Green Shoots A Blue Sheep Research Paper Forecasting 2009 Business Growth 20090310

A Blue Sheep Research Paper Forecasting 2009 Business Growth For six years, Blue Sheep has worked with Oxford Economics to apply the Oxford Economics growth forecast

index to the UK Business Universe, a comprehensive database of 4.5 million commercial entities. By ranking the 1.8 million workplaces, we build a view by business sector and economic region, showing the relative growth index for the next 12 months and the ‘green shoots’ where maximum profit and value can be squeezed from

marketing spend by profiling and targeting the companies that will fare better than others.

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Green Shoots: A Blue Sheep Research Paper

March 2009 Page 2 of 13

Executive Summary • As we go into 2009, the bad news continues, GDP is forecast to shrink by at least 2% ‐

possibly 6% ‐ and although the Government is holding out for 1% increase in 2010, recent history would lead us to expect more downward revisions as time goes on. 2009 will be the worst year for the global economy since 1945.

• Mervyn King’s Nice era of No Inflation, Continuous Expansion has ended. We are in an era of serious contraction and may be headed for deflation followed by runaway inflation as the Quantitative Easing overshoots.

• All economic indicators are negative and the major mortgage lenders are not even calling the rate of fall in house prices for 2009.

• Nonetheless, the real economy does continue to operate and businesses need to sell and find new customers. As always, businesses must look to the future and marketing spend online, in database marketing and in analytics is likely to hold up well. Even as the banking sector is in freefall, certain ancillary financial service sectors forecast growth.

• The key is to identify the businesses which are still healthy and finding ways to differentiate between the winners and the losers. For six years, Blue Sheep has worked with Oxford Economics to apply the Oxford Economics growth index to the UK Business Universe, a comprehensive database of 4.5 million commercial entities. By ranking the 1.81 million workplaces, we build a view by business sector and economic region, showing the relative growth index for the next 12 months.

• The overall picture is dramatically changed year on year; sectors previously robustly healthy are seeing a bleak future. IT and manufacturing are particularly badly hit, whereas Transport and the Energy sector are relatively optimistic. There is still a strong performance showing from parts of the Financial sector, which reflects the massive injection of public money as the government attempts to head off the worst of the recession.

• The regional variation is broadly maintained, with London and the South East still outperforming the regions in all sectors. We expect this to carry on as Government capital projects are brought forward and spending on the 2012 Olympics continues. House builders fare much worse.

• In the current downturn we expect around one in eight companies to grow and at least 45% to shrink with the rest essentially remaining static. The picture 12 months ago was for all but 10% of companies to have some positive growth. We are clearly in uncharted and dangerous territory.

• Our forecast shows which sectors and regions fare better than others; detailed modelling of business sector, size and location can tell us which individual businesses are more likely to become or continue to be customers.

1 Excluding home based and single employee businesses



Government spend holds up ... Manufacturing output is down 3.3% in the 3 months to November 2008 compared with the previous 3 months and is down 5.2% year on year2. Durables, capital goods and energy are all down. The only sectors showing positive growth are Government spending, mainly on health, education and recreation and Quarrying and Mining. Overall, Manufacturing output is falling twice as fast as Services.

Source: ONS. Percentage change in output in 3 months to November 2008 compared with three months to August 2008: Government spending is one of the few areas where output is still growing

The effect on consumers, previously driving force of the UK and US economies is that personal consumption fell 2.3% in 2008.

The major source of this personal wealth has been rising house values which are now in severe decline. The speed of decline has been astonishing: in the entire recession of 1990‐92, house prices fell by 15% in total. In the current recession, prices have already dropped 15.9% in 20093 and although many forecasters decline to make a call, there are fears that prices could fall another 10 – 15% in 2009.

2 Office of National Statistics 3 Nationwide Building Society

As consumers rein back, businesses suffer. If deflation sets in consumer and business spending plans could be further cut back and as the real value of debt increases, credit could be further constrained.

... Growth forecast is falling The Oxford Economics growth forecast gives a relative index of companies forecasting prospects for growth. As the prognisis for the economy overall has declined, our activity heat map (see Appendix One) is that businesses with an index of 1‐49 are forecast to shrink, businesses with an index of 50‐79 are will be static and those with an index of 80‐100 are our green shoots of recovery. In times of 2‐4% growth, we expect 80‐90% of companies to be showing positive growth. Only the lowest one or two deciles would normally be shrinking and detailed modelling would identify 50‐80% of businesses as above breakeven for marketing. When growth falls to negative territory only the top one or two deciles can be confidently expected to grow, together with outstanding performers from other deciles. As an indication of the size of this segment, we find 12.2% of the workforce is employed in these top deciles with 6.1% in the lower two deciles.

Source: Oxford Economics Percentage of workforce by UK Growth Forecast 2009 Decile.

There is a very worrying decline in Research, which previously figured in the top one or two

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0

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1% Change

Sector Growth

To August '08

To November '08

4.1%

8.1%

11.5%

9.1%

14.2%

20.5%

15.6%

10.8%

3.6%2.5%

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10.0%

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20.0%

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Grow Grow Static Static Static Shrink Shrink Shrink Shrink Shrink

Growth forecast

% of UK Workforce by Growth Decile



growth deciles. Research into natural sciences and engineering has dropped from an index in the high 80’s to the neutral range around 60 whereas research into the humanities has virtually disappeared. The drop in scientific research is likely to slow the rate of recovery in the important health related industries as we come out of the recession

North/South divide still shows The traditional North/South divide still holds true as almost all Northern regions are forecasting below average growth and the Southern regions are all above the national average.

A major change has taken place with London losing its place as the economic powerhouse with a score of 109 whereas the South East scores 142. Yorkshire, Wales and the North East show only marginally better than average index scores. Advertising, a good bellwether for the rest of the economy, is particularly badly hit, with London falling into the lowest decile, standing alongside Yorkshire and the East Midlands.

Source: Oxford Economics Comparative growth forecasts for 2009 by UK Region, base 100

The North/South Divide will affect both output and consumption as unemployment hits home harder with rates in the North East up to twice rates in the South and East.

Source: Oxford Economics

UK Growth Forecast Quintiles 2009: Percentage of companies in the upper and lower growth forecast quintiles

By comparing the number of UK workplaces in the top two and bottom two growth deciles, we can assess the relative optimism of the regional forecasts. The South West, South East and East have a relatively positive forecast.

Compared with previous forecasts, the regional variation is overshadowed by the difference in fortunes of business sectors: the damage inflicted by the recession is far less geographically determined. As business goes online and physical location is replaced by virtual positioning, geography will play a smaller part in many marketing strategies.

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160Base 100

Regional Growth Index

‐15.00 ‐10.00 ‐5.00 0.00 5.00 10.00 15.00 20.00

London

South East

East

South West

East Midlands

West Midlands

Wales

Yorkshire and Humberside

North West

North East

Scotland

Percentage of companies in top and bottom growth quintile

Businesses Forecasting Growth

Bottom quintile

Top quintile





The South East The South East is by far the region with the best prospects for growth in 2009, with an index of 142. Capital projects including the Olympics, are continuing to benefit from Government support and unemployment is among the lowest rates for the country. Even in parts of the financial sector, confidence is still strong and in all business sectors, the South East has significantly better growth prospects than London.

At a regional level, we expect around 20% of business in the South East to grow in 2009 and 37% to shrink, with a rising number of failures. Detailed profiling can match the remaining hot prospects to clients’ customer base and show which businesses to target for marketing communications. There are 85,000 businesses forecasting growth in this region compared with 157,000 at risk; this area and its businesses have taken over from London as the UK economic powerhouse.

The 85,000 companies forecasting growth employ a total of 776,837 people

Of the 85,000 businesses forecasting growth, the top 5 vertical industry sectors are: building installation and completion, accounting, transport and real estate activities

The top 5 vertical industry sectors represent a total of 471,362 employees which can be broken down as: building installation and completion ‐134,683, accounting – 152,95, transport – 136,819 and real estate – 46,909 employees.

29,000 of the 85,000 forecasting growth are in the building installation and completion sector

These sectors have stable new business startup rates year on year

The top 700 South East businesses in this sector have an average turnover exceeding £4.5m

807 of the companies in the South East forecasting growth have a profit of £1.25m in the last financial year

Almost 20,400 of the underperforming business are in the health sector with a further 20,000 in miscellaneous services and almost 13,700 in media and leisure.

East Following closely behind the South East is The Eastern Region with a score of 131. Sectors that are particularly strong are Fishing and Petroleum Extraction. There are 13,800 businesses forecasting growth and 33,000 expected to shrink.


Of the 13,800 businesses forecasting growth, the top 5 vertical industry sectors are: building, accounting, transport, wholesale and real estate

Of the top 5 vertical industry sectors , this represents a total of 84,713 employees which can be broken down as: building – 12,223 employees, accounting – 24,645 employees, transport – 26,911 employees, wholesale – 13,251 employees and real estate – 7,683 employees.

2448 of the 13,800 are in the Building sector

This sector has stable rates of new business start‐ups year on year



The top 155 Eastern businesses in this sector have a turnover exceeding £25m

46 of the companies in the Eastern region forecasting growth have a profit of over £1m in the last financial year

Of the 33,000 underperformers, 4,000 businesses are in the miscellaneous services sector, 3,300 are in health and 2,900 in media and leisure..

South West The South West is retaining an optimistic view although less than 7% of businesses are in the top two deciles. This indicates that although the confident businesses are in the same sectors as other healthy regions, in real terms the proportion of good prospects is significantly lower. It will pay to model new business acquisition particularly carefully here although there is still gold to be found. Within the South West there is major variation between areas such as Cornwall and the Cotswolds although it remains one of the most optimistic UK regions

The26,000 companies forecasting growth employ a total of 243,628 people

Of the 26,000 businesses forecasting growth, the top 5 vertical industry sectors are: building, accounting, transport, wholesale and lesiure and tourism.

The top 5 vertical industry sectors represent a total of 152,567 employees which can be broken down as: building – 23,993 employees, accounting – 44,974 employees, transport – 40,333 employees, wholesale – 26,979 employees and leisure and tourism – 16,288 employees.

5,000 of the 26,000 companies forecasting growth are in the Building sector

This sector has stable rates of new business start‐ups year on year

The top 200 South West businesses in this sector have an average turnover exceeding £4.5m

146 of the companies in the South West forecasting growth have a profit of over £1m in the last financial year

67,000 businesses are expected to shrink; 8,000 are in health, 7,300 in miscellaneous services and 6,200 in media and leisure.

London The London growth forecast is only marginally above average for the UK as a whole. The metropolis contains 8% of the workplaces in our UK Business Universe but almost 12% of employees, indicating relatively high labour intensity characteristic of a service economy. There are no sectors in which London out performs the South East and the London economy currently reflects the average position of the UK as a whole but remains sensitive to future changes in property prices and sales volumes and the changing fortunes of the Financial Services and Services sectors.

London has 23,000 businesses forecasting growth in 2009 and the non‐banking financial services sector is still strong.


Of the 23,000 businesses forecasting growth, the top 5 vertical industry sectors are: accountancy and bookeeping, real estate, transport, finance and wholesale.

Of the top 5 vertical industry sectors , this represents a total of 378,468 employees which can be broken down as: accounting – 234,527 employees, real estate – 28,383



employees, transport – 49,631 employees, finance – 52,262 employees and wholesale – 13,665 employees.

9,234 of the 23,000 are in the Accountancy and book keeping sector

This sector has 15% growth in new business start‐ups year on year

The top 150 London companies in the sector have an average turnover exceeding £72m

1,489 of the London companies forecasting growth have a profit of £1.5m in the last financial year

Of the 63,000 businesses expected to shrink, 7,200 are in health, 7,100 in miscellaneous services and 5,900 in media and leisure.

North West The North West has a marginally optimistic balance of growth expectations, with 11% in the top two forecasting deciles and 82,000 businesses expected to shrink. Unemployment is around 30% higher than the national average, growth in Sales of Motor Vehicles and Financial Services are in the top decile of growth forecast, higher than London. The North West and Manchester has managed to establish a regional economy which has some independence and may be suited to weather the storm better than others. There are 26,000 businesses forecasting growth in this region for 2009, with strong showings in transportation and selected financial intermediation. Taking size into account, the North West is still relatively optimistic about 2009, reflecting continued Government spending.


Of the 26,000 businesses forecasting growth, the top 5 vertical industry sectors are: building, accounting, transportation, wholesale and real estate.

Of the top 5 vertical industry sectors , this represents a total of 225,355 employees which can be broken down as: building – 34,285, accounting – 73,763, transport – 64,961, wholesale – 33,942 and real estate‐ 18,404 employees.

3,400 of the 26,000 companies forecasting growth are in the transportation sector

The new business startup rate has doubled in the transportation sector year on year

The top 60 businesses in the North West transportation have an average turnover exceeding £25m

334 of the companies in the North West forecasting growth have a profit of over £1m in the last financial year

Of the 82,000 businesses expected to shrink, 10,500 are in miscellaneous services, 8,700 are in the health sector and 4,700 are bars.

East and West Midlands Birmingham has twice the national level of unemployment and the manufacturing industry in the Midlands feels the full brunt of the recession. Around 8% of businesses are in the top two deciles but the East Midlands has 11% in the lower two groups ‐ a reversal of fortunes compared with recent West Midlands performance. Overall, 118,000 businesses are expected to shrink. Consistent with the broad pattern of regional and sectoral views of the forecast, the pattern of



growth index predominantly reflects business sector variations rather than regional effects. Almost without exception, the indexes for East and West Midlands run lower than the south and less pessimistic than the North. There are approximately 25,000 businesses in the Midlands forecasting growth, with manufacturing sectors performing badly.


Of the 25,000 businesses forecasting growth, the top 5 vertical industry sectors are: transportation, real estate, finance, motor vehicle sales and leisure and tourism.

Of the top 5 vertical industry sectors , this represents a total of 177,473 employees which can be broken down as: transport – 105,612 employees, real estate – 23,448 employees, finance – 24,951 employees, motor vehicle sales – 17,197 employees and leisure and tourism ‐ 6,265 employees.

5,000 of the 25,000 are in the transportation sector


The top 90 businesses in the Midlands transportation sector have an average turnover of over £10m.

276 of the companies in the Midlands forecasting growth have a profit of over £1m in the last financial year

Of the 118,000 businesses expected to shrink, 12,300 are in the miscellaneous services sector, 10,800 are in health and 7,500 in media and leisure.

Wales Wales is pessimistic about the future, 7% of businesses are in the top growth forecast deciles and 43,000 of all businesses are forecast to shrink. Unemployment is slightly under the national average reflecting the high proportion of Public Sector employees, as yet sheltered from the worst effects of the recession. The Welsh economy represents around 4% of businesses employees and is not a rich seam for business development in the next 12 months. Manufacturing in Wales is forecasting a worse 2009 than the dire outlook for UK manufacturing in general. There are around 5,200 companies in Wales forecasting growth in 2009.


Of the 5,200 businesses forecasting growth, the top 5 vertical industry sectors are: transportation, leisure and tourism, real estate, finance and motor vehicle sales.

Of the top 5 vertical industry sectors , this represents a total of 49,279 employees which can be broken down as: transport – 27,508 employees, leisure and tourism – 5,180 employees, real estate – 4,323 employees, finance – 9,169 employees and motor vehicle sales – 3,099 employees.



The top 20 transportation businesses in Wales have an average turnover of over £5m



4 of the companies in Wales forecasting growth have a profit of over £1m in the last financial year

Almost 43,000 businesses are forecasted to shrink, 3,700 are restaurants, 3,600 are in the miscellaneous services sector and 3,600 are in the health sector..

Scotland Scotland’s economy is faring worse than Wales, 7% of businesses are in the top two deciles, 11% in the bottom two deciles. The full effects of the Scottish banking crisis may not yet have made their mark. There is regional variation within Scotland; Glasgow has twice the unemployment of Edinburgh. The overall index for Scotland relative to the UK as a whole is 74 compared with 142 for the South East – Scotland is only half as optimistic as the South East for 2009. Approximately 11,800 businesses in Scotland are forecasting growth in 2009 compared with 145,000 expected to shrink.


Of the 11,800 businesses forecasting growth, the top 5 vertical industry sectors are: transportation, wholesale, leisure and tourism, finance and real estate.

Of the top 5 vertical industry sectors , this represents a total of 103,999 employees which can be broken down as: transport – 45,553, wholesale – 19,630, leisure and tourism ‐6,774, finance ‐17,703 and real estate – 14,339 employees.



Of the 145,000 businesses expected to shrink, 7,700 are restaurants, 7,200 are in the miscellaneous services sector and 6,700 are in the health sector.

North East The North East is the second most pessimistic region in the UK; 5% of businesses are expected to grow and around 48,000 expected to shrink. The area also has unemployment 20‐30% above the national average. The region represents around 5% of the UK economy and is not the natural focus of marketing activity in the current climate. Nonetheless, around 3% of UK growing businesses should be available from the North East, supported by robust modelling. There are around 5,800 companies forecasting growth in 2009 in the North East.


Of the 5,800 businesses forecasting growth, the top 5 vertical industry sectors are: transportation, real estate, leisure and tourism, finance and motor vehicle sales.

Of the top 5 vertical industry sectors , this represents a total of 48,855 employees which can be broken down as: transport – 27,756 employees, real estate – 6,617 employees, leisure and tourism – 4,560 employees, finance‐ 5,928 employees and motor vehicle sales – 3,994 employees.



The top 30 businesses in the North East in the transportation sector have an average turnover exceeding £60m



54 of the companies in the North East forecasting growth have a profit of over £1m in the last financial year

Of the 48,000 businesses expected to shrink, 4,700 are restaurants, 4,500 are in the miscellaneous services sector, 3,900 in health and 2,700 are bars.

Yorkshire and Humberside The Yorkshire and Humberside region has the worst regional forecast, with companies forecasting in the lowest deciles outnumbering those in the top deciles by two to one. In effect, 9,600 companies or 6% can expect to grow and 83,000 do not expect to grow. This region represents around 9% of businesses and employees so cannot be overlooked as part of a national marketing strategy. The depressed outlook is broadly distributed across all business sectors which show growth forecasts consistently 10% lower than average for the UK. We would advise setting shallower penetration targets in this and other less optimistic region.


Of the 9,600 businesses forecasting growth, the top 5 vertical industry sectors are: transportation, real estate, finance, motor vehicle sales and leisure and tourism.

Of the top 5 vertical industry sectors , this represents a total of 95,861 employees which can be broken down as: transport – 52,391 employees, real estate – 21,179 employees, finance – 11,743 employees, motor vehicle sales‐ 7,233 employees and leisure and tourism ‐3,315 employees.



The top 55 transportation businesses in this region have an average turnover exceeding £6m.

48 of the companies in Yorkshire and Humberside forecasting growth have a profit of over £1m in the last financial year

Of the 83,000 businesses expected to shrink, 8,200 are in the miscellaneous services sector, 8,100 are restaurants and 6,200 are in the health sector.

Conclusions for Marketers There is still business to be done and much of the real economy will still be here as we climb out of recession. The key to success is to squeeze maximum value for marketing money by targeting the best companies, whether existing customers or for new business acquisition. There is variation by business sector and variation by region although the effects and interaction of these are changing significantly both in response to the economic climate and to changing business patterns. Segmentation models need to be refined to reflect these changes.

Using up to date models and the best business intelligence available will maintain return on marketing investment – perhaps not at previous levels in all cases, but at least high enough to preserve competitive advantage. Customers still need to buy to maintain their own business processes, new customers still need to be recruited to compensate for natural attrition. Using the best targeting techniques will ensure a place in the top deciles.



Appendix One – Heat Map

Technology

Green Shoots A Blue Sheep Research Paper Forecasting 2009 Business Growth 20090310