Most private companies expect positive growth, majority plan upswing in hiring

PwC's Private Company Trendsetter Barometer tracks the business issues and best practices of privately held US growth businesses. It incorporates the views of 250 chief executive officers (CEOs/CFOs): 143 from companies in the product sector and 107 in the service sector, averaging $323 million in enterprise revenue/sales, and including large, $300M-plus private companies.

New York, February 7, 2012 — Growth projections remain strong among executives surveyed for PwC US’s Private Company Trendsetter Barometer: 78% expect positive growth over the next 12 months, with 35% projecting double-digit growth and 43% forecasting single-digit growth. The rate of expected growth for Trendsetter companies overall has risen 18%.

Hiring projections are also on the upswing. More than half (54%) of private companies say they intend to add to their workforce over the next 12 months (up from 48% the prior quarter), and only 3% plan to reduce headcount, with an overall 2.0% increase projected for private companies' composite workforce.

This focus on growth is in spite of private companies' ongoing ambivalence about the economy. Forty-five percent of Trendsetter executives say they remain uncertain about US economic prospects, while 39% voice optimism — up 12 points from last quarter, though still well below the 63% voicing optimism a year ago. The percentage expressing outright pessimism dropped to 16%, down eight points. Private companies' view of the world economy is comparatively dimmer, with nearly as many Trendsetter executives expressing optimism (24%) as pessimism (22%). Over half (54%) of private companies that sell abroad say they are uncertain about global economic prospects.

Against this backdrop, internationally active Trendsetter companies nonetheless forecast a 9.6% revenue growth rate for the next 12 months. The rate is highest (11.1%) for companies that sell in China, India, and Brazil. The average 12-month revenue growth rate for Trendsetter companies generally (both international and domestic-only) is 8.5%, with domestic-only companies projecting a 7.5% growth rate. Sales abroad are expected to contribute to 20% of total revenue for international Trendsetter companies overall and 28% for companies selling in China, India, and Brazil.

“After considerable economic misgivings in the third quarter of 2011, Trendsetter executives are increasingly optimistic," says Ken Esch, a partner with PwC’s Private Company Services practice. "But even in the late summer and early fall, when anxiety ran high about Congressional gridlock and the potential effect of the S&P downgrade of US debt, private companies didn't abandon their growth agenda. Instead, they maintained strong revenue forecasts and spending plans. Clearly, though, they're still concerned about the Eurozone's sovereign debt crisis — not just about its impact on European growth, but also the impact on the growth of emerging markets, which still rely a good deal on foreign direct investment and strong export revenue. And so we continue to see Trendsetter executives give a lukewarm assessment of the world economy.”

US Private Companies in Emerging Markets Plan Greater Spending Than Their Peers

In the final months of 2012, planned expansion into new markets abroad surged among Trendsetter companies that currently sell in emerging markets — rising to 60% (up 20 points from last quarter) — whereas 41% of international Trendsetter companies overall have such plans (up 8 points from last quarter). The percentage of domestic-only companies that intend to venture into international markets inched up 5 points to 7%.

 

"Although emerging markets are not immune to the effects of slow growth in Western economies, increased domestic consumption is providing a very solid buffer," says Esch. "As they see their wages and disposable income rise, emerging markets are growing less dependent on exports to the West. They're also exporting more to one another. Recognizing the tremendous growth potential in these markets, US private companies that have had success in one country are gradually fanning out into others."

International Trendsetter companies lead their domestic-only peers both in planned capital spending (53% versus 29%) and in planned increases in operational spending (83% versus 62%). Among Trendsetter companies selling in emerging markets, the numbers are higher still: 64% are planning major capital investments, and 88% plan increased operational spending. Taken as a whole (international and domestic-only businesses combined), Trendsetter companies that plan major capital investments (40%) and increases in operational spending (72%) have remained essentially the same percentage-wise since the prior quarter.

Forty percent of Trendsetter companies cite information technology as their top area of planned operational spending, followed by new products/services (29%), marketing and sales promotion (25%), business acquisitions (16%), and R&D (14%). Planned IT spending is higher among Trendsetter companies selling in international markets (48%) than among domestic-only companies (34%).

“Information technology is increasingly important to companies that want to penetrate and compete effectively in fast-growth markets," says Esch, "especially as the Internet is becoming a key sales channel there, via mobile devices in particular. For US companies to be as nimble as their emerging-market competitors — many of whom are unencumbered by legacy systems and can therefore leapfrog straight to ultra-high-speed mobile — they'll need to be more strategic about their IT investments going forward."  

Research and development is another area where planned spending by international companies outstrips that of their domestic-only counterparts (25% versus 5%). Planned increases in R&D spending are highest among Trendsetter companies that sell in emerging markets (33%).

"Reduced R&D spending at home doesn't mean that private companies have abandoned developing new products and services for US customers," notes Esch. "Some of them may simply be going about it differently than before. For instance, we've begun to see international Trendsetter companies engage in reverse innovation — test-driving products and services in emerging markets first and then rolling them out to their home markets at a later date. In light of this, domestic-only Trendsetter companies that have halted or capped their spending on R&D may want to rethink that decision rather than risk losing ground to their reverse-innovating peers."

The breakout of spending by international versus domestic-only companies is shown below (including a breakout of higher spending in key fast-growth markets abroad):

International Marketers
Domestic-Only Peers
Marketing in China/ India / Brazil
 
Plans over the Next 12 months
4Q 11
3Q 11
4Q 11
3Q 11
4Q 11
3Q 11
 
  • Major Capital Investments
53%
51%
29%
27%
64%
56%
  • Expansion to New Markets Abroad
41%
33%
7%
2%
60%
40%
Increased Operational Spending (net)
83%
83%
62%
63%
88%
89%
 
  • New Products/Services
43%
43%
17%
26%
43%
51%
  • Information Technology
48%
44%
34%
35%
48%
51%
  • Sales Promotion
31%
25%
21%
21%
33%
25%
  • R&D
25%
24%
5%
10%
33%
31%
  • Business Acquisitions
23%
21%
10%
11%
36%
22%

 

Concern About Gross Margins Drops
Though concern about lack of demand remains high, with 71% of private companies citing it as the chief potential barrier to growth, concern about profitability and decreasing margins has decreased to 30% — 7 points lower than the prior quarter.

Gross margins, however, haven't changed for the majority of private companies (59%). Twenty-two percent of Trendsetter companies report higher margins (up one point from last quarter), and 19% report lower margins (down 3 points), resulting in a net 3% of companies reporting higher margins. Only a net 9% report higher costs (down 8 points from the prior quarter). Similarly, just 6% (net) report  higher prices (down 4 points). Private companies that sell in emerging markets are reporting negative gross margins (net negative 5%), cost increases (net plus 19 percent), and price increases (net plus 22%).

“While private businesses continue to focus on cost-containment at home — where consumers are reluctant to pay higher prices — Trendsetter companies in emerging markets have greater pricing power," observes Esch. "That's because consumers are purchasing more in those markets, as wages and the standard of living improve. Higher wages, however, also mean higher production costs — a concern for private companies that also manufacture and source materials in emerging markets, making the ability to raise prices for the products and services they sell particularly important to those businesses." 

Limited Bank-Loan Activity

Banking activity for private companies remains limited, with only 7% reporting new financing. Just 6% are reporting new bank loans, with more loans being made to product firms (8%) than to service firms (2%). Concern about lack of capital as a barrier is down 8 points, at 18%, but is notably higher among small private businesses than large ones (22% versus 13%).

“The low percentage of new loans is not surprising," says Ken. "What we've generally seen among our private-company clients over the past several years is an emphasis on liquidity, with companies leveraging banks less and funding investments out of current cash flow.”

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