Economists predict a slow recovery at best over the next few years. But, find Douglas Friedli and Geoff Wright, certain sectors and approaches to business should yield better-than-average results. Here’s to the upside.
This is not going to be a year for the faint-hearted. But even if the economy refuses to grow for a few years, that won’t prevent growth at particular companies or in promising sectors.
Just as surely as some companies disappear or shrink, others will take their place, enjoy rising sales, booming exports and a greater share of the market. The old expression has it that a pessimist sees a glass as half empty, while an optimist sees it is half full.
Some trends affect all companies – flat consumer spending doesn’t help, for example. But again, consumers may alter the way they spend and save money. That’s good news for companies that are in the right sector or can get into it fast enough, and bad news for the less speedy.
In a downturn there’s a natural tendency for companies that are doing well to keep quiet and avoid being seen as insensitive or profiteering. Fair enough, but from a economic point of view there is a greater need for positive stories about companies doing well, which the rest of us can learn from.
With this in mind, we have tried to identify the trends and business practices that will separate the success stories from the failures in 2010.
And through the rest of the magazine, we have identified a few instances of “glass half full” thinking which could see companies through the downturn and towards more stable times.
Invest for growth, but watch the bottom line
Companies that want to make the best of 2010 face a difficult balancing act between spending on the things that matter and making sure there’s cash left in the till.
Phil Cooper, chief executive of Venture Wales, would like to see companies investing more in innovation, research and development. “Investing in operational and process improvements for efficiency and savings are important during these tough times,” he says.
It could be a mistake to cut spending on marketing, which is vital to maintain a high profile over competitors while establishing a strong position for the recovery.
“I would suggest a balanced approach to managing cash while staying receptive to the opportunities that arise to invest in growth during the downturn,” says Cooper. “Managing cash flows in a recession is vital for companies to survive but the recession can create opportunities for growth, which companies shouldn’t ignore.”
Eversheds partner Paul Pugh thinks it’s time to be brave: “If you are feeling bullish and have a strong order book, it’s a good time to try and win market share while your rivals are weaker. Look at what HSBC is doing in the mortgage market, for example.”
It’s also a good time to to make strategic acquisitions, he says, but don’t do anything reckless. “At the end of the past decade, deals were being done on terms that were too generous and prices were inflated. Now shareholders, investors and central government will require prudence.”
Jason Evans, area director for corporate markets at Lloyds TSB, pinpoints the importance of investing in technology and training to ensure competitiveness on a sustainable basis. “As we move into recovery, businesses should balance the rate of return to growth with the perceived levels of risk and ensure that they keep headroom in facilities or cash to guard against slower rates of recovery than they might expect,” he says.
“Most importantly, they should maintain an open dialogue and strong working relationship with their bank. Where slack in working capital has been managed out, businesses still need to be mindful of how they will fund growth.”
Managers’ appetite for risk may have abated, the degree of leverage available in the market has reduced and pricing of debt has moved up, so there should be an in-built prudence in what companies seek to borrow.
Basic housekeeping steps may also yield results – for example, assessing channels of distribution, evaluating marketing strategies and looking again at the supply chain. Some of this work may be too complex or time consuming during the good times. But in a downturn, suppliers, distributors and partners may be a bit more amenable to giving a discount or a bit of added value in exchange for some long-term security.
For instance, occupiers may be able to negotiate rent-free periods and discounts on shops, factories and offices. As we report elsewhere in this issue, it’s a good time to be recruiting, with plenty of applicants for each job, although employees in secure roles may need some persuading to leave.
Evans’ colleague, Allan Griffiths, area director for Lloyds TSB commercial, believes there may be opportunities further afield. “One way a business can significantly increase scale is to expand their geographical footprint,” he says. “As sales on the high street remain under pressure and exchange rates continue to favour exporters, there are a number of opportunities forWelsh companies in overseas markets. A business can boost its sales far quicker by targeting growing international markets.”
Because the pound is relatively weak, those overseas operations and hopefully profits will be worth more to the balance sheet than when sterling was stronger. But it may not be the best time to buy big overseas assets, if you reckon that sterling will recover.
Companies can also gain advantage by adding to their green credentials, even if they aren’t in an obvious sector such as wind power or organic food.
“Simple steps such as reviewing electricity and water use within commercial premises or becoming a paper-less office could have a significant impact on the bottom line,” says Griffiths. “Implementing schemes that involve initial capital outlay can generate even greater financial rewards in the medium and long term.”
Brian Morgan, head of the Creative Leadership and Enterprise Centre at the University ofWales Institute Cardiff, suggests taking advantage of low interest rates now to make long-term investments, either to take advantage of the most profitable opportunities or to reduce exposure to known threats. “Yes, there are uncertainties and a precautionary approach is to be recommended, but the real return on cash is likely to be zero for the next two years,” he says.
The main difference facing businesses in their approach to 2010, he says, is the nonavailability of credit on terms that people had come to expect. Restricted access to finance at a time of greater risks will mean companies must focus on cash flow more than ever.
“Invest wisely in those areas with the most likely profit opportunities but do not get over-extended,” he says. And he warns that companies that are heavily dependent on public sector investment should invest in diversification before spending cuts bite.
Also in: February 2010
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A taxing question
So the economy’s recovering, unemployment is falling and cautious optimism is everywhere. Is that it, then – the worst recession in 60 years, all finished? Not quite.
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Team towns
The Assembly Government is trying to coordinate economic development with Strategic Regeneration Areas, so is it working, asks John Sanders.
