Mid-market Britain 2018: the view from the boardroom

Transcription

1 Mid-market Britain 2018: the view from the boardroom In partnership with

2 Contents 03 Foreword 04 Executive Summary 06 Introduction 07 Internationalisation 08 Exporting and importing among MSBs 10 The rationale for not exporting 10 Anticipating export growth and future challenges 12 Preparing for Brexit 12 A regional perpective on internationalisation 14 Productivity 15 Productivity growth past and prospects 18 Current challenges Brexit and beyond 19 Sustainability 23 A closer look at the sectors 24 Sectoral perspectives on future growth 26 Primary Sector 28 Technology, Media and Telecoms 30 Manufacturing 32 Retail and Wholesale 34 Professional Services 36 Construction 38 Other Services 40 Annex 1: Survey methodology Foreword Understanding the challenges and opportunities in the market is crucial to building a sustainable business. This is particularly important as leaders across the UK grapple with issues ranging from the threat of cyber crime to future workforce planning. Mid-market Britain 2018: the view from the boardroom aims to give insight to provide clarity and focus to management teams of businesses with a turnover of 5-250m in this time of business uncertainty. To create it we ve partnered with Professor Stephen Roper from Warwick Business School, who specialises in innovation, enterprise growth and regional development. His analysis is based on interviews with 861 medium-sized businesses, who have shared their opinions about the industry s prospects for growth. In the report we explore their thinking on the challenges and opportunities in relation to three strategic themes: internationalisation and trade, productivity and sustainability. We also looked at these with a sector perspective to see how views differ from agriculture and technology, media and telecoms (TMT) to manufacturing and retail. Having worked closely with management teams for many years, it came as no surprise that underpinning all these themes was a focus on people and talent: the real driving force behind any business. NatWest is a keen supporter of UK enterprise and a key insight for me was how a company s exporting strategy dictates their view and attitudes to the other strategic themes of productivity and sustainability. I hope you will find relevant insight within this report to support your future growth. I would encourage you to reach out to your local Relationship Manager if you would like to discuss any of the themes in the report in more detail. Andrew Gray Managing Director, Corporate & Commercial Coverage NatWest About the author Stephen Roper is Professor of Enterprise at Warwick Business School and Director of the Enterprise Research Centre ( His research interests include innovation, innovation policy and the growth and development of small and medium-sized firms. Stephen regularly acts as an advisor for UK government departments as well as the OECD and World Bank. You can contact him at stephen.roper@wbs.ac.uk. 2 3

3 Introduction Executive Summary Drawing on interviews with 861 leaders of medium-sized businesses (MSBs) across Great Britain conducted by Charterhouse Research this report provides a view from the boardrooms of the UK s hidden champion businesses. MSBs are defined here as firms with turnover between 5m and 250m. In general, MSBs are optimistic about the future. The majority anticipate an improvement to growth and productivity over the next year. 21% of MSBs anticipate sales growth of 5%-9% over the next year and 7% anticipate sales growth of 10% or more. The strongest growth expectations are among larger firms (with a turnover of 50m or more). Internationalisation 73% of MSBs export and obtain around 22% of their sales from abroad. Just under half of MSBs are importing either goods or services. Around a fifth of MSBs do not trade internationally. MSBs exports are heavily dependent on EU markets. 85% of exporting MSBs sell into EU markets and this accounts for around 58% of all export sales by MSBs. Given this dependence on EU markets, it is perhaps unsurprising that the majority of MSBs anticipate some Brexit impact. After the EU, the next most important market for MSB exports is North America. MSBs exporting beyond Europe anticipate a 10% increase in export sales over the next 12 months. EU exporters anticipate a 1% fall in export sales, reflecting challenging market conditions and the effects of Brexit, which is cited as the most common challenge for exporters. Other challenges included lack of contacts, resources or competition. Only half of all MSBs have contingency plans in place for Brexit or are currently developing action plans. The most common preparatory activity relates to establishing the nationality and legality of all employees. 14% of MSBs have established new offices in the EU in preparation for Brexit, with a similar proportion currently seeking to establish EU offices. Mid-market businesses are relatively optimistic about the next 12 months 61% expect the UK economy to grow 61% expect their sector to grow Productivity, strategic priorities 55% of MSBs suggested that their productivity had increased over the 12 months prior to the survey. A slightly larger proportion anticipate productivity growth over the next 12 months. Larger firms with turnover of 50m plus were most likely to have made productivity improvements over the last year, and to anticipate future productivity improvements. However, 41% of MSBs suggested productivity levels were a significant strategic concern. This is lower amongst smaller MSBs with sales of less than 10m per annum. Only roughly 1 in 4 firms selling only in the UK market highlighted productivity as a strategic priority for their business. Sustainability 58% of MSBs regard sustainability as extremely or very influential in their decision making. Concern with sustainability increases both with firm size and the extent of the firm s export footprint. To become more sustainable, 66% of MSBs have conducted an energy efficiency audit, 62% have invested in new technologies to drive energy efficiency and 65% have committed to ethical behaviour through a Corporate Social Responsibility (CSR) policy over the last three years. 67% expect their gross revenues to increase 63% expect their operating profit to increase 4 Base: All respondents (861) 5

4 Introduction Internationalisation This report provides a view from the boardroom of MSBs across Great Britain. The latest figures from the Office of National Statistics suggest that there are 55,400 MSBs in the UK with a turnover between 5m and 250m. This is about 2.1% of all UK firms 1. At the smaller end, MSBs include companies such as Excel Manufacturing Ltd, the Huddersfield blind manufacturer and Guildford-based Galleon Care Homes Ltd. At the larger end are MSBs such as Wrigley Ltd (owned by Mars), best known as the manufacturer of chewing gum. Less of a household name, but similar in terms of turnover, is Sunseeker International Ltd, the Poole-based manufacturer of luxury yachts 2. We talked to business leaders in 861 MSBs in April and May 2018 and asked their opinions about the prospects for their business and the challenges they face (see Annex 1). 21% of MSBs are anticipating sales growth of more than 5% over the next year, with 7% anticipating higher sales growth of 10% or more. In later sections we explore the background to these expectations of growth: The strongest growth expectations are amongst larger firms (with turnover of 50m or more), with 10% of these firms anticipating sales growth of 10% or more. Expectations of high growth also vary between sectors, with 12% of firms in the Primary sector (Agriculture, Energy and Sustainability) and 14% of firms in Retail and Wholesale sectors anticipating an increase in annual sales. Professional and Other Services firms are less optimistic, with only around 4% of firms expecting high growth over the next year. We will start by focusing on internationalisation and consider how firms see Brexit impacting on their future prospects. We also consider how MSBs are preparing for Brexit and their state of readiness. Then we will go on to look at productivity, with the vast majority of MSBs anticipating future growth. We will then focus on sustainability, reflecting the finding that 58% of MSBs regard sustainability as an important or very important influence on their strategic decision making. Finally, we will provide a sectoral perspective on productivity growth, exporting and the key challenges faced by firms in different sectors. 1 Figure at March No size breakdown above 50m turnover was published in Source: UK business activity, size and location, 2016, Office of National Statistics. Available at: 2 Data from Company Accounts accessed using FAME (Financial Analysis Made Easy). 6 7

5 Internationalisation Research studies have strongly linked internationalisation to innovation, business growth and productivity 3. Exporting offers firms the opportunity to learn from foreign competitors the so-called learning by exporting effect and to spread the costs of developing new products or services across greater sales volumes. At the same time, exporting involves additional risks primarily linked to exchange rates and potential market volatility as well as logistic and operational issues 4. 73% of mid-market businesses are exporters Exporting and importing among MSBs Our survey suggests that 73% of MSBs export, and such exporters make an average of 22% of their sales from abroad. Across the population of MSBs, a smaller proportion of firms 49% are importing either goods or services, accounting for an average of 35% of all purchases. The overlap between importers and exporters is relatively strong, with 42.3% of MSBs both importing and exporting (Figure 2.1). Around a fifth of MSBs do no international trade. Figure 2.1: Internationalisation of MSBs Figure 2.2: Export profile of MSBs by market Figure 2.3: Export share of sales of MSBs 20.6% No international trade Over 6 in 10 MSBs export less than 30% of their output. At the other extreme, a quarter of MSBs export 40% or more of their sales. However, MSBs exports are heavily dependent on EU markets. Firms exporting to each area Value of exports by area % of goods are EXPORTED 30.5% Export only 42.3% 6.6% Export and import Import only 85% of exporting MSBs selling into EU markets account for around 58% of all export sales by MSBs (Figure 2.2). After the EU, the next most important markets for MSB exports is North America, an export destination for 37% of MSB exporters and accounting for around 13% of all export sales. The Middle East and other European countries outside the EU are almost as important (Figure 2.2). EU 85% 58% North America 37% 13% Middle East 28% 9% Other Europe (outside EU) 28% 7% Asia Pacific 27% 7% Africa 17% 4% Latin America 10% 2% 27% None 19% Low (1-10%) 27% Low-medium (11-30%) 8% Medium-high (31-40%) 26% High (Over 40%) Base: All respondents (861) 3 Love, J. H., & Roper, S. (2015). SME innovation, exporting and growth: A review of existing evidence. International small business journal, 33(1), Love, J. H., & Ganotakis, P. (2013). Learning by exporting: Lessons from high-technology SMEs. International Business Review, 22(1),

6 The rationale for not exporting Nearly a quarter of all MSBs do not export, and around a fifth engage in no international trade (i.e. neither importing nor exporting). Some of these domestically focused firms have products or services that are not suitable for export markets. For other MSBs the costs or logistics of exporting make it too expensive or risky. One firm commented: It would cost too much to export food products. Others focused on the logistical challenges, including accommodation costs for people working abroad and construction infrastructure being UK-based. Commercial judgements played a role in other firms decision to focus on the UK market: We prefer to stick with British-based companies as we can service this market without too much financial exposure. While for others there was a wider intent: We are getting out of the EU and want nothing to do with them!. Anticipating export growth and future challenges The impact of EU markets on MSBs export sales and the imminence of Brexit suggest the value of looking in a little more detail at the challenges and opportunities facing exporters. We focus on three groups of firms: 27% 25% 48% are domestically focused selling only in the UK market for the variety of reasons discussed in Section 2.2. We are in the car business in the UK. Right-hand drive cars cannot be exported. We are healthcare providers operating in the UK market. There would be no export market for our services. We provide business services in the UK. We would not be interested in doing this abroad as we would prefer a bigger share of the UK market. are EU exporters which export only to the EU and might be expected to be impacted most severely by a poor Brexit deal. are global exporters which have a more global export footprint, trading outside the EU. Looking forward over the next year, we see a very different profile of expected export growth between EU exporters and global exporters. Global exporters are, generally, more optimistic with 50% anticipating an increase in export sales, 9% anticipating a fall and 37% anticipating stable sales. EU exporters are, perhaps unsurprisingly, less optimistic, with 28% anticipating an increase in export sales, 26% a decrease and 41% stable sales. In terms of percentage growth, this translates into an anticipated decline in export sales by EU exporters of 0.5% whilst exports of global exporters anticipate an increase of 10% (Figure 2.4). In terms of export development, only around 8% of domestically focused firms anticipate moving into export markets over the next year. We asked MSBs which factors represented challenges for expanding their exporting or entering new geographic markets. The most common factor representing a significant or considerable challenge for both EU exporters and global exporters was Brexit, cited by 42-46% of firms (Figure 2.5, overleaf). Brexit was perceived as a less common challenge for domestically focused firms seeking to expand exports. Here, regulatory issues, competition in international markets and the scale of their firm were more common issues. Beyond Brexit, the challenges emphasised by EU exporters and global exporters differed significantly, perhaps suggesting some alternative profiles of potential policy support (Figure 2.5, overleaf): For EU exporters, the key challenges to export expansion are perceived as a lack of contacts or knowledge of export markets and the costs of exporting; For Global exporters already selling beyond the EU, key challenges are related to regulatory issues in international markets, local competition and the size and potential reach of their business. In policy terms this suggests that the support needs of firms at each stage of the export journey, from domestic markets through to EU markets, might be rather different. For domestically focused firms, support overcoming potential regulatory issues may be important, while for EU exporters supporting the development of contacts in non-eu markets may be more important. Regulatory issues may also be important in supporting global exporters to extend their export footprints. Figure 2.4: Anticipated total growth of exports: EU and global exporters % Increase in export sales % EU exporters 10% Global exporters 10 11

7 Figure 2.5: Top 5 export market challenges for MSBs: Brexit dominates firms concerns 1 Brexit 46% 42.1% 15% 2 Size of the company 24.7% 16.7% 2.3% 3 Limited resources within the company 24% 17.6% 10.9% 4 Lack of local knowledge or contacts 25.9% 29% 10.1% 5 Lack of capital to fund expansion 23% 21.1% 15.8% Global export EU export Domestically focused firms Preparing for Brexit As Brexit dominates exporting firms concerns, we asked firms trading internationally what steps they have taken, or are taking, to prepare for Brexit. This picture is likely to change rapidly over the next few months, but our data provides a good picture of how prepared MSBs are for Brexit as of April/May For each possible measure we focus on whether firms are: Not considering Brexit an issue Aware of an issue but have not yet done anything about it Are considering Brexit an issue now Are in the process of putting policies in place Have policies in place Around half of all MSBs either have plans in place for Brexit or are currently developing action plans across a range of areas linked to trade, supply chains and ensuring the legality and rights of their workforce (Figure 2.6). The most common preparatory activity relates to establishing the nationality and legality of all employees. 19% of MSBs have completed such an audit, with a further 29% of firms currently carrying this out. 14% of MSBs have established new offices in the EU in preparation for Brexit with a similar proportion currently seeking to establish EU offices. Slightly smaller proportions of firms have completed contingency planning for any border disruption, mapped and audited supply chains or obtained trusted trader status. Notably, a further 19% of MSBs are currently seeking trusted trader status. Figure 2.6: Preparations for Brexit (sorted by highest % of actions not considered) Setting up offices in the EU zone 29.52% 21.36% 19.47% 15.17% 14.48% Building software for customs declarations 22.12% 21.42% 28.11% 18.27% 10.08% Obtaining trusted trader status 20.44% 21.82% 27.15% 19.31% 11.28% Mapping and auditing supply chains % 27.35% 20.87% 11.96% Deciding to make use of EU free-trade agreement 18.93% 22.62% 29.62% 16.61% 12.22% Assessing supply chain shipping responsibilities 18.62% 18.86% 33.17% 19.78% 9.57% Ensuring adequate cash flow if VAT charged at borders 17.46% 19.01% 31.42% 21.39% 10.72% Developing contingency plan if border disruption 16.37% 21.15% 31.13% 18.62% 12.73% Knowing employee nationalities to ensure legality 10.66% 17.18% 23.98% 29.07% 19.11% A regional perspective on internationalisation There is a clear and marked difference by region in the level and type of export activity (Figure 2.7). Analysis shows Scotland has the largest proportion of domestically focused MSBs, more than twice the proportion than in London and the South East. This is reflected in a relatively low proportion of exporting firms in Scotland, and a lower than average proportion of Scottish MSBs which are both exporting and importing (Figure 2.7). At the other extreme, London and the South East stand out as having a particularly high proportion of internationally engaged firms. A high proportion of these firms are export-only, a pattern more typical of Services firms. Not considered Aware but yet to action Considering now Action in progress Policies in place Figure 2.7: Internationalisation by region No exports or imports Exports only Imports only Both imports and exports North, North West & Yorkshire 19.2% 23.1% 9.0% 48.7% 12 Scotland 33.8% 23.7% 7.5% 35.0% Midlands & East of England 25.2% 23.1% 9.0% 48.7% London & South East 13.6% 35.0% 4.6% 46.8% Wales & South West 28.5% 31.9% 8.4% 31.2% Great Britain 20.5% 30.4% 6.7% 42.3% 13

8 Productivity Productivity and firms strategic priorities and challenges Over the last few years, UK national productivity has flatlined, widening the gap between productivity in the UK and our international competitors and creating concerns about the longterm competitiveness of UK firms. Recent NatWest research, conducted by Cebr, reveals that UK SMEs could add up to 57 billion a year more than the cost of Brexit 5 to the UK economy if they were as productive as SMEs in Germany 6. Figure 3.1: Productivity growth by MSB size band All Firms 12% 33% 55% Past 12 months 10% 31% 59% 5 10m 12% 35% 53% Past 12 months Productivity growth past and prospects 55% of MSBs suggested that their productivity had increased over the 12 months prior to the survey (Figure 3.1). A slightly larger proportion anticipate productivity growth over the next 12 months. Larger firms with turnover of 50m plus were most likely to have made productivity improvements over the last year, and also to anticipate future productivity improvements. 11% 33% 56% 10 50m 12% 32% 55% Past 12 months 9% 33% 58% 50m + 7% 28% 64% Past 12 months Decrease Same Increase Base: All respondents (861) 6% 20% 74% 14 5 Chief of Government s spending Watchdog, Sir Amyas Morse of the National Audit Office, sets the Brexit divorce bill at 39 billion. 6 With workers 15

9 Nearly four in ten mid-market businesses have not invested in new generation technologies We asked MSBs whether productivity is a concern. Overall, 41% of MSBs suggested productivity levels were a significant strategic concern, a proportion which is lower amongst smaller MSBs with sales of less than 10m per annum. Notably bigger differences in the strategic priority given to productivity are evident between domestically focused firms, EU exporters and global exporters (Figure 3.3). Only slightly more than 1 in 4 domestically focused firms highlighted productivity as a strategic priority for their business compared to 41% of EU exporters and 49% of global exporters (Figure 3.3). The stronger focus on productivity improvements amongst global exporters may relate to their need to compete in the toughest international markets. This is consistent with recent OECD reports which have highlighted higher productivity levels in Frontier firms, which tend to be larger and trade globally, and lower productivity in Non-frontier firms which are typically smaller and focused on more domestic markets. Figure 3.2: Productivity growth by export group Figure 3.3: Productivity improvement is a strategic priority All Firms 12% 33% 55% Past 12 months 10% 31% 59% No export 13% 36% 51% Past 12 months 8% 37% 55% EU only There is a clear link between achieved and anticipated productivity growth and MSBs export profile (Figure 3.2). Non-exporters and EU exporters were less likely to report productivity growth over the last year than global exporters and were also less likely to anticipate productivity growth over the next year. This emphasises the virtuous circle between exporting and productivity and, in particular, the potential contribution to productivity growth of trading beyond the bounds of the EU. All MSBs 41% 5m- 10m 38% 10m- 50m 42.1% 50m- 250m 49.4% 13% 37% 50% Past 12 months 13% 33% 53% Wider export 10% 30% 60% Past 12 months 9% 28% 64% Decrease Same Increase Base: All respondents (861) Domestically focused firms 26.7% EU exporters 41% Global exporters 49.2% 16 17

10 Nearly 40% of businesses say Brexit will have a considerable or significant impact on business Sustainability Figure 3.4: Brexit is going to have a considerable impact on many MSBs Significant impact 16.5% Considerable impact 20.7% Some impact 31.8% Little impact 17.8% No impact 9.5% Don t know 3.7% Current challenges Brexit and beyond We asked MSBs about the key challenges they face in achieving their business objectives over the next year. The uncertainty created by Brexit is clearly an issue for many MSBs with 37% of firms anticipating that Brexit will have either a significant or considerable impact on their business over the next year (Figure 3.4). More generally, MSBs currently see a range of more perennial business challenges as either significant or very significant (Figure 3.5). Workforce and management issues together with issues around costs and competitive pressures are the most common challenges. Both issues are discussed in more detail later in this report. Regulation and compliance costs dominate firms other concerns. The specific issues associated with the new GDPR legislation were the 11th most common challenge, highlighted by 33.4% of MSBs. Figure 3.5: The most common challenges for MSBs Attracting employees with the right skills 40.8% Lower price expectations from customers 38.1% Retaining key/talented employees 37.7% Keeping down costs and overheads 37.3% Attracting top managerial talent 37.2% Securing orders/winning business 36.3% 18 19

11 Sustainability Looking beyond productivity we asked MSBs about the influence of sustainability on their decision making and what steps they were taking to enable their business to become more sustainable. A third of mid-market businesses have not yet committed to ethical behaviour in their CSR policy Figure 4.1: Sustainability is influential in MSBs decision making Figure 4.2: Influence of sustainability by export focus and size band All MSBs 57.5% 5m- 10m 53.5% 10m- 50m 58.3% Perhaps surprisingly, a larger proportion of MSBs regarded sustainability as extremely or very influential on their decision making than concerns about productivity. However, as with productivity (Figure 3.1), the proportion of MSBs indicating that sustainability was important in their decision making increased both with size band and firms export reach (Figure 4.1). Domestically focused firms were less likely than exporting firms to regard sustainability as an influence on their decision making. Global exporters 58.7% 62.0% 73.5% EU exporters Breaking this down further by export focus and size band, it is clear that global exporters in all size bands are strongly influenced by sustainability concerns. Markedly smaller proportions of domestically focused firms, particularly in the smaller size bands, are concerned with sustainability (Figure 4.2). 50m- 250m 54.0% 70.3% 68.8% Domestically focused firms 45.3% 73.3% Domestically focused firms EU exporters 61.4% 45.3% Global exporters 42.7% 62.4% 57.6% 5m- 10m 10m- 50m 50m- 250m 20 21

12 Figure 4.3: Engagement with key sustainability initiatives: All MSBs 83.0% Invested in training for staff 66.2% Conducting an energy efficiency audit on buildings 64.9% Committed to ethical behaviour through CSR 62.4% Invested in new technologies for energy efficiency In the survey we also considered firms engagement with four different sustainability initiatives over the previous three years (Figure 4.3). Differences are evident in the adoption of sustainability initiatives by those MSBs which indicated that sustainability is an important influence on their decision making and those where it is not. In each case, firms regarding sustainability as important were more likely to engage in each initiative, with the difference between groups being particularly large in terms of the two energy efficiency metrics (Figure 4.4). A closer look at the sectors Figure 4.4: Steps towards sustainability: The influence of sustainability on decision making Sustainability is influential to decision making Sustainability is not influential to decision making 86.3% invested in training for staff 78.8% invested in training for staff 73.9% committed to ethical behaviour through CSR 53.1% committed to ethical behaviour through CSR 72.7% invested in new technologies for energy efficiency 49.0% invested in new technologies for energy efficiency 74.7% conducting an energy efficiency audit on buildings 54.9% conducting an energy efficiency audit on buildings 22 23

13 Sectoral perspectives In this section of the report we focus in more detail on the view from the boardrooms of MSBs in individual sectors. Before the discussion on individual sectors, Figure 5.1 focuses briefly on the contrasting degrees of optimism around future growth. Figure 5.1: MSBs views of growth potential in their sector Figure 5.2: MSBs view of prospects of growth for their own firms Total 15.8% 23.5% Primary Sector (Agriculture, Energy and Sustainability) 3.1% 29.3% TMT 14.4% 21.1% Auto/Manufacturing 12.7% 27.9% Wholesale 19.6% 14.6% Construction 21.1% 16.8% Professionals 60.7% 67.3% 64.5% 59.5% 65.8% 62.1% Sectoral perspectives on future growth We asked MSBs both about their optimism for growth in their sector (Figure 5.1) and their view of the growth of their own business over the next year (Figure 5.2). MSBs in each sector remain optimistic about growth, with more than 60% of firms in each sector (apart from Manufacturing and Other Services) anticipating sectoral growth in sales. MSBs in the Primary sector are the most optimistic about sectoral growth, with a particularly large proportion of MSBs in the Primary sector envisaging sectoral growth of more than 5% in the next year. Very few respondents in the Primary sector envisaged any decline in sectoral sales, a marked contrast to views in sectors such as Construction, Retail and Wholesale where 17-18% of MSBs envisaged minor falls in sectoral sales. Total 12.5% 20.53% Primary Sector (Agriculture, Energy and Sustainability) 20.47% 18.43% TMT 8.12% 17.4% Auto/Manufacturing 14.48% 15.33% Wholesale 11.4% 20.18% Construction 19.32% 19.32% Professionals 66.88% 61.1% 74.48% 70.19% 68.42% 61.36% There are some key differences in how MSBs view the prospects for sales growth for their own firms in comparison to their sector overall (Figure 5.2). 67% of MSBs envisage a growth in their own sales, with the least optimistic view being in Other Services. MSBs in the Technology, Media and Telecoms Sector are the most optimistic about their own growth over the next year. MSBs in the Primary sector are less optimistic about growth prospects for their own business than for the sector as a whole, with 20% of Primary sector firms anticipating a decline in their own sales of 5-9% over the next year. Conversely, firms in the Manufacturing sector are more optimistic about their own prospects for growth than those of the sector as a whole, with 70% envisaging some growth in sales over the next year. 9.5% Other 27.6% 62.9% Decline Same Grow 8.83% Other 27.12% 64.03% Decline Same Grow 16.1% 28.5% 55.5% 11.55% 23.69% 64.76% Taken together, these results suggest a degree of confidence in future growth among MSBs, with the majority anticipating both sectoral and firm-level increases in sales. MSBs in the Primary and the Retail and Wholesale sectors are the most bullish in terms of sectoral growth. MSBs in Technology, Media and Telecoms are most optimistic in terms of the prospects for firm-level sales increases. Manufacturing MSBs and those in the Other Services sector are least confident about sectoral growth

14 Primary Sector (Agriculture, Energy and Sustainability) As noted earlier, MSBs in the Primary Sector are amongst the most optimistic in terms of future sales growth, although around 1 in 6 Primary Sector MSBs are anticipating a fall in sales over the next year. In terms of productivity, the experience of Primary Sector MSBs has been more disparate than that of all MSBs over the last year, a pattern which is expected to continue. In other words, Primary Sector MSBs are more likely to see a greater fall or rise in productivity than MSBs in general. Nonetheless, Primary Sector MSBs are more likely to have seen their productivity rise over the last year than MSBs in general, and are more optimistic about productivity continuing to increase over the next 12 months (Figure 5.3). 61% of Primary Sector MSBs are anticipating productivity increases in the next year. Figure 5.3: Recent and expected productivity growth of MSBs in the Primary Sector Previous 12 months 11.6% 33.1% 55.4% Figure 5.4: Export profile of MSBs in the Primary Sector Businesses were asked about the key opportunities and challenges financial, regulatory, employment and trading facing their business. Figure 5.5: Top five challenges for MSBs in the Primary Sector over the next year Primary Sector 20.6% 19.1% 9.7% 31.4% Primary Sector 19.1% 19.5% Decrease Stable Increase 60.3% 58.9% 61.4% 9.4% Domestically focused firms 21.9% EU exporters 68.7% Global exporters As we noted in earlier sections, the challenges perceived by businesses differs significantly depending on their export or domestic market orientation. Firms in the Primary Sector are more likely to be engaged in both global and EU export markets than MSBs in general. Indeed, 68.7% of MSBs in this sector were trading beyond Europe compared to 48% of MSBs in general (Figure 5.4) % Providing competitive wages/benefits 56.5% Lower price expectations from customers 55.3% Keeping down costs and overheads 54.0% Threat from new competition 53.1% Securing orders/winning business This global market positioning is reflected in the challenges identified by firms in the Primary Sector which emphasise sell-side pressures (rather than the skills and talent challenges which were more common across sectors). Primary Sector MSBs suggested that the most common challenge was Providing Competitive Wages, with the next four key challenges relating to pricing and competition. Other significant challenges relate primarily to regulation, with the Primary Sector the only industry group to see Open API/Open Banking as one of their main challenges. GDPR compliance was also seen as an important challenge by 50% of Primary Sector MSBs

15 Technology, Media and Telecoms (TMT) MSBs in the Technology, Media and Telecoms (TMT) sector are among the most optimistic about future growth at both the sectoral and firm level. Firms in this sector are amongst the most likely to be looking to enter new markets and looking to expand through merger or acquisition. Productivity growth in the sector has also been more common than that among all MSBs, and MSBs in the TMT sector remain optimistic about future productivity improvement. Indeed, 68% of MSBs anticipate productivity growth over the next year, while only 8% envisage falling productivity (Figure 5.6). Figure 5.6: Recent and expected productivity growth of MSBs in the TMT sector Previous 12 months Figure 5.7: Export profile of MSBs in the TMT sector Businesses were asked about the key opportunities and challenges financial, regulatory, employment and trading facing their business. 11.6% TMT 33.1% 55.4% Figure 5.8: Top five challenges for MSBs in the TMT sector over the next year 9.2% 29.2% 9.7% 31.4% TMT 7.8% 24% Decrease Stable Increase 61.6% 58.9% 68.3% 10.4% Domestically focused firms 30% EU exporters 59.6% global exporters MSBs in the TMT sector are more likely to be exporting both to the EU and globally than MSBs in general. Notably 60% of MSBs in the TMT sector are exporting outside Europe compared to 48% of MSBs across all sectors (Figure 5.7) % Securing orders/winning business 46.1% Threat from established competitors 46.0% Attracting employees with right skills 43.8% Lower price expectations from customers 43.4% Creating a diverse workforce MSBs in the TMT sector see a range of challenges both reflecting the competitive pressure from established competitors, lower price expectations from existing customers and challenges around securing future business. Issues around skills and talent also prove important, with the TMT sector being unusual in identifying Creating a diverse workforce as one of their key challenges. Regulatory factors, and the costs of compliance are also important challenges for MSBs in this sector

16 Manufacturing MSBs in the sector are among the least optimistic in terms of future growth for the sector as a whole, but firms are more confident in their own future growth (Figures 5.1 and 5.2). Survey data also suggests that firms in the Manufacturing sector are placing more emphasis on organic growth and less emphasis on potential mergers/acquisition than those in other sectors. Figure 5.9: Recent and expected productivity growth of MSBs in the Manufacturing sector Previous 12 months Figure 5.10: Export profile of MSBs in the Manufacturing sector Businesses were asked about the key opportunities and challenges financial, regulatory, employment and trading facing their business. 11.6% 33.1% 55.4% Figure 5.11: Top five challenges for MSBs in the Manufacturing sector over the next year Auto/Manufacturing 12.1% 33.2% 9.7% 31.4% Auto/Manufacturing 11.7% 27.3% Decrease Stable Increase 58.9% 61.1% 54.7% 17.3% Domestically focused firms 23.1% EU exporters 59.6% Global exporters As we would expect for this sector, the proportion of Manufacturing MSBs exporting to global markets is notably higher than the national average. Conversely, relatively few firms in this sector are focused purely on the domestic market, 17.3% compared to a GB average of 27% (Figure 5.10) % Attracting employees with right skills 40.2% Lower price expectations from customers 37.9% Attracting top managerial talent 36.7% Securing orders/winning business 35.5% Threat from established competitors Key challenges for MSBs in the Manufacturing sector broadly reflect those of MSBs generally (Figure 5.11), including a range of sell-side, regulation and workforce-related issues. Whilst regulatory concerns in one way or another feature in every sectors list of challenges, Manufacturing MSBs are the least concerned about the overall cost of compliance with just 29% seeing this as a challenge, suggesting that this sector identifies regulatory compliance as less of a challenge

17 Retail and Wholesale Retail and Wholesale sector MSBs are marginally more positive about growth in their own business than in the sector as whole (Figures 5.1 and 5.2). Growth strategies here, as in the Manufacturing sector, focus strongly on organic growth rather than merger or acquisition. 61% of Retail and Wholesale businesses have increased productivity in the past 12 months and the same proportion is anticipating increase over the next 12 months. Both are slightly above average for the MSB sector as a whole (Figure 5.12). Figure 5.12: Recent and expected productivity growth of MSBs in the Retail and Wholesale sector Previous 12 months Figure 5.13: Export profile of MSBs in the Retail and Wholesale sector Businesses were asked about the key opportunities and challenges financial, regulatory, employment and trading facing their business. 11.6% 33.1% Wholesale 10.1% 29.2% 9.7% 31.4% Wholesale 10.7% 28% 55.4% 60.7% 58.9% 61.3% 20.9% Domestically focused firms 26% EU Exporters 53.1% Global Exporters Figure 5.14: Top five challenges for MSBs in the Retail and Wholesale sector over the next year % Securing orders/winning business 40.7% Lower price expectations from customers 40.2% Attracting employees with right skills 39.3% Threat from established competitors The Retail and Wholesale sector is generally more export-oriented than MSBs in general, with 26% exporting to Europe only and 53% exporting beyond Europe. The competitive nature of the markets in which firms in this sector are trading is reflected in the key challenges, with the most common challenge being Securing orders/ winning business emphasised by 41% of MSBs. Other challenges for MSBs in this sector reflect both sell-side issues around competition and pricing as well as regulatory and workforce issues. Decrease Stable Increase % Retaining key/talented employees 32 33

18 Professional Services Firms in the Professional Services sector are marginally less optimistic about sectoral and firm-level growth than those in some other sectors, notably the Primary sector (Figures 5.1 and 5.2). Nonetheless, more than 50% of Professional Services MSBs are anticipating growth over the next twelve months (Figure 5.15). This moderated optimism carries over into productivity: 55% of Professional Services MSBs reported productivity improvements in the last 12 months and 52% expect this to continue in the next 12 months. The proportion of Professional Services MSBs which anticipate stable productivity is notably larger than that across all sectors (Figure 5.15). Figure 5.15: Recent and expected productivity growth of MSBs in the Professional Services sector Previous 12 months Figure 5.16: Export profile of MSBs in the Professional Services sector Businesses were asked about the key opportunities and challenges financial, regulatory, employment and trading facing their business. 11.6% Professional Services 33.1% 55.4% Figure 5.17: Top five challenges for MSBs in the Professional Services sector over the next year 11.1% 34.1% 9.7% 31.4% Professional Services 10.9% 37.4% Decrease Stable Increase 54.8% 58.9% 51.7% 24.6% Domestically focused firms 14.7% EU exporters 60.8% Global exporters MSBs in Professional Services are among the most likely to be trading globally, with fewer firms selling solely into the EU. Only 15% of MSBs in Professional Services are EU exporters, compared to 25% of all MSBs (Figure 5.19) % Attracting employees with right skills 45.8% Lower price expectations from customers 40.6% Attracting top managerial talent 40.3% Keeping up with new regulation 38.6% Retaining key/talented employees Challenges in this sector reflect the people-based nature of the industry: three of the top five challenges relate to attracting and retaining talent (Figure 5.17). Regulatory compliance and keeping up with new regulation are also seen as key challenges by Professional Services firms. GDPR compliance was highlighted by 38% of firms in this sector as an important or very important challenge

19 Construction Although relatively positive about the UK economy, Construction MSBs are among the least likely to be anticipating growth in their sector over the next 12 months, and the least likely to envisage growth in their own business (Figure 5.2). Survey evidence suggests that over a third of MSBs in Construction are focusing on consolidation over the next 12 months. The relative weakness of MSBs growth expectations is reflected in anticipated productivity growth: 51% of MSBs in Construction anticipate growing productivity over the next year, compared to 60% of MSBs overall. Figure 5.18: Recent and expected productivity growth of MSBs in the Construction sector Previous 12 months Figure 5.19: Export profile of MSBs in the Construction sector Businesses were asked about the key opportunities and challenges financial, regulatory, employment and trading facing their business. 1.6% Construction 33.1% 55.4% Figure 5.20: Top five over the next year challenges for MSBs in the Construction sector over the next year 11.7% 40.3% 9.7% 31.4% Construction 7.3% 41.9% Decrease Stable Increase 58.9% 48% 50.8% 45.2% Domestically focused firms 30.4% EU exporters 24.5% Global exporters % Keeping down costs and overheads 44.4% Attracting employees with right skills 41.2% Retaining key/talented employees 38.7% Securing orders/winning business 37.8% Attracting top managerial talent The Construction sector is the most domestically focused industry group, with 45% of MSBs selling only in the UK market compared to 27% nationally. Where Construction MSBs are exporting they are more likely to be selling only in the EU, rather than more globally. Challenges within the Construction sector reflect those of MSBs more broadly, including a mix of sell-side, competition, regulation and human resource issues. Construction MSBs place more emphasis, however, on Keeping down costs and overheads than most MSBs, ranking this as their top challenge. GDPR compliance is seen as a significant challenge by around a third of MSBs in the Construction sector, reflecting the pattern in other sectors such as Technology, Media and Telecoms

20 Other Services The Other Services sector includes a wide range of service activities dominated by personal services. MSBs in this sector were among the least optimistic in terms of the potential for sectoral and firm-level growth (Figures 5.1 and 5.2). The proportion of firms in this sector reporting productivity growth over the last year was also somewhat below the GB average at 53%. Looking forward, Other Services firms were more optimistic in terms of productivity with 59% anticipating growth over the next year (Figure 5.21). Figure 5.21: Recent and expected productivity growth of MSBs in the Other Services sector Previous 12 months Figure 5.22: Export profile of MSBs in the Other Services sector Businesses were asked about the key opportunities and challenges financial, regulatory, employment and trading facing their business. 11.6% 33.1% 55.4% Figure 5.23: Top five challenges for MSBs in the Other Services sector over the next year Other services 12.4% 34.5% 9.7% 31.4% Other services 8% 33.6% Decrease Stable Increase 58.9% 53.1% 58.5% 34.9% Domestically focused firms 24.4% EU exporters 36.3% Global exporters Unsurprisingly this sector, along with Construction, has a particularly strong domestic market focus, with 40% of firms selling only in the UK (Figure 5.22). Among those MSBs in the sector which do sell outside the UK there is a focus on the EU market, with only 36% of MSBs in Other Services selling outside the EU % Keeping down costs and overheads 38.6% Providing competitive wages/benefits 36.7% Retaining key/talented employees 36.4% Attracting employees with right skills 35.9% Keeping up with new regulation Challenges in this sector reflect the price sensitivity of many personal services as well as the centrality of firms human resources. Keeping down costs and overheads was the most commonly cited challenge by MSBs in this sector, with the next three most commonly cited challenges being related to human resources. Compliance with new and existing regulations also prove important. GDPR was seen as a challenge by 34% of MSBs in Other Services (Figure 5.23)

21 Survey methodology 40 41

22 Annex 1: Survey methodology Research has been conducted by Charterhouse Research, a leading market research consultancy specialising in the financial sector. This report is based on 861 interviews with MSBs across Great Britain conducted using CATI telephone or online interviewing during the period 23rd March 10th May Interviews took around 20 minutes. In each case the respondent had overall or joint responsibility for making strategic and/or financial decisions in the business. All respondent companies had a turnover of between 5m and 250m in the past financial year and the survey covered firms in all sectors (excluding market research firms and firms in the financial and insurance sectors). The profile of respondents is summarised in Figure A1.1. Figure A1.1: Survey respondents 5m- 10m 10m- 50m 50m+ Manufacturing % % % Technology, Media and Telecoms % % % Primary sector % % % Retail and Wholesale % % % Construction % % % Professional Services % % % Other Services % % % During the sampling process, larger mid-market businesses and certain sectors were deliberately over sampled in order to be able to achieve sufficiently robust segments to be able to create reports at the sector level. However, this meant that when looking at the total, the sample base was not representative of the GB mid-market. In the analysis observations are therefore weighted to the overall population of mid-market firms derived from Office of National Statistics data (Figure A1.2). Figure A1.2: Target population for weighting 5m- 10m 10m- 50m 50m+ Manufacturing 4, % 5, % 1, % Technology, Media and Telecoms 1, % 1, % % Primary sector % % % Retail and Wholesale 5, % 5, % 1, % Construction 2, % 2, % % Professional Services 2, % 1, % % Other Services 8, % 6, % 1, % TOTAL 26,630 22,815 7,450 Source: ONS, Enterprise by Industry, Turnover size band and Legal status, TOTAL Please note that rounding of figures has been applied throughout the report. This rounding can in some circumstance result the sum of these rounded figures slight exceeding or falling short of 100% (e.g. 99.9% or 100.1%)

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