A common startup pitch revolves around consolidating fragmented industries dominated by SMBs. The idea? Leverage economies of scale to grow faster and more profitably than standalone small businesses.
While this strategy has seen success in sectors like medical labs, it’s been less effective in others, such as groceries, fashion retail, farming, and food supply chain. Why? Because SMBs possess unique advantages that often make it challenging for larger enterprises to succeed, regardless of the quantum of funding thrown at the problem.
In a series of upcoming posts, we’ll explore these SMB advantages one at a time.
Advantage 1: Profit Expectations
Large businesses need to cover costs across multiple levels—operational, managerial, and investor returns. Without meeting these margins, the business is deemed unviable.
Conversely, many small business owners prioritize freedom and self-sufficiency over high profits. For some, running a business is a practical necessity due to limited employment opportunities in the organized sector. They often view investment as a means of maintaining independence rather than maximizing profit.
As a result, it’s not uncommon to see retail shops, those with self-owned premises, continue operating without generating market-level rental returns. They choose to stay open rather than closing down for better rental income, as the business provides a livelihood and a sense of freedom.
Additionally, these businesses often operate at a scale that doesn’t require a separate managerial layer. Family members, including children, frequently work part-time, minimizing the need for paid labor. This informal structure further reduces costs.
A case study from the JBCS illustrates this challenge through the story of two young executives in the U.S. who attempted to consolidate the fragmented laundry industry. They launched 36 stores before realizing that consolidation wasn’t feasible and eventually shut down the business.
Their conclusion? Many laundromats were run by first-generation Asian immigrants who worked alongside unpaid family members. These businesses provided just enough income for family expenses and small savings, offering social status and security. The entrepreneurs found that adding external labor costs would render the business model unviable at scale.
What other advantages that make SMBs resilient and challenging to consolidate? Leave it in comments
Link to next post in this series SMB#2
