The Pandemic Forced Thousands of Businesses to Close—But New Ones Are Launching at Breakneck Speed

Stephen Natoli needed to act fast when the COVID-19 pandemic hit. He was desperate to keep his business, Natoli’s Italian Deli in Secaucus, N.J., open, and retain his workers. But with all his customers suddenly homebound, event catering—which accounted for half his revenue—completely seized up. Individual orders like pizza slices and sandwiches also took a hit. There were no obvious options to bolster the company’s prepared food sales.

So Natoli took a leap, and dramatically pivoted the business. He moved all the seating outside and turned the indoor space into a small grocery market, stocking kitchen staples and fresh produce. The demand was so great that he opened a grocery store in another area of town, which he later sold. Now, his food services are bouncing back, but he has no intention of returning to the way things were: the groceries are there to stay.

“We picked up about 20-to-25% of the business we lost in catering,” Natoli says. “I decided to keep that 20-to-25% and when catering comes back, I want to bang that on top.”

Last year, lockdowns and other COVID-19 containment measures hit businesses so fast that many couldn’t withstand the shock. Now, as the economy rebounds, the extent of the damage is becoming more clear. But despite the glut of business closures, there are a few comforting signs. For one thing, the pandemic has spurred business creation, both in terms of entrepreneurial startups and also new products and services at existing firms. What’s more, firms that outlive the pandemic may end up more resilient and prosperous in the future because they will better cater to home-based lifestyles, new digital habits and other societal shifts that took place over the past year.

“The best thing we can do for the economy to recover is to allow what’s going to happen to happen,” says José María Barrero, assistant professor of finance at the Instituto Tecnológico Autónomo de México who studies how U.S. workers and employers are reacting to the pandemic-era norms. “Trying to cryogenically freeze the economy where it was in February of 2020 is potentially going to hurt more than help due to the extent that things have changed permanently or persistently.”

In the spring of 2020, as shutdowns swept the country, more than 3 million businesses stopped operating. A widely cited study from The Hamilton Project, a branch of the Brookings Institution, found last year that 400,000 businesses had permanently closed by June 2020. A more recent estimate from the U.S. Federal Reserve estimates that 200,000 businesses with employees boarded up between March 2020 and February 2021—about 25% to 33% above the norm—with smallest enterprises faring the worst. The final tally of business deaths may end up higher, as the federal Paycheck Protection Program (PPP) initiative ended in May and owners continue to grapple with overdue credit bills, deferred rent and other expenses.

Closures of such proportions have been devastating to business owners, their employees and their communities. But COVID-19 also acted like a forest fire that cleared brush for more resilient growth and fresh green shoots. Applications for new businesses jumped in the latter half of 2020 to the highest rates in the 17 years that the government has tallied such figures, according to a University of Maryland analysis. The pace has stayed high through 2021. Following the economic upheaval of the 2008 Great Recession, by contrast, business applications declined.

It may appear that this trend is simply a byproduct of laid off or unhappy workers trying to find independent ways of earning a living. But John Haltiwanger, a University of Maryland economics professor who authored the study, says that the influx in businesses that are likely to hire employees—which generally need more resources to get off the ground than one-person firms—is probably “driven by new market opportunities” brought about by the pandemic. For instance, a third of the increase in new business applications came from non-store retailers—a direct result of the shift to remote interactions between businesses and customers. In other words, for all its damage, the pandemic is also spurring innovation.

“Startups play critical roles in restructuring,” says Haltiwanger, before adding a crucial caveat. “What we don’t know is how much of this will stick. There’s enormous uncertainty, but startups are oftentimes the experimenters out there. There’s lots of evidence that they are often more capable of doing major innovations—not just technological innovations, but changing the way they’re doing business.”

In normal times, there’s a constant churn of new business systems and technologies replacing outdated ones—a process known as “creative destruction,” a term popularized by Austrian economist Joseph Schumpeter in the 1940s. Major events can expedite that process because less efficient firms die off en masse, leaving a void that savvier or nimbler firms can fill.

During the pandemic, even firms as large as Disney had to adapt. Around the time that the company released the live-action Mulan via its Disney+ streaming service for an extra fee of $30, CEO Bob Chapek explained on an earnings call that the pandemic had made the company consider “alternative ways” of reaching audiences beyond movie theaters.

Since then, the company has released a number of films in the same fashion. And although theaters have at this point largely reopened, the company is giving audiences the choice to see its July releases Black Widow and Jungle Cruise on the big screen or at home. It may have been possible for the entertainment juggernaut to bypass theaters before the pandemic. But given the risk of jeopardizing its relationships with the theater chains, there was no urgency for it to try. After theaters closed, the company had little to lose in giving direct-to-streaming a whirl—and plenty to gain, considering Disney+, which launched in 2019, is in a knife fight for subscribers against rivals like Netflix and HBO.

One of the biggest business shifts was adopting technologies that allowed companies to reach their employees and customers remotely. In a July 2020 survey of nearly 900 executives from all industries around the world, McKinsey & Company found that companies transitioned to digital solutions far quicker than they had thought possible before the pandemic. In some cases, what was assumed to take close to two years ended up taking less than a month. The survey also found that most of the technological changes were likely to last beyond the pandemic. When asked why such changes weren’t implemented prior to the pandemic, more than half of the executives said that they hadn’t been a top business priority.

That was precisely the case at Coucou French Classes, a language school and cultural center with locations in New York, Los Angeles and Minneapolis. In March 2020, the school asked all current students to finish out their classes over the video conferencing tool Zoom. But with enough cash on hand to cover expenses through September, cousins Léa and Marianne Perret, who co-founded the business, initially thought that life would return to normal after a few weeks, and that the best move would be to shut down operations for that time.

They scrapped that idea pretty quickly, as it became apparent that the situation was getting worse and that they were sitting on a potential opportunity: people stuck at home indefinitely were looking for ways to occupy their time. They began enrolling new students for online classes—students not just from the three cities where Coucou operates, but from all over the United States, Canada and even Europe.

“We had been trying to develop an online class product for a while before that,” says Marianne. “We never had time to give it thought or get it going. It was something that we had on the back burner for a while, and then it was like, ok, bam, let’s do it.”

The digital transition spurred other business ideas. The company developed new courses and class schedules, built out new workbook materials and optimized every aspect for the digital experience. “We feel like we’ve done three years of work,” says Léa.

Coucou is enrolling for in-person instruction again, and the classes are at capacity. Given that demand, the cousins plan to expand their physical presence in regions where they see the most interest, based on online enrollment. The online classes will continue going forward, and will also serve as a backup option if students need to make up a class, or if the city shuts down for stormy weather or another wave of COVID-19 cases.

Such pivots are happening across the business landscape. A May study from the International Journal of Disaster Reduction ​​found that 63% of U.S. small businesses surveyed last summer had changed how they served customers, while 56% had changed how they procure supplies. On the digital front, 49% of the firms had increased their social media presence and 41% had shifted to online sales.

Not all those businesses initially thrived. Firms that changed the way they served customers, for example, experienced higher probability of income loss and a longer anticipated time to recovery, in part because of the increased upfront investment that may be required. The study notes, however, that if a business can withstand the short-term pain of such a pivot, it may ultimately end up stronger.

“In the long run, these changes can result in being more resilient,” says Maria I. Marshall, an economics professor at Purdue University who has studied business survival in the wake of climate disasters and who co-authored the study. “Resilience is not just, ‘did I come out of this the same as when I came in.’ Resilience means that you have adjusted something that would make you better off. Even if your profits stay the same, your business has changed in a way that makes you more resilient to the next nonnormative shock.”

Indeed, experience alone gives businesses a type of resilience. Those that reacted to the pandemic, whether by pivoting to new business lines or navigating bureaucracies to get a PPP loan, can fall back on their knowledge the next time disaster strikes.

Natoli, the New Jersey deli owner, feels like he’s been through it all. He applied for a PPP loan (which he credits with getting the business through the toughest months). He figured out how to get personal protective equipment like masks and gloves for his employees. He transitioned his catering options from family-style trays to COVID-friendly, individually packaged items. And, of course, he built out a grocery business. With each challenge, Natoli has learned about what it takes to adapt.

“I feel that we could turn this negative into a positive, but not overnight,” he says. “But over a few years, we might actually come out of this thing stronger. Like anything, if you’ve experienced something once or twice, and you survive, then you have a different confidence level and you know you can do it.”