We can't afford to ignore the decline of small businesses

Staff arrive at the Michelin tyre factory in Dundee after the company announced plans to close the facility in 2020 with a loss of 850 jobs. Picture: Michal Wachucik/AFP/Getty Images

The Scottish Government wasted no time in its response. Finance secretary Derek Mackay has convened an action group to save as many jobs as possible. And Steve Dunlop, the head of Scottish Enterprise, has been tasked with producing alternative plans to prevent closure. The omens do not look good. In recent years Michelin has spent €70 million on modernising the plant and has now deemed it unsuitable: “conversion is not financially viable”.

However, arguably more worrying is the silent, invisible erosion of jobs and businesses elsewhere: the decline in Scotland’s small business base.

Figures released last week showed that the number of Scottish businesses fell by 8,830 between March 2017 and March 2018 – with a large fall in unregistered enterprises and a smaller decline in registered firms.

Andrew McRae, policy chair of the Federation of Small Businesses Scotland, warned that “a decline in the number of Scottish businesses spells trouble for our ambitions for our economy and our local communities. To tackle this problem, we need to see more people in Scotland choose to start-up in business and develop a business environment which helps local firms thrive.”

The loss of a small firm here and there might seem of little consequence. Such closures are diffuse, and a permanent feature of the small business universe, like the movements of the sea.

But while ministers rush to act against plant closures that make headline news, they overlook the problems facing the SME sector at their peril.

There are 343,535 SMEs operating in Scotland, providing an estimated 1.2 million jobs. These businesses account for 99.3 per cent of all private sector businesses in 2018 and more than half (54.9 per cent) of private sector jobs.

“These figures”, McRae added, “also underline just how important smaller businesses are to the fabric of Scotland. There are roughly three times as many Scots employed by these operators than work in the NHS and our local authorities combined. By giving smaller businesses the best chance to succeed, we can boost prospects for the country as a whole.”

Well said. However, the causes of the recent decline in numbers are complex and difficult to rectify. Many will immediately blame Brexit, the culprit all too readily to hand. But most SMEs are not directly affected: they are not so heavily dependent on exports as larger firms.

However, many are critically dependent on the supply of components, finished goods and services from across the English Channel. They can also rely heavily on orders and business from larger firms which are affected. And arguably most corrosive of all is the effect that the interminable uncertainty over the outcome of Brexit negotiations has had on business morale generally. Barely a week goes by without some new alarm about business disruption and stockpiling of goods and materials in the event of no deal. This is now starting to assume the features of a trade blockade. And if major businesses from the NHS to food distributors have started to hoard, a widespread consumer panic may not be far behind.

In this febrile atmosphere it cannot be that surprising that new ventures are put on hold and that vulnerable small firms have been tempted to sell up or fold. While this uncertainty persists, there is little that the Holyrood administration can do.

Much more visible and immediate has been the attrition of retail businesses in high streets across the land. Here, too, the closures and retrenchments of household names such as Marks & Spencer have captured the headlines. But it is the loss of smaller, specialist businesses that is as worrying.

According to latest figures from accountancy giant PwC compiled by the Local Data Company, there were 58 new store openings in Scotland’s main cities and towns, but 107 closures, giving a net loss of 49 – a rate of attrition equivalent to almost two per week.

The data highlights an acceleration in the number of retail shops closing across Scotland’s high streets as a result of the growth in online shopping, a shift to in-home leisure, heightened restructuring activity and continued digitisation of services.

Scotland, of course, is not alone – in fact the rate of attrition is greater south of the border. Across the UK, a net 1,123 stores disappeared from the top 500 high streets in the first half of the year. The net loss is sharply up on the 222 store closures in the first half of last year.

In Scotland, Aberdeen fared worst in relative terms of the nine major towns surveyed, with net closures estimated at 4.24 per cent of the retail total. In our largest two cities there were also further net closures, with Edinburgh seeing a net reduction of 13 stores and Glasgow 11, to 992 and 887 stores respectively.

Mark Addley, head of restructuring for PwC in Scotland, says the figures reveal “a retail map which is continuing to change beyond recognition from a generation ago. The convenience of online shopping is making its mark on the high street, and we expect this will lead to retailers having to re-evaluate the purpose of their bricks and mortar operations.

“The number of high-profile retail casualties in 2018 has made headline news, while the volume of distressed businesses this year has led to a spike in company voluntary arrangements. While these measures can help alleviate short-term distress, they are not a viable long-term solution unless there is a fundamental change to the business model.

“The intensity of the current retail climate which is being felt across Scotland’s towns and cities highlights that restructuring and new investment are required, but so are new ways of thinking.”

Too true. But in the meantime, there are steps that can be undertaken as soon as the Scottish draft budget next month. Measures could include a radical overhaul (and reduction) of business rates and a larger and/or longer tax and rates exemption for start-up firms. That our SME sector accounts for such a high proportion of private sector employment should be an urgent reminder to Holyrood of how important small firms are to the health and wealth of Scotland.