Private company optimism about the economy drops, yet spending plans strengthen



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 240 chief executive officers (CEOs/CFOs): 132 from companies in the product sector and 108 in the service sector, averaging $293 million in enterprise revenue/sales, and including large, $300M-plus private companies.

New York, August 11, 2011 — Reflecting growing global uncertainty, optimism about the US and world economies dropped sharply among private company executives surveyed for PwC US’s Private Company Trendsetter Barometer. Only 43% of executives say they’re optimistic about the outlook for the US economy over the next 12 months, a decrease of 21 points from the previous quarter’s pre-recession optimism level of 64%. Meanwhile, uncertainty about the US economy rose to 42%, up 13 points from last quarter and in line with a year ago. Rising uncertainty is also evident among those marketing abroad. The majority (52%) of international private companies are uncertain about the outlook for the world economy, and only 38% express optimism, down 16 points from last quarter.

“The decline in optimism reflects Trendsetter executives’ growing unease about a range of issues," says Ken Esch, a partner with PwC’s Private Company Services practice. "Those issues include debt crises at home and abroad, stock market volatility around the globe, high commodity prices, and rising political and social tensions in a growing number of countries. Although these conditions aren't causing Trendsetter companies to retrench — planned spending remains strong — private businesses are nonetheless more alert to potential warning signs than they were pre-2008.”

Revenue forecasts by Trendsetter executives also dipped this past quarter, although they remain well above levels of a year ago. Private companies’ forecasted average revenue growth rate dropped to 9.5%, down from 10.2% the previous quarter but up from a year earlier, when it was 9.1%. For private businesses selling goods and services abroad, own-company average revenue forecasts decreased from last quarter’s 10.7% to 9.5%, matching their domestic-only peers’ forecast of 9.5%. The percentage of Trendsetter respondents projecting positive own-company growth for the next year rose just slightly to 88% (up three points from last quarter) but is up 12 points from projections a year ago. Forty percent of Trendsetter executives forecast double-digit revenue growth, and 48% expect single-digit growth.

Costs and Prices Rise
Costs and prices continued their upward trend in the second quarter of 2011. Among Trendsetter companies overall, costs increased for 27% and decreased for 8%, resulting in a net increase of 19%. Prices rose for 19% of those surveyed and fell for 9%, with a net increase of 10%. The net increase in cost was markedly higher among private companies selling in China, India, and Brazil (21%), as was reflected in the significant gross-margin contraction they experienced this quarter (net negative 21%). Prices for this group increased a net 5%. For Trendsetter companies overall, gross margins were flat in the second quarter: 21% reported higher margins, and 20% reported lower margins, for a net positive 1%.

“Downward pressure on margins for private companies that sell in emerging markets reflects not only high oil and energy prices, which drive up transportation costs, but also signals increasing labor costs in those markets," says Esch. "While it’s too early to say whether this downward pressure will continue, we’ll be watching the numbers closely. In the meantime, what we can say with relative certainty is that the rate of growth in emerging markets will outpace that in mature markets for the foreseeable future. A temporary shrinking of margins is therefore unlikely to deter growth-focused companies from pursuing opportunities in these regions.”

Spending on Growth and Expansion Continues
Despite an environment of uncertainty and rising costs, private companies are still planning to spend in key areas over the next 12 months, with international marketers continuing to far outpace their domestic-only peers in prospective spending. Over half (54%) of international marketers are planning major capital investments, compared with 35% of domestic-only private companies. International Trendsetter companies also led their domestic-only peers in plans to increase operational spending — 84% versus 63%. Planned operational budget increases focus on information technology, new product/service introductions, and marketing and sales promotion. Almost one-quarter (24%) of companies expect to increase spending for geographic expansion, up three points from last quarter.

“To drive growth, private companies need to spend some of their cash reserves," says Esch. “So while cost containment remains a priority for our clients, we encourage them to balance that with a focus on opportunities for judicious investment — such as in diversifying their networks and revenue bases, both at home and abroad. Pursuing joint ventures and strategic alliances is one way to achieve that diversification, but at less cost than making outright acquisitions. Trendsetter data shows an uptick in these spending areas. Growth enablers such as information technology and product innovation are also likely to continue drawing investment from companies with strong growth agendas. We're seeing this especially among companies marketing abroad.”  

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
2Q 11
1Q 11
2Q 11
1Q 11
2Q 11
1Q 11
 
  • Major Capital Investments
54%
48%
35%
29%
61%
60%
  • Expansion to New Markets Abroad
36%
31%
2%
3%
42%
40%
Increased Operational Spending (net)
84%
78%
63%
64%
88%
85%
 
  • New Products/Services
44%
38%
23%
27%
49%
45%
  • Information Technology
47%
42%
26%
38%
49%
58%
  • Sales Promotion
32%
26%
23%
24%
40%
33%
  • R&D
21%
23%
4%
10%
28%
38%
  • Business Acquisitions
27%
25%
14%
14%
33%
38%

 

Hiring Momentum Slows
Private companies are pulling back slightly on their hiring plans over the next year, with planned net hiring dropping to 58%, down from the previous quarter's 63%. However, only 3% of firms expect net reductions, and 39% plan to maintain the size of their workforce. For respondents’ composite workforce, an overall increase of 2.0% percent is planned, down from 2.4% last quarter. The slowdown in hiring is largely due to service firms that are allocating resources to planned increases in major capital investments and operational spending.

"Many businesses find that to maintain profitability when making new capital investments, they need to manage their cost structure by scaling back other expenditures, such as hiring," says Esch. "IT spending, however, remains strong among firms making capital investments, and in fact may be enabling companies to reduce the need for new hiring. For example, technological improvements in automation can provide private companies in the manufacturing sector with an economical way to replicate the functions of workers laid off during the recession. That said, Trendsetter companies overall consider a lack of qualified workers a bigger barrier to growth now than they did a year ago. Rather than placing a lower premium on skilled workers, private businesses are simply becoming more creative in obtaining those employees — for instance, by absorbing talent into their workforce via mergers and acquisitions.”

Concerns about Growth Barriers Rise
Potential lack of demand remains the chief barrier to growth over the next 12 months, according to 75% of chief executives, up eight points from the previous quarter. Legislative/regulatory pressures rank second (52%), followed by concern about oil/energy prices (45%). Concern about the latter is up 20 points from a year ago, whereas concerns about demand and legislation/regulation have returned to roughly the same levels as 12 months earlier. Larger companies are markedly more worried about oil/energy prices than their smaller counterparts (53% vs 27%).

While concern about taxation as a barrier has risen five points since last quarter, it's still considerably lower than a year ago (35% vs 52%). Anxiety about the strength of the US dollar, meanwhile, rose nine points to 23% this past quarter, and concern about higher interest rates rose eight points to 21%. Lack of qualified workers is cited as a growth barrier by 23% of Trendsetter executives, compared with 14% a year earlier.

 “Considering the number and scale of tumultuous developments this year — in the Middle East, Japan, the Eurozone, and Washington — it's no wonder that private companies' anxiety has increased," says Esch. "Yet calm heads are clearly prevailing. Although the crisis of a few years ago underscored the imperative to heed warning signs, it also revealed the importance of staying the course. So far, private companies are taking things in stride, opting to put in motion carefully considered post-crisis plans rather than take a reactive stance."

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