread of Covid first took effect,” says Lucy Monks, who is head of international affairs at the Federation of Small Businesses.
“At the same time, one in eight small exporters have temporarily or permanently stopped sales to the EU – and a further one in 10 are considering doing so,” she adds.
Tasnime Rotherham, business owner of Very Craftea, says that difficulties exporting after Brexit meant she couldn’t capitalise on, say, a viral post that captured potential international customers. The complexity around sending goods abroad with the red tape involved made her stop sending goods to the EU. And as a small business, she did not find the fluid developments easy to understand.
Each passing month since Brexit, she discovered more things she and her peers didn’t know about, like the code you have to have on every packaging, without which the package will be returned and sometimes that postage would not be refunded. Each time a new issue hindered the business owner during this period, the price for the consumer would go up, she says. Customs would also hold things up but no one, it seemed to Rotherham, understood what was happening or had the right paperwork. Rotherham says she has had to suspend shipping internationally, which has hindered her growth.
As well as shouldering the impact of Brexit, other global uncertainties have directly and indirectly impacted small businesses.
For instance, Covid-19’s sudden onslaught meant that the brick-and-mortar shops McGrath was supplying with her garments were closed during much of the lockdown and so weren’t taking stock.
Before the impact of Brexit red tape, Rotherham also saw purchases of her loose-leaf tea and embroidery kits paused during the pandemic because they were considered as simply “nice to have items”.
It is not only supply that has been affected by the global uncertainty; there have been demand shifts, too. Covid-19 saw many households prioritise essential goods over services like hair salons but reopening meant a sharp reversion on what goods and services consumers were spending.
For Natalie Quail and her premium oral care at-home teeth-whitening brand, SmileTime, there was an unexpected demand that they frustratingly couldn’t meet.
“Everyone had their smile full front and centre every day on Zoom. So we saw an increase in demand,” says Quail, “but we struggled at the beginning to meet that demand with our supplier because factories had shut down in the US and Asia.” Even when factories started to reopen after a few months, she says difficulties persisted at international ports.
Dr Monika Paule is the CEO of Caszyme, a Lithuania-based research and development company in the field of CRISPR-based molecular tools, whose clients include innovative corporations and startups, mostly in the US, Europe and Asia.
The pandemic brought Caszyme multiple challenges, in particular, as an industry player that relies on laboratory work which can’t be done remotely and uses specialist materials that have an expiry date not dissimilar to food. The stockpiling, says Paule, ties up the financials and holds back investmentThat said, the need to move fast to avoid waste means meticulous and advanced planning that has done away with their previously lean business model.
The war in Ukraine, trade wars and embargoes have further pushed some away from Asian suppliers and toward those closer to home. The conflict also meant Simply Wicked’s expansion into international orders to Russia hit a wall, as their drop shippers could no longer access that market due to sanctions.
“For the last three years, it feels like I’ve had a baseball bat and I keep having to bat away one thing after another, just to try and keep changing,” says McGrath.
Business models have certainly been adapted, including by replacing popular just-in-time global manufacturing supply chains with just-in-case arrangements.
Businesses in EU-member countries like Lithuania – particularly small businesses – also have to consider whether keeping the UK as an export market is worth the additional effort, paperwork and cost, according to Rasa Uždavinytė, who is the director of international trade development department at Innovation Agency Lithuania.
Those with a high dependency on this market will integrate the additional internal and external processes to deal with the bureaucracy. Others will turn to ecommerce if they have consumer-orientated businesses.
Uždavinytė notes how geopolitical developments, such as the trade war with China and certain embargoes, have disrupted Lithuania’s high-tech industries, particularly its laser industry, which depends on components from China.
In response, “Lithuania is focusing on diversification and looking for new markets that relate both to exports and to import the supplies,” Uždavinytė says. That might mean more talks with and suppliers from Taiwan or the US. That lesson of diversification is universal across industries and jurisdictions as businesses have learnt to seek additional income streams.
Common learnings from the past few years reveal two key themes to prepare for challenges and uncertainty to ensure continuity and resilience in business operations: monitoring the landscape; and joining networks and business communities to share resources and information to help respond to unexpected shocks.
For instance, Paule says, to build resilience it is important to have a broad mindset, while keeping up to date about global and events can help with anticipating future disruptions. For many, that means preparing for a possible recession and shrinking economy and therefore, reduced demand.
Connecting with larger business networks and associations can also help to level the playing field for smaller enterprises, particularly those that are marginalised. The London Chamber of Commerce and Industry notes that there is a further disproportionate impact on small businesses run by particular communities of colour. The impacts between these communities will differ but Richard Burge, CEO of the London Chamber of Commerce and Industry, notes there is often unacknowledged racism from the rest of the world toward some of these businesses.
“Then there is access to advice and services, which can disproportionately hit businesses because they’re just not part of that loop,” says Burge, acknowledging the importance of including bodies such as the Black Business Association within the chamber rather than sitting outside of it.
As a South Asian business owner, Rotherham felt that relevant information wasn’t reaching many business owners among the South Asian communities in the UK. But she found services like the Business and IP Centre, a British Library-based initiative rolled out to certain libraries around the country, invaluable during lockdown to access services and programmes.
Quail says industry-specific resources, in her case beauty-related forums and trade publications, can offer timely advice and information. The key thing, says Quail, is that you do the research and find solutions that are best for you rather than following people’s advice blindly. In addition, owners of small businesses must learn the skill of being responsive and nimble to navigate future challenges.
While consecutive shocks have damaged businesses and their bottom lines, Julian Birkinshaw, professor of strategy and entrepreneurship at London Business School, says there may be a silver lining to the need to react to uncertainty.
“In the earliest six months of Covid companies came up with innovative new products and ways of offering their own service. What is difficult but important is to remind ourselves just how innovative and creative we were in that period,” he says – adding that it’s easy to fall back into old ways of working.
Each business that survived is likely to have had to pivot or invoke an additional revenue stream. Quail had to stockpile and is thinking about offering more hygiene over cosmetic products to weather any downturn, while Paule says Caszyme had to take their business planning process to granular levels with a forward-looking approach.
For Rotherham, it’s important for her to focus on her local customers and find more stockists, while McGrath has adapted her business into something quite different from what it looked like three or four years ago – but without swaying from its mission.
“It’s a manufacturing business at its heart,” she says, and her pivot built on the rising sentiment in Britain to reshore production and build new brands. McGrath started incorporating made-to-order fulfilments from other businesses by utilising her existing machinery and staying within the undergarment segment of the market.
“It’s almost like sticking with what we do but we can help other people develop a brand. If we can support another brand to set up or to manufacture in the UK, why wouldn’t we? It’s growing the skills, and that next generation of skilled manufacturing coming back to the UK would be a great, great thing to happen,” she says.
As long as small businesses can access the support, information and resources they need to innovate, diversify and adapt, they may be able to weather whatever incoming storm is on the horizon.