Transforming SMEs Digitally Through COVID-19 and Beyond

Chang Cheng, Su Wang, and Yutong Zhong​1

Executive Summary

The current COVID-19 situation accelerated the decade-long rise of e-commerce, shifting the
demand from brick-and-mortar retail to internet sales. Small and medium enterprises (SMEs) in
the traditional retail industry were disproportionately hit, as they lack the resources of large
corporations to weather the storm and transition into online retailing.

In this memo, we suggest a policy package focusing on the structural transformation of the retail
industry, aiming at promoting sustainable growth of SMEs during the pandemic and beyond. In
order to evaluate the feasibility and implementation details, we look at Australia specifically.​2
We propose to extend the existing Small Business Digital Champions program, complementing
the government’s current policies that only address the financial constraints faced by SMEs
during the pandemic.

1
​University of Virginia.
2
Australia is the 10th largest e-commerce market in the world by revenue. See also: 2020 eCommerce Industry
Report. ​Australia Post.​
https://auspost.com.au/content/dam/auspost_corp/media/documents/2020-ecommerce-industry-report.pdf
Background

The transition to e-commerce is a globally common trend expedited by the COVID-19 pandemic.
For example, in the United States, the share of e-commerce in total retail increased slowly
between 2018Q1 (9.6%) and 2020Q1 (11.8%), but spiked to 16.1% in 2020Q2. The story is
similar for the United Kingdom (50% increase QoQ), China (26.9% increase QoQ), Australia
(30.2% increase YoY), and many others across the globe (Figure 1).​3

With the current rise of e-commerce, SMEs in the retail sector are disproportionately affected by
the pandemic due to the reduced foot traffic and lack of existing online platforms to reach
customers (Figure 2). Survey indicates that Australian retail SMEs experienced an increase of
9.1% in the bankruptcy rate, and 41% of SMEs experienced a drop in income of 50% or more at
the onset of the pandemic.​4

Governments have enacted multifaceted policies to assist SMEs during the shock. In particular,
the Australian government has introduced a number of measures to support cash flows and
encourage lending.​5 However, the current stimulus package is not exhaustive and is unlikely to
support the tenable growth of SMEs post-COVID, as the rise of e-commerce continues to pose
serious challenges to the traditional brick-and-mortar retail businesses. Therefore, we intend to
design policies that facilitate the digital transformation of SMEs, build business resilience, and,
in doing so, preserve the competitiveness of the retail industry in and beyond the recovery
period.

3
​Data from the US Census Bureau, the Office of National Statistics in the United Kingdom, OECD Report on
E-commerce in the time of COVID-19, the National Australia Bank (NAB) Group Economics ​Online Retail Sales
Index Report​.
4
​Buffington, C. et al. (2020), “Measuring the Effect of COVID-19 on U.S. Small Businesses: The Small Business
Pulse Survey”, No. CES-20-16, US Census Bureau,
https://www.census.gov/library/working-papers/2020/adrm/CES-WP-20-16.html​ (accessed on 24 June 2020).
Sebnem Kalemli-Ozcan, Pierre Olivier Gourinchas, Veronika Penciakova, Nick Sander. 2020. COVID-19 and SME
Failures. ​IMF Working Paper W ​ P/20/207.
5
This includes the JobKeeper program, which provides cash payments to employees through their employers,
Boosting Cash Flows for Employers, which offers tax credits to SMEs, and the SME Guarantee Scheme, which
enhances lenders’ ability to provide credit to SMEs. See the Reserve Bank of Australia’s bulletin on the COVID-19
outbreak and access to small business finance for more information:
https://www.rba.gov.au/publications/bulletin/2020/sep/the-covid-19-outbreak-and-access-to-small-business-finance.
htm​l
 Figure 1

Figure 2

Policy Recommendation

Our overall recommendation emcompasses a short-term and a long-term plan, aiming at assisting
Australian SMEs to transform into digital-native companies.
The short-term plan focuses on digitizing sales, establishing delivery channels, and promoting
small businesses in the local community to empower SMEs to survive the crisis.

We propose three types of actions to digitize sales:

1. States should engage NGOs such as Digital Empowerment Foundation to assist SMEs to
hire talents with digital skills to build up websites and establish third-party payment
processors;
2. The Australian Taxation Office (ATO) can offer tax breaks for small businesses sales that
take place on line;
3. The Department of Education, Skills, and Employment should further offer
reimbursement for SMEs that registered for government-contracted vocational training
programs to help employees obtain and enhance their digital skills.

To assist SMEs to establish a delivery service, the national government can subsidize delivery
companies that contracted with SMEs at a lower-than-usual price. An upper limit of subsidy is
placed to prevent exploitation of such policy.​6

To promote small business locally, city-level or council-level governments should raise

consumers’ awareness of supporting local retailers with“Shop Local” campaigns.

The long-term plan consists of training programs established by the national government on
topics such as data protection laws, data-driven strategies, and social media marketing
campaigns, which could help SMEs preserve their key competitive advantages and further
expand their presence in the global market.

Our proposed policy complements Australia’s existing COVID response policy packages and
fulfills SMEs’ top demands in the digital transformation process. Study shows more small
business owners in the Asia-Pacific region are seeking to digitally transform their business in
2020 than in 2019, with 56% of the respondents claiming that they “recognize [their]
competition is transforming and must keep pace.” The report points out the biggest challenges
for SMEs include shortage of digital skills and talent, lack of necessary technologies, and lack of
budget.​7 In Australia, large businesses often have better digital capabilities to implement
information communication technology, whereas small businesses often lack access to digital
infrastructure.​8
6
We suggest measuring the upper limit of subsidy by the size of the business, which is represented by the previous
annual sales.
7
IDC-Cisco 2020 Asia Pacific SMB Digital Maturity Study.
https://www.cisco.com/c/dam/global/en_sg/solutions/small-business/pdfs/ebookciscosmbdigitalmaturity-withcountri
es.pdf
8
Australia Bureau of Statistics, Business Use of Information Technology.
https://www.abs.gov.au/statistics/industry/technology-and-innovation/business-use-information-technology/2015-16
Amidst an era where SMEs have to gain digital presence to stay afloat, governments can assist
them by providing training and digital courses, offering digital services, promoting digital
technologies and tools, and funding digital transformation.​9 Our policies encompass all these
measures and address directly the dire needs and challenges of SMEs during their transformation
process.

Similar policies are carried out pre-COVID in Australia. The government’s Small Business
Digital Champions program supports the comprehensive digital transformation of 100 small
businesses through hardware and software assistance and digital training. The initiative has
deepened SMEs’ digital engagement, which makes them “50% more likely to grow revenue,
eight times more likely to create jobs, seven times more likely to export.”​10 Therefore, the
government should extend and expand this program, and tailor it to accommodate the special
needs of SMEs in a time of crisis.

Implementation

The biggest challenges to our policy is the funding, which comes from several sources, namely
the government, central bank, and venture capital firms. The ATO should raise the tax rate for
large businesses at least until the economy has fully recovered from the pandemic. The Reserve
Bank of Australia (RBA) should extend its current 0.1% cash rate target and lower risk-free
interest rates farther out along the yield curve.​11 Additionally, venture capital firms that are keen
on investing in consumer packaged goods and softwares are also major contributors of the fund.

Another risk comes from the uncertainty of the pandemic. As it is unclear when the pandemic
ends, the assistance package provided by the government will incur extra costs (such as the
safety protocols in the delivery service) for an indefinite period of time. However, as more SMEs
move online, they will become self-sustaining without government support.

9
Chen,C.-L.; Lin,Y.-C.; Chen, W.-H.; Chao, C.-F.; Pandia, H. Role of Government to Enhance Digital
Transformation in Small Service Business. Sustainability 2021, 13, 1028.
https://doi.org/10.3390/su13031028
10
Small Business Digital Champions fact sheet.
https://www.business.gov.au/-/media/grants-and-programs/small-business-digital-champions/small_business_digital
_champions_project_fact_sheet-pdf.ashx?sc_lang=en&hash=BBACD8AEC78459FC58128319FC06E995
11
Supporting the Economy and Financial System in Response to COVID-19. ​Reserve Bank of Australia.
https://www.rba.gov.au/covid-19/