When does Recovery begin?
Over the past 3 months this question has appeared in almost every meeting I've been in and it has just been confirmed that that the UK has now had its' sixth consecutive quarter of economic decline - the longest UK recession since records began!! In fact we are still in recession as our economic competitors appear to be emerging; Japan, Germany, France and even the US all reported growth in the last quarter.
Recovery in the stock market to "pre Lehman" levels has given cause for optimism but what's for sure is that there are no easy answers and no obvious predictions. One only has to remember that no-one predicted the economic decline and that the sheer pace of the fall took us all by surprise. In January 2008 out of the top 36 major private and public sector forecasters only one actually forecast a recession, and that was only a very moderate decline. With the benefit of hindsight it all seems so obvious though; years of excess, easy credit, mortgages at six times salary, personal credit at astronomical levels - how did no-one see it coming!!
In the retail sector in which I have been active for the past two and a half years we have seen some major and very rapid structural changes. The list of company failures is sobering with Threshers recently added to the list: Roseby's, Woolworths, Alexon, Zavvi, Blacks Leisure, Adams, Kwik Save, Principles, MFI, Barratts, Priceless, Whittards, USC amongst others. It certainly is about survival of the fittest; and whilst being very highly leveraged with little working capital headroom and over reliance on supplier credit was a recipe for increased profits on the upswing it has proved to be overtly risky in the face of a sales decline and credit squeeze. The reduced cover by trade indemnity insurers was particularly telling as the subsequent supply chain funding gap couldn't be plugged by either cash reserves or taken up through traditional loans or overdraft funding from the banking sector. On the other hand for good well run businesses this is a moment for opportunity; with huge amounts of capacity having come out of the market and more conservative stock purchasing we shouldn't witness a "feeding frenzy" on discounted stock again this year and margins should hold up better. That said, customers will not part with their money easily so it is vital to be offering very good value, remain competitive and be very responsive to customers.
So when can we look forward to an upswing? The fact that this recession has gone far deeper than previous ones will probably mean that it will last longer and that the recovery be far slower. Remember that this recession has involved all the major economies and is global in its nature. So even though sterling has fallen by 25% and is at a very competitive price we are unlikely to be able to simply assume exports will be our saviour given that others will have to expand their demand to be able to import. The fiscal measures taken have been enormous and unprecedented. We are probably looking at net debt in the UK to reach 80% within the next two years and world wide recovery is still very fragile. Many economists believe that the government action is simply stalling the decline and that the current 'V' shaped recession curve prediction is merely half a 'W'. However given the depth of the decline I believe that growth trends will allow a quicker accelerator effect. We are probably at the bottom of the curve now and even if growth picks up to only 1% in 2010 with demand growing to 2% or 3% businesses will have to start recruiting again, especially given the extent to which the private sector has been able to offload excess capacity over the past two years. At a senior level the need to make structural changes and efficiency improvements will require skills and expertise which companies don't readily have. What is for sure though is that companies which have been able to keep their heads above water this year in whatever sector will be well placed to take advantage of the upturn in business whenever it starts to emerge.
Robert Deri is an experienced Business Consultant and Interim Manager who has specialised in leading major cost improvement and strategic change programmes. Having trained with KPMG he has worked at senior levels in Retail including mail order and internet, Mobile telecoms, Computer gaming and Technology. Robert was on the Board at BT Mobile Communications, Group Finance Director at Grattan plc and ZOO Digital plc and has experience of AIM listing, institutional fundraisings, VC transactions and international commercial negotiations.