With business in rude health, but the economic climate increasingly volatile, the case for good risk management is stronger than ever. Peter Bartram invites experts to look back at 2015 and predict the trends and potential threats for the year ahead
Here is a sobering fact for directors who believe the good times have started to roll again – insolvencies are 75 per cent higher than they were before the credit crunch in 2007. Yes, the economy is growing, but that doesn’t mean that risk has been left behind with the recession’s unpaid bills. The old risks, such as insolvency and non-payment, are still around. But now there are also new problems, such as a key market being closed by sanctions (Russia), terrorism undermining a region (Middle East) or goods not being delivered to the correct destination (West Africa).
“Despite the good news that the economy is rebounding, we cannot forget that we are still operating in the shadow of recession,” warns Jason Curtis, commercial director at Atradius, the trade credit insurance provider which protects businesses from the risks of trading and also runs surety and collection services. Sadly, late payment is rife in UK business culture – Atradius’ recent payment practices report shows that 41 per cent of B2B invoices are paid late, while 1.2 per cent are not paid at all.
Managing risk is part of a director’s job. “The key to success for businesses is to proactively manage their risk environment,” says Richard Reynolds, operational manager for new business at Atradius UK.
A risk assessment of the business landscape – sector by sector – from the shape of the high street to the need for speed in cyberspace
Few energy industry pundits predicted the collapse of the oil price from a peak of around $120 a barrel to a low of less than $50 (£33) in 2015. And attempts by tardy wiseacres to post-rationalise the fall don’t alter the fact that they didn’t see it coming. The price slump is a sharp reminder that when it comes to energy market risks there are plenty of Donald Rumsfeld’s “unknown unknowns” to contend with as well as the “known unknowns”. And neither type is limited only to oil.
There are question marks over energy issues as varied as solar generation, fracking and wind farms. It is understandable that geopolitical events, such as a war or terrorist attack, can deliver an unexpected shock. But the problem for some energy industry firms is that what they thought were solid odds-on bets proved to be long-odds outsiders.
Given David Cameron’s oft-stated ambition to run the greenest government ever, few decision-makers expected his energy ministers to pull the plug on solar PV electricity generation by closing the “renewables obligation” to solar projects above 50kw from April 2016 or cancel subsidies for as many as 250 onshore wind projects.
All this throws more emphasis back on conventional fuels such as oil and gas. The Autumn Statement also exempted energy-intensive industries, such as the troubled steel sector. Arwel Roberts, a senior underwriter at Atradius Risk Services, believes low oil prices are here to stay – at least for the foreseeable future. “Producers will have to adapt and make difficult decisions about the viability of operations,” he says. “However, unrest in the Middle East or further tensions with Russia could change this.” Those “unknown unknowns” again.
A recent state-of-the-industry report from the Association of Chartered Certified Accountants, spells out key issues on the energy industry’s future agenda – managing the volatility which hits firms’ cost bases, capex and funding; developing better forecasting and decision-support capabilities; handling new corporate reporting challenges; and forecasting the impact of asset impairment and stranded assets.
And it’s not only the energy industry’s central players who need to be concerned about the risks ahead. The sector traditionally boasts a long-tail supply chain including firms supplying goods and services that range from measuring instruments to deep-sea divers. If the oil producers decide to cut back on capital expenditure, it won’t take long for cash cuts to start rippling back down that chain.
But what should the rest of the world care? A low oil price is good for energy-using companies – right? Up to a point. Firms at the margin have been kept alive by a combination of low-cost money and lower-cost energy. A rise in either could cause a near-death experience. Just another of those unknown unknowns.
So the man in the moon had a happy Christmas after all. The old guy got a telescope, courtesy of John Lewis and its marquee Yuletide advertisement. He’s probably not the only one managing a smile. Early reports suggest that the highest levels of consumer confidence for years are encouraging a seasonal spending spree.
But every Christmas, there are winners and losers when the season’s trading figures from major store groups appear in January. And 2016 is unlikely to be different, with some companies’ bosses having a few awkward questions to answer.
It is no surprise that there is a new spring in the step of retailers as the economy has returned to growth. Furniture stores and DIY chains have done especially well on the back of a buoyant housing market. John Lewis, for example, reported a 6.1 per cent increase in like-for-like furniture sales in the first week of November over the same week in 2014.
DIY chains attribute some of their sales buoyancy to the tough culling their sector underwent in the wake of the recession. There is more business to go round for those firms that are still left standing.
But it’s harder in other sectors. Clothing retailers, for example, are fighting like alley cats for a share of customer spending. One loser: the womenswear chain East Lifestyle, which closed 19 of its stores after being bought in a pre-pack administration deal in June.
The problem for many retail chains is that they are a prisoner of their history – with an expensive high-street estate of stores at a time when more and more consumers are buying online, notes Owen Bassett, a senior underwriter at Atradius Risk Services. “The challenge for many is what they do with large unwieldy store portfolios that are not necessarily fit for the multichannel retail landscape we now find ourselves in,” he says.
And if that wasn’t enough to be going on with, there are new problems on the near horizon. One is how to manage the increased costs that the national living wage will lump on chain store salary bills. The new wage is phasing in, yet it could still be a challenge for some retailers where low pay was sometimes supplemented by staff discounts and other perks.
Then there is the question of Sunday opening – affecting larger stores, mostly supermarkets. There is not a lot of enthusiasm for the proposed new trading regulations, on hold at the time of writing. Sainsbury’s chief executive Mike Coupe probably echoes the private views of other big firm bosses when he says the complex rules are open to abuse and “not a sensible way of going about it”.
Still, for the time being, the prospects for most retailers look reasonably bright. But it’s worth trading with caution and using experts to help manage the risks – sentiment can change and even a small hike in interest rates could dampen consumer confidence because every 0.1 per cent rise in rates ratchets up to cut disposable income by 1.8 per cent.
When Tesco chief executive Dave Lewis announced a small decline in the supermarket chain’s like-for-like sales in October, he predicted food price deflation would continue into 2016. But good news for shoppers doesn’t always raise a hearty cheer with struggling firms in the food industry, where price pressure tends to get passed down the supply chain.
There was a harsh example of that earlier this year when food processors such as Muller and Dairy Crest cut the price they pay dairy farmers. Farm gate prices for milk have slipped since 2014 and weaker demand from China plus payback sanctions from Russia – in response to those imposed by the West following the Crimea invasion – mean they are likely to stay low.
But what is bad news for commodity producers can be good news for food processors. And the strong pound is playing its part, too. Britain is a net importer of food to the tune of £21bn a year.
Even so, volatility is an ever-present threat for companies relying on commodities to make their products. Wiser companies develop strategies to mitigate volatility. Innocent, for example, which makes smoothies and fruit juices, has diversified its sources of supply and flexes its product range so that if one fruit rises too steeply in price a different product can replace it.
Competitive pressures in the UK market mean that some food processors will reap only limited benefits from lower commodity – and oil – prices. The big-name supermarket chains – Tesco, Asda, Sainsbury’s and Morrisons, which account for more than 70 per cent of the market – are under growing pressure from discounters such as Aldi and Lidl.
One way the Big Four are defending their turf is by giving more prominence to lower-priced own-brand products over independent lines. “The major risk for companies in the food sector is loss of contracts as a result of a more simplified store offer and rationalisation of shelf space,” warns Darran Tilke, a senior underwriter at Atradius Risk Services.
“This will inevitably lead to an increasingly competitive outlook for suppliers during tender processes, where we can expect additional pressure on pricing and terms to secure shelf space,” he says. The producers most in danger are those with the bulk of their sales going to just one or two chains.
But the best food companies are adaptable. When volatility has become a way of life, it’s stability that can be worrying. There seems little chance of that in 2016, with global and domestic changes piling more pressure on food firms at every level of the supply chain.
Could the government’s pledge to bring superfast broadband to every corner of the UK be just what the ICT business needs to turbocharge its growth? The bulk of the 115,000 companies which make up Britain’s burgeoning ICT sector will certainly be hoping so.
In line with the economy as a whole, most ICT businesses are enjoying healthy growth rates. And the pundits are predicting that some sectors, such as the new “wearable technology”, are poised to forge faster ahead. Despite what were reported as disappointing early sales for Apple’s smartwatch, industry research suggests this sector is already a £300m-plus annual market.
But it’s not all good news. As the chancellor, George Osborne, seeks to balance the nation’s books, cuts in government spending could hit some firms hard. Public sector sales could be harder to find in the next few years. There will always be star performers in the sector, but for many suppliers the business is one of tough sales and squeezed margins. “Much of the IT channel that we insure has historically been high-volume, low-margin businesses,” says Atradius’s Arwel Roberts. “There is no continuity of sales and it can lead to a hand-to-mouth existence.”
The problem becomes worse when the company relies heavily on public sector contracts. If it misses out on the big public sector buying periods of April (end of the budget year) and September (end of the school holidays) it can find itself scratching for business for the next 12 months.
In a market where companies are all selling the same kinds of products, one key way to differentiate from competitors has been on payment terms. What was typically 60-days credit a couple of years ago is drifting out to 90 days. That doesn’t look good – especially when there often aren’t a lot of fixed assets, such as freehold property or plant and machinery, to beef up the balance sheet. It is not surprising that more ICT companies are trying to move away from being “box-shifters” to provide more value-adding services. Despite this, not many IT and telecoms companies go bust.
Even so, coupled with high debt levels, it leaves some companies teetering permanently on the financial edge. But with business growing, and new technologies constantly evolving, one of the biggest problems the industry faces is recruitment. Skills shortages encourage user companies that can’t find qualified staff to outsource services to specialist providers. And superfast broadband, enabling larger volumes of data to be shifted more quickly, could encourage that trend.
Time for action
So you want to reduce trade risk. Where to start? “Focus on your market,” advises Richard Reynolds, operational manager for new business at Atradius UK. “You will have much more success directing your energies to specific markets and not taking a scattergun approach.”
Do proper customer credit checks. “This will enable you to decide whether you can do business with them on credit,” says Reynolds. Make it clear what you’re selling. “Nearly one in five invoices go unpaid because the customer disputes the quality of the service or goods,” he says.
Keep a close watch on the aged debtor reports and take swift action to follow up non-payment with reminders. Customer relations matter but too many directors are squeamish about handing unpaid invoices over to reputable collection agencies. “You may have a long-standing relationship with a customer but you cannot let this hamper your business sense,” says Reynolds. “Stay alert for new risks, even in trusted trading partnerships.” Red flags include frequent late payments, customers at the limit of their credit lines, or firms regularly changing banks.
“Information is the bedrock of sound trade,” Reynolds adds.
How does the south-west buck the national trend and why might the north be reliant on breaking bottlenecks? Peter Bartram details the risks region by region
London and south-east
With due apology to George Osborne’s Northern Powerhouse concept, London and the south-east is the real economic engine room of the UK. It’s where booms and busts start – and finish.
So the big question for directors running businesses in the region is whether economic recovery will continue into 2016. “I’m optimistic about the future,” says Costas Andriopoulos, professor of innovation and entrepreneurship at London’s Cass Business School, who keeps a close eye on the region’s prospects.
“London is a phenomenal success story,” adds Colin Stanbridge, chief executive of the London Chamber of Commerce and Industry. But he worries its economy could hit the buffers because of a lack of affordable housing, overloaded transport infrastructure, and too much expensive regulation.
For financial services firms still rebuilding after the crash or the new high-tech start-ups flooding into offices around Old Street’s Silicon Roundabout, these problems are a side issue to their main focus on developing innovative products and finding new customers.
But that’s not always the case for companies in less buoyant markets taking on tough competition. They may grapple with big-city costs and struggle to hire the skilled staff they need. At first glance, London may scream success, but there are plenty of risks not far beneath the surface.
James Burgess, regional manager for Atradius in London and the south-east, says the demand for insurance cover for risks such as non-payment of invoices or customer insolvency is high. Not getting paid is, of course, highly significant for businesses in all sectors and Burgess has seen a growing call for credit insurance in areas as diverse as chemicals, metals, music and games stores and construction.
Getting paid on time is important, but it is not the only issue on the minds of company directors in London. About half of them are worried about the high cost of commercial property, according to a recent survey for London Tomorrow. If property costs constrain expansion, the region’s growth could stall earlier than expected.
In the longer term, London’s attractiveness as a global business magnet could be compromised if the government further delays a decision on airport expansion. The Airports Commission recommended a third runway at Heathrow in July. If the government backs that plan, against the rival Gatwick bid, it will provide a major jobs boost to west London.
A mayoral election in 2016 will see a new mayor facing tough challenges, not least making the case that, with almost 40 per cent of London’s exports going to the EU, Brexit could hit the region hard.
South-west & Wales
Here’s a paradox: at the height of the recession following the credit crunch (2007-10) the south-west’s economy grew faster than the rest of the UK. When the recovery was under way elsewhere (2010-13) the region fell behind.
Dylan Jones-Evans, professor of entrepreneurship and strategy at Bristol Business School, says the south-west has a particularly resilient economy. When times are hard, it grits its teeth and keeps going. But now the wider economy is growing more robustly, the south-west is outpacing much of the rest of the nation again. As an indicator, unemployment at four per cent is the lowest in the UK.
The greater paradox is that a regional economy seemingly kept afloat by farming and tourism is nothing of the sort. Of course, both industries still play a major role – tourism accounts for 11 per cent of the area’s jobs. “Industries such as engineering, aerospace and construction are becoming the real local growth engine,” says Tanya Giles, Atradius’s regional manager for the south-west. Big-name companies there include Rolls-Royce, GKN Aerospace and Airbus UK, which employs 4,000 engineers and others at Filton, just outside Bristol. In all, the area has the largest aerospace cluster in Europe, worth around £7bn annually.
Jones-Evans believes the region also has the potential to develop growing strength in digital business. He points to a 200 per cent growth in the number of digital companies in Bournemouth in 2014. A report from Tech City UK argued that the Bristol-Bath corridor had the potential to rival London as a centre for the digital economy, Jones-Evans notes. “As London overheats, the south-west becomes an attractive place to live and work,” he says. Initiatives such as the Engine Shed in Bristol are encouraging start-ups within the region, he adds.
In Wales, the number of businesses has grown by 10 per cent in four years, with financial and professional service companies, including Deloitte, Admiral and of course Atradius, establishing themselves further.
But even a buoyant economy faces risks, Giles points out. As more companies seek to enter export markets, many worry about being paid on time. “We use our market intelligence to advise firms about the payment culture and practices they may encounter in countries they’ve never sold to before,” she says.
Another rising problem is the growth of fraud – especially “buyer impersonation”, with crooks claiming to be from an established creditworthy company to order goods which they collect themselves or divert to a rogue address. Not surprisingly, this fraud is growing in the agricultural south-west as fruit, vegetables and meat – untraceable and easily sold at markets – are prime targets for such scams.
Digital fraud is another rising problem but the south-west boasts a world centre of excellence in cyber security at GCHQ at Cheltenham. So it looks as though the south-west could be well placed to fight off new risks as it seeks fresh opportunities.
If the car industry is anything to go by, the Midlands is enjoying a boom time. Production of new cars is up on 2014 – exports, too – and the influential Society of Motor Manufacturers and Traders is talking about record production levels of British-made cars by 2020. Never mind that many iconic marques, such as Jaguar and Land Rover, are foreign owned (by India’s Tata), the cars are pouring off the production lines. That means good times for hundreds of firms in the long supply chains that feed their product into the main manufacturers – and which lie at the core of the Midlands’ economic health.
Mary Ravenscroft, Atradius’s head of distribution for midlands, sees how important it is for some clients. “There is a company that makes extrusions for the piping around car seats. They send them to a firm which stitches on the fabric. They send it on to the company that makes the seats. Finally, it goes to the car manufacturer.”
Ravenscroft’s story is an insight into how manufacturing in the region – especially in the automotive industry – is closely integrated, with one company relying on another. It is also a sharp reminder about how risk in one part of the region’s supply chain can spread like contagion through the rest of it – as it has done in the past.
That is not likely in the immediate future, according to Dan King, head of business and local partnership team at Nottingham University. “There is a level of confidence about growth in the region,” he says. But he agrees there are also some weaknesses. For example, growth is not as robust as some other regions and the three-year survival rate of start-ups is not as strong. Perhaps the former coalition government’s plan to create a Midlands Engine for Growth will help the region raise its game. There is to be £5.2bn spent on improving motorways and railways in addition to the controversial HS2 high-speed rail project. The aim is to get the region’s long-term growth rate up to that forecast for the whole UK.
King believes it is important for Midlands cities to work more closely together to identify key priorities and targets that will generate faster growth. As always in the Midlands, exports – especially from the big manufacturers such as Rolls-Royce, JCB, Bombardier and Toyota – are crucial to the prosperity of the region. “Up-to-date information is the key to sound decision-making as companies change rapidly,” Ravenscroft says. “Credit insurance, which protects against trading risks, now extends to meet modern perils.”
North and Scotland
The Northern Powerhouse is being trailed as an initiative that will enable the north of England to rival London as a driver of economic growth. But the closure of the Redcar steelworks, with 1,700 job losses, provides an unwelcome dose of realism about the tough choices firms face when they compete in the global economy. If the powerhouse project takes off, it may well inject some new dynamism into the region’s economy, but it may come too late to save other firms outpaced by global competitors.
This could include some in traditional metal-bashing industries under pressure from volatile world commodity prices. And Russia’s tit-for-tat sanctions against European food products – including fish – have cut sales for the fishing industry which operates from ports in the north-east of England and Scotland. The government hopes that giving extra powers to northern cities, more investment in infrastructure and a focus on new rather than old industries will revive the region. Business leaders long for investment in projects such as new high-speed rail between Liverpool and Hull and improvements to the region’s sclerotic motorway network, including M62 and M6 bottlenecks, to attract business. “Improvements such as these, and better IT connectivity, could bring more investment into the area,” says Mike Rowan, northern regional manager for Atradius. “People need to buy into the powerhouse concept rather than sit on the sidelines.”
Although the north’s traditional industries, such as steel and textiles, face tougher competition than ever before in global markets, there are also signs that the region is developing new businesses. Rowan points out that both Manchester and Leeds already have major clusters of financial services firms. And the £61m development of the National Graphene Institute in Manchester could help to create thousands of jobs as entrepreneurs find ways to use the wonder material in commercial applications. It is just that kind of high-tech project which could attract other tech-based businesses to the region.
Airport City Manchester’s £800m development will create thousands of jobs and provide a strong regional boost. The scheme is strongly backed by Chinese investors. Future prosperity will hinge heavily, as it always has for the north, on exports. That means facing up to potential new risks. “It’s true that businesses have to face a far wider range of risks than before,” says Rowan. “We now insure companies for loss of trade caused by risks as diverse as sanctions, terrorism and diversion of goods – a particular problem in West Africa during the Ebola outbreak.”
Managing risk and enabling trade is the hallmark of credit insurer Atradius, which has been supporting UK businesses for over 90 years. With 160 offices worldwide, Atradius provides the eyes and ears on the ground for thousands of businesses. Using live data on over 200 million companies, Atradius helps businesses to trade – and ensures they get paid. Atradius UK is headquartered in Cardiff with regional hubs in the north, midlands, Wales & south-west and London & south-east. We invite businesses to contact us for an exploratory discussion to see if credit insurance and our extensive knowledge of markets here and overseas would be of use to them.
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