PwC's Private Company Trendsetter Barometer tracks the business issues and best practices of privately held US growth businesses. It incorporates the views of 240 chief executive officers (CEOs/CFOs): 135 from companies in the product sector and 105 in the service sector, averaging $352 million in enterprise revenue/sales, and including large, $500M-plus private companies.
New York, May 15, 2012 - Confidence about the US economy's 12-month outlook rose sharply this past quarter among executives surveyed for PwC US’s Private Company Trendsetter Barometer. Sixty percent of Trendsetter executives voiced optimism (up 21 points from the prior quarter), with just 8% expressing pessimism; the remaining 32% were uncertain.
Confidence about the global economy also rose, with optimism being voiced by 29% of Trendsetter companies that sell abroad (up 5 points). Just 10% expressed pessimism, while the majority registered uncertainty (61%).
“Trendsetter executives' confidence in the US economy has returned to nearly the same level it was a year ago, and pessimism levels keep dropping, indicating private companies' belief that the economy continues to recover, if at a slow pace," says Ken Esch, a partner with PwC’s Private Company Services practice.
"Last year, we saw confidence plummet to 27% on the heels of policymaking gridlock and the S&P's downgrade of the US debt rating," Esch further notes. "While we don't anticipate a repeat of last year, these are still volatile times, and so optimism about the US economy may continue to fluctuate. On the other hand, optimism about the world economy has seen no dramatic movement among Trendsetter executives over the last several quarters, reflecting the Eurozone's difficulties of the past year. With the political uncertainty around austerity measures and the recent announcement that Spain and the UK are officially in a double-dip recession, Trendsetter optimism about the world economy might stay at its current level for the time being."
Private Companies Project Strong Growth, Set Higher Revenue Targets
Overall, 90% of private-company executives expect positive revenue growth for the next 12 months (up from 78% last quarter). They forecast an average revenue growth rate of 9.5%, up from 8.5% the prior quarter. Much of this increase comes from domestic-only companies, which forecast a growth rate of 9.9% (up from 7.5%). Meanwhile companies selling abroad forecast a growth rate of 9.0% (down from 9.6%).
Despite their uncertainty about the world economy, Trendsetter companies selling abroad expect that 21% of their total revenue over the next year will come from outside the United States. Sales abroad improved in the first quarter of 2012, with 43% of international Trendsetter companies reporting higher sales (up 6 points) and only 4% reporting lower sales.
"Many of the Trendsetter companies that sell abroad are operating in a two-speed economy because they have a presence in both Western Europe and various emerging markets," says Esch. "So while we see the survey results clearly reflecting companies' ongoing concern about the Eurozone, where economic growth remains sluggish for the most part, we're also seeing those same businesses maintain their focus on fast-growth markets outside Europe. Those markets have become integral to the long-term growth strategy of many US private companies."
Hiring Holds Steady
To keep pace with increased revenue projections, 59% of private companies plan to add to their workforce over the next year (up five points). Only 3% plan to reduce the number of people they employ, and 38% expect headcount to stay about the same. Overall, a 1.8% increase is projected for private companies’ composite workforce.
“Though private companies continue to hire, it’s mostly at the margins, and we do not expect significant additions to headcount," says Esch. "One reason we're seeing only small increases to the workforce is that companies are having difficulty finding people with the right skills for the jobs available. We've seen this in the Trendsetter findings for some time now, with roughly one-quarter of Trendsetter companies consistently citing lack of qualified workers as a barrier to growth.”
Operational Spending Remains Strong, Led by International Marketers
Seventy-one percent of private companies plan to increase operational spending over the next year. Trendsetter companies that sell abroad outpace domestic-only businesses in planned boosts to operational spending (81% of international companies vs 61% domestic-only), with top areas of increased investment including information technology (40% of Trendsetter companies), new product/service introductions (30%), and marketing and sales promotion (26%) topping the list of spending areas reported by companies. Trendsetter companies are also planning to engage in new strategic alliances (25%), new joint ventures (23%), and the purchase of another business (19%).
“Information technology continues to lead operational spending as private companies seek to better understand and engage their customers through social media and data analytics,” says Esch. “Integrating digital strategies into their marketing plans also allows companies to do more with fewer people. Here many of them see great upside potential for a moderate investment.”
The number of private companies planning major new investments of capital over the next 12 months has also held steady at 38% (down just two points from the prior quarter). More international businesses expect major new investments of capital, compared with their domestic-only peers (48% versus the 28%), with Trendsetter companies in emerging markets leading the way at fifty-nine percent.
Trendsetter companies planning expansion to new markets abroad rose to 27% (up four points), the percentage being highest among companies that already have a presence outside the United States (47%), and higher still among businesses selling in China, India, and Brazil.
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:
Gross Margins Stay Positive, But Tighter in Emerging Markets
Gross margins remain positive for private companies, with 23% of respondents reporting higher margins and 15% reporting lower margins, resulting in a net 8% having higher margins (up 5 points from the prior quarter). Net gross margins were notably better for international marketers (plus 19%, up 16 points) versus their domestic-only peers (minus 3%, down 5 points).
Costs were higher for 23% of private companies and lower for 10%, resulting in a net 13% with higher costs (up 4 points). Prices were higher for 16% and lower for 6%, for a net 10% with higher prices (up 4 points). Gross margins were tighter in emerging markets due to increased costs (net plus 26%); price increases were also higher (net plus 21%).
“Higher costs for labor and commodities are compressing margins for private companies operating in emerging markets,” says Esch. “The good news for those companies is that, unlike their domestic-only peers, they have greater price flexibility, since consumption in fast-growth markets continues to rise, enabling companies to pass on some of the higher costs to their customers.
Potential Lack of Demand Still a Concern
Despite their renewed economic optimism, private companies remain concerned about potential lack of demand for their products and services over the coming 12 months - reported by 68% of Trendsetter companies. Slightly less than half of respondents (46%) regard legislative/regulatory pressures as a potential barrier to growth, while over one-third cite anxiety about oil/energy prices (38%) and increased taxation (36%). Twenty-seven percent are concerned about profitability/decreased margins, and just 17% see lack of capital as a barrier to growth, with only 7% of private companies reporting new financing activity in the first quarter of 2012.
Notably, concern about pressure for increased wages has risen steadily over the past year, up from 15% to 24%. “At the moment, what we’re seeing is that many private companies are opting to increase pay as a way of keeping skilled workers rather than seek new hires, who might be costly to train. I think there's real concern, however, that if the current skills gap in the overall workforce doesn't close soon, unemployment or underemployment will become a drag on private-company growth. To gain meaningful growth in the economy, we need to get more people back to work.”
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