As the economy picks up following a Brexit decision will firms adapt in time asks ParcelHero

Study: Will Brexit resolution – whatever its shape – bring dividends or disaster?

UK businesses are crying out for a resolution to Brexit, with many organisations putting spending on hold while they wait for a decision. But ParcelHero’s Head of Consumer Research, David Jinks MILT, argues that companies should be getting into shape now, rather than treading water. Most companies go bust immediately after, rather than during, a downturn.

 

Retailers and logistics companies have put investment on hold while they await a final Brexit decision. But whether there’s a hard Brexit, a soft Brexit or no Brexit, what they most want is some kind of resolution.

But perhaps businesses should be careful what they wish for: recent recessions have seen many companies surviving a downturn only to go bust when economic stability returns.

Data from previous recessions and slowdowns shows more businesses fail as the economy recovers than at the height of a recession. The same could well happen after Brexit is finally resolved, whatever the outcome, as businesses struggle to switch from cautious retrenchment to renewed investment.

In 2009,  as the full impact of the 2008 subprime mortgage disaster hit the UK, 37 large UK retailers failed. As the economy hauled itself out of recession four years later in 2012 you might expect fewer retailers to collapse, but in fact 54 major UK stores went bust.1

In the US, the ‘Great Depression’ played out a little earlier, arriving in December 2007 and officially ending in June 2009 2 . Nonetheless, at the height of the recession in 2008 ‘just’ 138 public companies and 65,584 businesses failed; but in 2009, as the recession ended,  210 public companies and 89,402 companies crashed. 3

In the last two recessions, retailers suffered falling sales and shrinking margins, coupled with rising store closures and bankruptcies—as one might expect. But the respected business analysts Deloitte said in a recent report: ”What was more surprising, was the degree to which the structural change of the industry not only continued unabated during the periods of downturn, but actually appeared to accelerate, leaving many of those that failed to reposition during the downturn even more exposed when the market returned.”

Said the report: “The companies we studied that experienced this tended to be reactionary—they cut, looked inward, and were not able to position well for a future recovery.” 4

There’s no doubt that Brexit uncertainty has slammed the brakes on business growth for retailers, logistics organisations and manufacturers alike. Things do not look rosy. The British Retail Consortium says May saw the worst ever decline in monthly sales since it started keeping records in 1995. Manufacturing also slumped. Everything points to the fact that we are in something of a trough.

I recently chaired a, supposedly well-timed, Brexit debate; staged as part of the influential annual Richmond Supply Chain Forum for leading retailers and logisticians. It was held on the 28th of March: the day before the UK was supposed to leave the EU. As we now know, that never happened; businesses were left in continuing limbo. During the debate, over a quarter of leading professionals revealed their companies were holding back on investment and new projects until Brexit is resolved. Many business leaders at the event argued that, while organisations could plan for major potential disruptions such as Y2K because they knew the nature of the problem, they were unable to properly plan for Brexit because they still had no idea whether it would be hard, soft; or even happen at all.

But life is never straightforward; and there is plenty of evidence that businesses may find it far harder than they might expect to start growing again as market confidence returns. The Harvard Business Review had some sobering statistics to reveal in its report on how businesses responded to the 2008 collapse: Seventeen percent of the companies in its study didn’t survive a recession: they went bankrupt, were acquired, or became private. The survivors were painfully slow to recover from the battering. About 80% of them had not yet regained their pre-recession growth rates for sales and profits three years after a recession; in fact, 40% of them hadn’t even returned to their absolute pre-recession sales and profits levels by the end of that time period. Only a small number of companies—approximately 9%—flourished after a slowdown.

The obvious solution to surviving a recession is retrenchment. But firms that cut costs faster and deeper than rivals don’t necessarily flourish. They have the lowest probability—21%—of pulling ahead of the competition when times get better, according to Harvard’s study. But businesses that boldly invest more than their rivals during a recession don’t always fare much better either. They enjoy only a 26% chance of becoming leaders after a downturn. And companies that were growth leaders coming into a recession often can’t retain their momentum; about 85% are toppled during bad times. 5

Many of the companies that merely limp through a recession are slower to recover and never really catch up. Pulling up the drawbridge, retrenching and cutting back on marketing and R&D will often give any kind of business the ability to cling on during the worst of a dip such as this pre-Brexit hiatus. But it leaves companies disadvantaged when it’s time to lower the drawbridge again and sally forth for new opportunities.  As markets start to pick up, some companies are just too slow to turn the ship around to take advantage of new opportunities, and are left behind.

But for companies quicker to react, there is an equally disastrous potential trap. These businesses hire more staff and purchase higher quantities of stock to keep up with increased demand. The problem is then the dreaded issue of cash flow: the time lag between investing and being paid money can be just too long for many businesses struggling to keep up in growing markets. By the time stock has been purchased or manufactured and the customer has paid, the wolves are baying at the door.

Whether British retailers, logistics organisations and manufacturers find themselves suddenly chasing new markets in the USA, Australia or India post a tough Brexit; or re-establishing core markets in Germany and France following an exit from Brexit – companies are going to have to change tack rapidly. Ramping up stock levels and marketing spend to meet the new market will be a gamble, whatever the shape of the final Brexit. But continued cuts are equally harmful in a growth market. British businesses will face serious choices whenever we emerge from the fog of Brexit, and no matter how hard or cushioned its final shape.

Of course, there is one more option open to UK businesses, and that’s to start planning now; rather than await our Brexit fate.  According to new research from the international global management company Bain & Company, Beyond the Downturn: Recession Strategies to Take the Lead, the final answer might be to address depressed markets now, rather than wait for recovery. Bain & Company’s analysis of nearly 3,900 companies worldwide found that winners diverged from losers during the past recession and widened the profit and market cap gap during the subsequent expansion. It found well-prepared companies took action both during and after past recessions: by taking out excess costs, identifying a short list of projects that formed their next business model, and spending and hiring before markets rebounded. That included taking decisive action such as selling uninspiring non-core businesses now, rather than waiting for the market to pick up in the hope they might return to their previous value.

Trying to react hastily in a crisis may not work, but neither may overstretching in the growth period following the Brexit stall. As Bain’s report emphasises: ‘To raise the odds of success, it is more effective to map out a series of offensive moves for the next few years that aim to propel a stronger enterprise through and out of a downturn.” 6

 

 

Sources:

1 https://www.retailresearch.org/whosegonebust.php

2 https://www.lexology.com/library/detail.aspx?g=c796b0ee-bcb2-465b-a966-53b0c49c9c6e

3 https://www.jonesday.com/the-year-in-bankruptcy-2009-02-09-2010/

4  https://qz.com/1527291/a-global-accounting-firm-is-telling-brands-to-prepare-for-a-recession/

5 https://hbr.org/2010/03/roaring-out-of-recession

6 https://www.bain.com/it/about-bain/media-center/press-releases/2019/winning-in-a-downturn/

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