Technology investments should be a priority for entrepreneurs

BDC Monthly Economic Letter November 2020

 

Most Canadian entrepreneurs have faced major challenges as they cope with the COVID-19 pandemic this year. While government assistance programs have helped alleviate the cash flow difficulties of many businesses, entrepreneurs must still plan for how they are going to get through the crisis and benefit from the recovery.

This economic letter looks at research on how entrepreneurs are dealing with the pandemic and their investment intentions for the future. We also look at how consumer habits are changing.

Liquidity, then technology

In a new BDC study, The Response: How Entrepreneurs Are Adapting to the Pandemic, our economists Sylvie Ratté and Isabelle Bouchard report on the results of a survey of 1,000 Canadian entrepreneurs and 2,000 consumers.

For nearly 40 percent of the entrepreneurs, engineering a financial turnaround in their business over the next year is the top priority, the survey indicated. Many have taken loans to survive a sharp drop in revenues, especially during the spring lockdowns. In fact, the proportion of small and medium-sized businesses whose debt represents more than 25 percent of their revenue has more than doubled this year, from 10 percent to 22 percent.

Entrepreneurs are prudent but far-sighted

Still, investment intentions remain weak, according to our October survey. Across all sectors, a majority of entrepreneurs planned to reduce their investments in the next year.

This finding is consistent with the overriding desire of entrepreneurs to turn their company’s finances around. Many are waiting to see how the pandemic evolves before making longer-term investment decisions.

On a sectoral basis, only the resource industry had a positive investment outlook (+9; see definition in the chart’s footnote). Intentions in the manufacturing sector (-18) had particularly deteriorated since the summer. Wholesale and retail trade—sectors more affected by social distancing measures—also showed negative investment intentions (-2).

These low investment intentions reflect a reluctance to invest in tangible assets, such as buildings (-17) and machinery and equipment (-8).

Uncertainty about the duration of public health restrictions and the increased importance of telework partly explain the cautious approach of entrepreneurs toward investing in buildings and renovations. Many will re-evaluate their physical space requirements between now and the resolution of the pandemic.

With respect to investments in machinery and equipment, entrepreneurs are waiting for more clarity on the direction of the economic recovery. This will depend on the evolution of COVID infections and the development and distribution of an effective vaccine.

The good news is that a small majority of entrepreneurs said their companies plan to invest in technology assets over the next 12 months (+2). Planned investments would be aimed at making teleworking more efficient, at improving e-commerce platforms and at deploying additional cyber-security tools. All of these areas will continue to grow in importance over the next decade.

Consumers increasingly online

At the end of November, our team of economists will publish a new report on e-commerce platforms, entitled Profit from e-commerce: How to compete in the online marketplace. This report will recommend online strategies that our experts believe are best suited to Canadian small and medium-sized businesses.

The pandemic is accelerating the transition of Canadian consumers to online shopping, underlining the importance of investing in e-commerce.

In 2015, only 5.8 percent of retail sales in Canada were conducted online, compared to 7.2 percent in the United States, according to eMarketer, an e-commerce firm. As of 2019, Canada had caught up with its neighbour, as online sales accounted for 11 percent of total sales in both countries. The figure was then expected to rise to 15 percent by 2022.

However, this forecast predates the surge in e-commerce caused by the pandemic. Statistics Canada found that online sales by Canadian retailers increased from 2 percent to 4 percent of total sales between 2016 and 2019. (Note these figures exclude purchases by Canadian consumers from foreign-based retailers). Last April, sales jumped to more than 10 percent and have remained above 5 percent since then.

When foreign purchases are added, more than 15 percent of current Canadian retail sales are made online. With several provinces facing a second wave of infections and strengthened health measures, consumers are likely to turn more to digital platforms for holiday shopping and in the months afterward.

The bottom line is that consumers are likely to maintain their new shopping habits, accelerating trends that were expected to emerge over the next decade. As Canadian entrepreneurs compete with the rest of the world for market shares, they are increasingly realizing the importance of investing in a reliable and flexible digital platform.

 

What it means for entrepreneurs

  1. Difficult economic conditions have forced companies to lower their investment intentions over the next 12 months. In general, entrepreneurs are focused on getting their finances back on track.
  2. Despite a climate of uncertainty, our surveys indicate that a majority of entrepreneurs intend to increase their investments in technology.
  3. Leveraging technology, teleworking and selling online are top priorities for entrepreneurs for the coming year.
  4. BDC has a wealth of experience in advising clients on developing an online strategy. These articles could help guide your strategy:

 

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