Philly’s smaller businesses are underperforming those in other big cities, report finds

In the years after the Great Recession, Philadelphia’s small and mid-size companies made up a shrinking share of the local economy’s total sales, taxes, and workers, as these crucial growth engines underperformed those in other big cities, according to a new report.

Research from the Pew Charitable Trusts found that Philly trailed its peers in several key economic metrics, from launching new firms to the number of businesses per capita. The city’s small and mid-size companies were also in weaker financial shape and less likely to reach customers outside the region.

Philadelphia’s high level of poverty is a significant factor, locking the city in a cycle of economic underachievement, the report said. With a quarter of Philadelphia’s population below the poverty line, the city has fewer people to start and successfully run a small business, as well as fewer consumers with the buying power to support the firms, the report said. At the same time, the city has fewer businesses to pay local taxes and employ residents, something that could help lift people out of poverty.

The report comes as the city enters another recession, this one caused by the coronavirus pandemic and government restrictions that shut down businesses to slow the spread of the virus. Philadelphia’s unemployment rate has soared to 17.7% as of June, and at least 1,000 businesses in the region have permanently closed their doors, according to Yelp.

From 2007 to 2016, small and mid-size firms saw their share of Philadelphia workers shrink, from 41% to 39%, the report said. That’s in part because employment at these businesses grew just 1% during the period, far below the median of 10% for similar-sized companies in other cities, the report found. (The median is the middle number; half are above, half are below.)

The report defined small and mid-size businesses as those with one to 499 employees. It compared Philadelphia with a dozen other large cities where similar data were available, and found that the city lagged in several areas. For example, Philadelphia had 18.2 small and mid-size establishments per 1,000 residents ages 16 and older in 2016. That was half as many as Denver or San Francisco, and well below the median figure of 26.2 for the 13 cities studied.

Other findings show a lower percentage of local small and mid-size businesses reaching customers nationally or globally. The report noted that only about 19% of such firms earned most of their sales outside of the metro area, well below the median of 27% posted by other cities. By relying on the local market, businesses were forgoing growth opportunities beyond the region.

“This is what’s known as local or local-oriented business activity. And this certainly does provide jobs and livability and a sense of community here,” said Thomas Ginsberg, author of the report and senior officer with Pew’s Philadelphia research and policy initiative. “But economists say that it also tends not to lead to net economic growth of a region.”

Another area where Philadelphia lagged was in self-employed business owners, who may include “solopreneur” or “gig” contractors working alone, or employers of wage-earning workers. The report said 5.6% of city adults in 2017 identified as self-employed in census surveys, compared with the median of 6.8% among other cities.

The city was above the median when it came to self-employed immigrants (10.3%) and Asians (6.9%), and was near the median rates for Hispanics (6.8%) and veterans (4.8%). But Philly was below the medians among other cities for self-employed whites (6.9%), Blacks, (3.5%), women (4%), and men (7%), the report found.

From 2007 to 2016, Philadelphia companies created or opened locations at a slightly higher rate than they closed them. The gap between business “birth rates” and “death rates” averaged an anemic 0.6 percentage points during the period, about half of the median 1.1 percentage points among other cities.

And Philadelphia’s small and mid-size firms had lower average sales and worse credit records than those in other cities. Meanwhile, the tax bill on small and mid-size businesses has shrunk over the last decade because of modest sales growth and tax code changes, among other reasons.

Smaller businesses in Philly went from carrying about 58% of the total Business Income and Receipts Tax and Net Profits Tax bill, to just 50%, the report said.

The Philadelphia Inquirer is one of more than 20 news organizations producing Broke in Philly, a collaborative reporting project on solutions to poverty and the city’s push toward economic justice. See all of our reporting at brokeinphilly.org.