What kind of business will outlive the pandemic?

A business survey of Ugandan enterprises, reveals that new realities requiring companies to adjust to new business models, is the prudent way to respond to the uncertainties of the Coronavirus (Covid-19).

The most popular adaptation measures according to a survey examining the impact of Covid-19 on formal Small and Medium Enterprises (SMEs), is the use of digital and communication technologies plus new procurement/supply delivery channels.

A socioeconomic assessment of Covid-19 by the United Nations Capital Development Fund (UNCDF), Makerere University (the College of Business and Management Sciences) and Uganda Revenue Authority (URA) conducted in April 2020 reveals that only those SMEs that have embraced new models as a priority in their operations, will thrive amidst the pandemic.

The report, however, notes that so far, online channels are used by about 40 per cent of all companies. Almost as many use telephone communication to reach out to customers, receive orders and payments.

This should be in addition to switching local materials where possible. Mobile door-to-door delivery is also widespread, with 27 per cent of all companies relying on this method.

Digital solutions reduce transaction costs of dealing with suppliers and customers, facilitate financial transactions, and allow for data recording and analysis for multiple purposes including building the business credit profile to facilitate access to finance.

In the context of Covid-19, digital solutions minimise the need for physical contact between the business and its partners and customers.

Digital potential
The sectors with a huge digital potential, education and health and social work, also report low uptake of digital solutions (23.0 and 30.6 per cent, respectively). The challenge of creating adequate online content in a short period of time and availability of digital devices and Internet penetration as well as digital skills) hamper wider application of digital solutions across all industries.

The report assessing socioeconomic impact of Covid-19 discloses that only about 15 per cent of surveyed companies can sustain more than three months of operation on their current cash flow.
To stay afloat, SMEs must adjust to keep their profitability up.

The survey released recently by the Minister of Trade, Ms Amelia Kyambadde notes that 85 per cent of all businesses will be financially distressed after three months of lockdown.

“The expectation of loss is at least 90 per cent and uniform across companies of all sizes, with a somewhat higher loss expectation among the companies employing 51-100 employees,” reads the report assessing socioeconomic impact of Covid-19 on formal sector and SMEs.

The report indicates: “Companies that expect a drop in their revenues of above 10 per cent this year belong to the following sectors, culture, sports and entertainment; accommodation and catering; transport, storage and postal industry; wholesale and retail trade and manufacturing.”
Impact on workforce
Layoffs are likely to continue. The downward pressure of declining production due to a reduced workforce and slowing demand forces companies to look for ways to reduce their operating expenses including labour. About 62.3 per cent of the respondent companies are considering or have already started cutting jobs.

The biggest layoffs are planned by companies with 11-50 employees (72.5 per cent) followed by companies with 51-100 employees, 65 per cent of which are implementing or planning staff downsizing.

The industries bracing for the biggest layoffs include accommodation and catering, mining and quarrying, manufacturing, culture, sports and entertainment, and wholesale and retail trade. This would mean a loss of jobs for more than 100,000 employees in the formal sector.
Impact on supplies, operating costs
Some industries expect an increase of over 30 per cent in the cost of inputs and operating costs. These include manufacturing and supply of utilities (electricity, heat, gas and water), where 45 per cent of companies expect an increase of more than 10 per cent.

According to the report, businesses are unlikely to absorb these costs in the aftermath of Covid-19, resulting into higher prices for the consumers on these essential goods and services.
Recovery
Recovery for most businesses is expected to take more than three months and possibly until the end of the year. According to 1,012 companies surveyed, 70 per cent respondents estimate their recovery time of to be in more than three months.

Industries with the longest period of recovery of more than three months include accommodation and catering (57.6 per cent of respondents); production and supply of electricity, heat, gas, and water (54.2 percent); real estate industry (54.2 percent); financial industry (44.2 per cent); and manufacturing (41.2 per cent).

The tourism industry, which started slowing down in January and all but stopped in early February, does not expect to recover until over a year from now, bringing the full recovery to the second quarter of 2021.

Also, two most appreciated business relief measures are an extension of loans terms and reduction of financing costs for SMEs (66.8 percent of all responding companies) as well as an extension of tax payment deadlines to the Uganda Revenue Authority (URA) (also 66.8 per cent). Suspending payments for the utilities and loan interests is also viewed as an effective relief measure by 44.3 per cent of the respondents.

The longer businesses stay inoperative, the greater the economic impact and the more difficult it becomes for them to resume their operations. The smaller companies which are the backbone of any economy are particularly concerned.
Bigger companies are easy to refinance to start operation, but once small companies are out of business, they may never recover for various reasons.

Uganda needs a proper relief and economic stimulus package that would define all government measures in support of businesses through an act of Parliament. The relief package would set any reduction in utility fees and rental costs, extension of taxation duration of tax holidays, wage entitlements of the staff (full pay or reduced) and any possible government support in this respect, access to affordable capital.

Businesses are convinced that without such a package to kick-start the economy, many businesses may not be able to recover.

Further rescue packages should be linked to upgrading businesses, for example adding to local value, to decrease reliance on imported inputs, to get standards certification so that the next time a shock hits, the businesses can ride the wave.
Low demand, labour freeze
About half of the businesses in the country have experienced decline in demand for their goods by more than 50 per cent. Eight out of every ten businesses (83%) reported a decline in demand for their products.

This is in addition to risk aversion due to fear of contamination, as well as reducing visits to food markets that were allowed to operate. Also, the restrictions on vehicle movements reduced purchases by the urban middle class.
Furthermore, the closure of institutions such as schools and hotels has highly contributed to decline in demand in the agricultural food stuffs. In response, consumers have stocked dry rations, which has reduced demand for other fresh agricultural produce.

Overall, nine out of ten businesses have reportedly experienced increase in operating expenses due to preventive measures instituted by government to curb the spread of the virus. However, the report reveals that majority of them (62 per cent) reported an increase of less than 25 per cent, with only 38 per cent of the businesses reported an increase in operating costs of more than 25 per cent.

Also approximately three-quarters of the surveyed businesses report reduction in the number of employees. Overall, 76 per cent of the businesses reported to have reduced the size of the workforce due risk presented by COVID-19 and subsequent lockdown measures.
Outlook
With respect to the future outlook, report analysis shows that the major concerns highlighted by businesses—in the event that the COVID-19 situation persists for more than six months—relate to reduced product demand and potential inability to meet costs of operations.

“In particular, majority of micro and small businesses indicate that they would exit business in 1 to 3 months in the event the current situation persist. On the other hand, majority of the medium and large firms do not foresee closure,” reads part of the results from the EPRC’s business climate survey.

Importantly, there is a slightly higher resilience among agriculture and manufacturing firms compared to service sector firms.

The report projects that in the event that Covid-19 persists for the next six months, about 3.8 million workers would lose their jobs temporarily while 0.6 million would lose their employment permanently.