Business & Economic

EnvironmentBUSS4 May 2013

Business and the Economy

• Economic environment is crucial for all businesses– Large corporations and

SMEs– Domestic facing

businesses and TNCs– Businesses in cyclical

sectors and those less exposed to macroeconomic volatility

An Age of Uncertainty

• High levels of economic uncertainty

• Financial crisis has left a long shadow

• Developed countries – persistent slow growth for many

• In 2013 the world's ten fastest growing countries are likely to be emerging countries

• European economy is struggling

The Big Picture – Slow Growth

Deep recession in 2008-09

Followed by persistently low growth

GDP has grown by less than 2% in each of the last six years

The Key UK Data in a Table

Indicator 2011 2012 2013*

Real GDP (% change) 0.9 -0.1 0.9

Consumer spending (% change) -0.9 1.1 1.6

Capital investment (% change) -2.4 1.8 2.5

Exports of goods and services (% change) 4.5 -0.2 2.4

Unemployment rate - % of labour force 8.1 8.0 8.3

Consumer price inflation - per cent 4.5 2.6 1.9

Source: OECD World Economic Outlook, December 2012 Data for 2013 is a forecast

Capital spending remains weak

Can you identify 3 factors that might explain why investment spending remains so weak at the moment?

Consumer spending and incomes

A combination of tax rises, high inflation and modest growth in earnings have hit consumers across the income spectrum in the last 5 years

Real Disposable Income

The strong rise in real incomes has come to an end – when living standards are squeezed which businesses benefit most?

Inflation and interest rates

Inflation in the UK has been above the 2% target in recent years – what does this mean for business?

External Factors: BRICs Growth

Fast growth for BRIC countries – can you think of some of the effects for a range of UK businesses?

External Factors: Asia Rising

Strong growth is not just confined to BRICS – Asia and Sub Saharan Africa both having a phase of rapid growth and development

External Factors: EU Growth Rates

Economic conditions have been very tough in a number of EU countries – consider the effects for a range of UK businesses

External Factors: Oil prices

World oil prices have been high in recent years but also very volatile – which industries are most affected by this?

External Factors: Food Prices

The global prices of many foodstuffs are highly volatile and have risen in recent years – what implications are there for certain businesses?

Business Profitability

How has the recession and the slow recovery affected rates of returns for businesses?

Fragility in the Financial System

Commercial banks have cut their lending to many businesses – new forms of lending are growing quickly

Policy Factors: Interest Rates

Official policy interest rates are set each month by the Bank of England – they have been at 0.5% since March 2009This is not the interest rate paid by businesses!

Economic growth & unemployment

The jobless rate has grown to 8% of the labour force - what are some of the implications for business?

Exchange Rates: Sterling v US $

Sterling has been stable against the US dollar in recent years – but is now falling. For which businesses is this significant?

Focus on Construction

In 2011/12 the number of new homes built fell to the lowest level since 1923.

Why are businesses in the housing industry more exposed to cyclical fluctuations in the economy? How can they respond?

The conventional wisdom is ...

• Standard view is that macro uncertainty favours large, diversified businesses

• Sectors which benefit from stronger GDP growth include consumer services companies, financials and travel and leisure businesses

• Sectors that do better in slower-growth times include energy, utilities and pharmaceuticals

• How true is this in current times?

Business Strategies for Uncertainty

Challenges• Expected demand• Profit margins• Cash flow / late payment• Availability of credit• Financial uncertainty• Structural challenges from

other economies

Business Strategies for Uncertainty

Challenges• Expected demand• Profit margins• Cash flow / late payment• Availability of credit• Financial uncertainty• Structural challenges from

other economies

Opportunities• Plenty of growth sectors• Grow market share even if a

market is flat• Implement long overdue

changes• New business models• Emergence of new forms of

business financing

Defensive Balance Sheet Strategies

• Increasing cash flow• Cutting costs• Reducing leverage

In the UK official data show corporate cash balances stood at £671 billion in 2012 equal to 46% of GDP, up from £240 billion in 2002, and close to record levels

Priorities

Opportunities – Growth Sectors

• Consumers are spending more on technology• UK car production is on an upward path, rising 34%

between 2009 and 2011• Skilled services such as design, consultancy, media• Hotels, catering and restaurants, facilities

management• Renewable energy, shale oil, natural gas fracking

Business Finance – Old....

Traditional Bank Finance• Commercial bank loans• Overdraft facilities• Credit card finance

especially for SMEs• Equity raised through stock

market

SMEs have built up their savings deposits in banks but have found it much tougher to get the loans they want .... New finance streams needed

Business Finance..... And New

Growing Financial Options• Corporate Bond Market

including retail bonds• Peer to peer funding

– Funding Circle– Zopa– Crowd Cube

• New banks– Aldermore– Virgin Money– Possible new regional banks

• Invoice discounting facility

Business Finance..... And New

Growing Financial Options• Corporate Bond Market

including retail bonds• Peer to peer funding

– Funding Circle– Zopa– Crowd Cube

• New banks– Aldermore– Virgin Money– Possible new regional banks

• Invoice discounting facility

Retail Bonds

Tesco raised £125m in February with an eight-year bond paying 5.2% a year

John Lewis raised £50m in April through a Partnership bond, though this was reserved for its customers and staff.

Hotel Chocolat raised £4m by selling the bond to members of its Chocolate Tasting Club, who don't get interest but instead receive a box of chocolate each month

Peer to Peer FundingWhere people lend directly to others via online exchanges

Peer to Peer FundingConventional bank lending to business in the UK continues to decline.

Amazon – Aggressive Expansion

The world's biggest online retailer by sales

Aggressive expansion strategy

JCB – Digging for Higher ReturnsOne of the UK’s biggest family-owned companies,

£360m profit on turnover of £2.9bn

Huge player in the global market for excavation equipment and other heavy units

Manufacturing in the UK, Brazil and India

Competitors include Caterpillar and Komatsu

Apple – Competition Rising

“Investors have been worried that its market share was being eroded by popular offerings from rivals such as Samsung”

BBC News

Around two-thirds of Apple’s cash pile, which now stands at $145bn, is held overseas

Falling share prices - concerns about competition, fears of slowing innovation and expectations of lower profits

Dominos – Big Recession Success!

Marketing key to sales and profits

Using social media to drive sales

BSkyB

UK’s fastest-growing broadband and telephony business

£7bn annual turnover compared to £2,2bn for ITV

Tutor2u 10 for 2013

• Ikea• Royal Mail• Amazon / Zappos• Nokia• Sony• Starbucks• Tata Group• Samsung• John Lewis Partnership• Southwest Airlines

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