Times may be tough, but for companies that are fast enough there are some great opportunities to beat the opposition, take advantage of lower costs and refine strategies. Douglas Friedli reports.
Redrow, the housebuilder, has taken a pasting over the past year. But Stuart Rowlands, just appointed to run the Flintshire company’s south Wales division, is upbeat.
“The slowdown has given us a number of opportunities,” he says. “We have more time to interface with the customers. We have increased our rapport with them and we will be spending more time listening to them to provide a more personalised service.
“We are also taking a new approach to the product – a total rethink of the way we apportion the living space. We will offer customers more for their money.”
Rowlands is typical of a breed that would rather look for opportunities than complain about how tough things are.
Redrow signed new funding arrangements in the autumn, which should ensure that it avoids the fate of rival David McLean, which had to be rescued by administrator Deloitte before Christmas. “As a business we have some certainty now. We don’t need to worry about having to refinance,” says Rowlands.
In common with many other companies, Redrow sees an opportunity in working more closely with the public sector. The company has been in talks with the Welsh Assembly about helping meet targets for affordable housing.
“There are two major issues since the crash,” says Rowlands. “We have been left with unsold stock, and we have other sites with planning permission where we are reluctant to start. Putting deals together with housing associations is one way of solving those problems.”
So Redrow has been lobbying for changes to dispose of some of its stock to social housing providers.
“Social housing has a lower trading margin but it takes away the sales risk element and you get staged payments so that cash flow is improved – that is a big attraction,” he adds.
This is also a great time for companies that want to acquire others, says Rob Cherry, partner at Morgan Cole: “It is good for corporate acquirers. Their valuation models have stayed the same, but they are not being placed in a competitive situation. All of a sudden Cinderella bidders are the winners if they are well funded. There is less competition.”
But he adds: “Their valuations won’t necessarily work for financial buyers.”
Whisper it, but it may also be a good time for recruiting and managing staff. Unlike the recession of the 1980s, this one has seen job losses across the social spectrum from production line workers to professional services partners. As a result, it is much easier to recruit qualified and experienced staff. That should ease one or two skills shortages.
Darren Stewart, head of employment law at Howells Solicitors, says: “There will be an increased employee pool, which will allow employees to take their pick and could put the employer in a stronger bargaining position in terms of salary and benefits. That does, of course, assume that the employer has the capacity to employ more people.”
There is also a chance for businesses to review and revise their workforces. “In my experience there are a lot of employers who have tolerated inefficiencies in their working methods because profitability allowed them to,” says Stewart. “Now the economy is in a downturn employers are having to improve efficiency, cut cost and ensure the workforce is commensurate to their requirements.
“This allows businesses to address human resources issues that had previously gone unconsidered and should lead, in theory, to increases in efficiency, lower costs and improved profitability.”
Clever companies are using a dip in demand to meet staff demands for flexible working, says Elin Pinnell, employment partner at Capital Law: “You are unlikely to find anyone singing and dancing and doing cartwheels right now – but not everybody is suffering.
“Companies that are a bit more open-minded are trying to find ways to keep their staff, for example, by changing their contracts so that rather than make redundancies they do shorter working weeks, job sharing or unpaid leave.
“If a pattern of work suits the business and means a lower wage bill at the end of the month, it is a win-win situation.”
Spending habits change in a downturn. So customers will spend more on products that save them money, such as clothes from Peacocks or food from discount retailers such as Aldi.
Buy As You View, the homewares and electrical goods retailer, has tapped into changing consumer demand. This Christmas the company’s sales rose sharply, suggesting a lower-cost lifestyle – such as computer game consoles and televisions. These may seem like expensive gadgets, but once bought they can be used again and again, offering a cheaper alternative to nights out, which can cost a couple £100 or more.
Companies also change their spending, and clever service providers can tap in to that. The ones that do best are those already in these growth areas, or agile enough to get into them.
Some companies diversify and get staff to work across a wider range of tasks. This can be risky where physical work is involved – but it also created a new market for Caerphilly insurance firm Thomas, Carroll.
Kevin Price, the firm’s management services director, has just launched SafetyLine, a health and safety telephone advice service. The idea is that small and medium-sized companies unable to afford an in-house safety team can use the service to avoid costly mistakes.
“A lot of people are looking to save money, and there are opportunities,” says Thomas, Carroll director Paul Gardner. “For example, by putting proper health and safety measures in place they can reduce their overheads.”
You can even find bankers who are reasonably sanguine about the downturn. Harry Lewis, head of HSBC’s private banking division in Cardiff, admits it has been a tough year but says: “We have had a good war. We haven’t had to go to the government for support and we are taking more deposits.”
He has noticed an interesting trend: “We are starting to take more calls from people interested in backing commercial property. The difficulty is trying to predict the bottom of the market. But there are yields of 8 to 9 per cent available now. A lot of the money that came out of property a few years ago is going back.”
Given that the property market was the first to go into recession, it may well be the first to come out. Residential properties are still expensive relative to average earnings, but some commercial buildings can show a good rate return.
“It’s all about the rental covenants,” says Lewis. “You want long-term, high-class tenants with an air of permanency about them.”
Steve Gibbon, director at property agency GVA Grimley, agrees: “There is a polarisation in the market between poor quality investments with poor quality tenants, and those with FTSE 100 or government covenants.
“There was previously a marginal difference, but now there are yields of about 7 per cent on buildings with government covenants but 10 per cent on poor quality covenants. People are knocking at our door now, asking where the bargains are. There have been a number of high-profile office developments and most of those are finding tenants.
He adds: “Housing has been on the back burner for more than 12 months. There has to be a time when housing developments will come back on to the market, and I think that will be in 2009. When they do, it won’t be flats – there will be more demand for detached, terraced and linked houses.”
Matt Phillips at property agency Knight Frank, says that yields on commercial property that had dropped below 5 per cent have shot back up to 7 or 7.5 per cent.
“Now we are back to where we were five years ago, with people who understand property, he says. “If you are a property person with access to cash there will be some very good opportunities in the year ahead. If we are not at the bottom, we are very close to the bottom of the curve.”
Wider economic factors also work in favour of the opportunists, and against the do-nothing brigade. The price of a barrel of oil has halved over the past year. Many other input costs – such as the gas price, the cost of anything transported, and even the price of food – depend, in part, on the oil price. So it will cost less to produce goods and services this year than last.
UK exporters will also get a benefit from the lower value of sterling, which suddenly makes products made in the UK much better value overseas. The size of the benefit depends on the proportion of the components that are sourced in the UK – the more the better.
Indeed, the benefit may already have started. The value of exports from Wales grew 14 per cent in the most recent year for which figures are available. Exports for the 12 months to September 2008 rose to £10.3bn – a faster rate of increase than for the UK as a whole, according to figures from the Welsh Assembly Government.
Currencies move up and down all the time, and so far no big inward investor has been lured to Wales by the perhaps temporary cheaper pound. But the benefit is there for local based companies that can choose between charging less and therefore being more competitive; taking a bigger profit; or perhaps a bit of both. It’s not a bad dilemma to have.
Also in: February 2009
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