Private companies see strong US economy, less certain about world economy



PwC's Private Company Trendsetter Barometer tracks the business issues and standard industry practices of leading, privately held US businesses. It incorporates the views of 256 chief executive officers (CEOs/CFOs):140 from companies in the product sector and 116 in the service sector, averaging $294.2 million in enterprise revenue/sales, and including large, $300M-plus private companies.

New York, May 31, 2011 —Signaling sustained confidence in the strength of the domestic market, 64% of private-company executives surveyed for PwC US's Private Company Trendsetter Barometer say they're optimistic about the US economy’s prospects over the next 12 months, up one point from last quarter and 13 points from a year ago.

This matched the percentage of Trendsetter executives who expressed this sentiment pre-recession, in the second quarter of 2007. More international private companies are optimistic about the US economy (67%) than domestic-only companies (61%). Meanwhile, optimism about prospects for the world economy among private companies selling abroad has held relatively steady, dropping just two points to 54%, with uncertainty rising three points to 38%.

“We're seeing the return of the US consumer and the strengthening of the domestic market," says Ken Esch, a partner with PwC’s Private Company Services practice. "At the same time, there has been increasing uncertainty around the globe, including political unrest, natural disasters, and renewed concern over debt problems in European countries. It stands to reason, then, that Trendsetter companies operating abroad have begun to view the US economy somewhat more positively than the world economy. Yet the recession has also shown the limitations of having a domestic-only business, and so we expect that private companies will continue to seek opportunities abroad -- particularly in emerging and fast-growth markets -- as an effective way to hedge economic risk at home.”

Trendsetter executives’ own-company growth forecasts emphasized their perception of strength across markets and sectors. Eighty-five percent forecast positive own-company growth, up from 83% last quarter, with 40% projecting double-digit revenue growth and 45% projecting single-digit growth. Only 4% expect negative growth revenue over the next 12 months. The forecasted average growth rate among private companies rose this quarter to 10.2%, up from 9.8% last quarter. International marketers pulled ahead of their domestic-only peers, forecasting 10.7% growth versus 9.9%.

International Companies Continue to Outpace Domestic-Only Businesses on Spending

Private companies operating abroad remain ahead of their domestic-only peers in prospective spending for the next 12 months, consistent with previous quarters. Of the private companies with an international presence, significantly more of those operating in China, India, and Brazil are planning major capital investments in the next year (60%), compared with private companies operating in international markets overall (48%), while only 29% of domestic-only businesses are planning the same. Private companies in emerging markets are also outpacing their peers in plans to increase operational spending -- 85%, compared with 78% of international companies and 64% of domestic-only companies. Planned increases focus on information technology, new products and services, research and development, and business acquisitions.

“The rising percentage of Trendsetter companies that are looking to make business acquisitions is consistent with an overall return to a growth strategy for private companies, post-recession,” says Esch. “Although costs have risen somewhat for international companies, demand and consumption in emerging markets has kept pace, such as in China, India, and Brazil, which are the primary focus for expansion by leading private companies. Companies hesitant to go it alone in these markets may want to consider pursuing joint ventures and strategic alliances, which can be an effective way to establish key relationships and tap local networks.”

The breakout of spending by international versus domestic-only companies is shown below:

International Marketers
Domestic-Only Peers
Marketing in China/ India / Brazil
 
Plans over the Next 12 months
1Q 11
4Q 10
1Q 11
4Q 10
1Q 11
4Q 10
 
  • Major Capital Investments
48%
43%
29%
30%
60%
52%
  • Expansion to New Markets Abroad
31%
32%
3%
5%
40%
43%
Increased Operational Spending (net)
78%
84%
64%
65%
85%
98%
 
  • New Products/Services
38%
31%
27%
31%
45%
36%
  • Information Technology
42%
36%
38%
28%
58%
39%
  • Sales Promotion
26%
30%
24%
23%
33%
25%
  • R&D
23%
17%
10%
5%
38%
25%
  • Business Acquisitions
25%
24%
14%
7%
38%
30%

Costs Rise Sharply and Prices Follow

Costs and prices both rose sharply for private companies in the first quarter of 2011. Thirty-four percent of those surveyed report that costs increased, while only 6% report that costs decreased, for a net increase of 28%, up 16 points from last quarter. A higher percentage of international firms said their costs had increased, as compared with domestic-only companies -- net plus 30% versus 26%. Prices rose for 22% and fell for 8%, for a net increase of 14%, up 11 points from the previous quarter.

Gross margins continued to be slightly on the positive side, as 24% reported higher margins and 21% reported lower margins, for a net positive three percent. Despite rising costs, only 31% of Trendsetter executives are concerned that profitability/decreasing margins will be a barrier to growth over the next 12 months.

“While costs have been increasing rapidly, private companies have still been able to maintain their margins," says Esch. "In a challenging pricing environment, they're faced with either eliminating costs in the supply chain or increasing prices -- or a combination of both. The need to manage supply chain costs will underscore the importance of maintaining strong relationships with suppliers.”

Hiring Picks up Momentum, Concern about Lack of Qualified Workers Rises

Sixty-three percent of Trendsetter executives say they plan to hire new employees over the next 12 months, up six points from the prior quarter. Only 2% plan net reductions. Overall, an increase of 2.4% is planned for the survey panel’s workforce, up from 1.8% last quarter. Private-company executives report that over the next year their hiring efforts will primarily target professionals/technicians (38%) and sales/marketing (24%). Notably, more than one-quarter (26%) of private companies surveyed cite the lack of qualified workers as a barrier to growth, an increase of 8 points from the previous quarter and up 15 points from a year ago.

“The lack of qualified workers cited this quarter by private-company executives highlights a trend we’re seeing among our clients,” says Esch. “As companies are looking to succeed in an increasingly competitive marketplace, the small pool of skilled workers that can execute on companies’ spending and growth plans is in high demand. It will become crucial for companies to have innovative programs in place to attract and retain these workers.”


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