Still feeling Lucky?

By Mark Toohey FCA

The Australian economy emerged from the GFC stronger than most other advanced economies and has shown itself to be one of the best performing among similarly sized countries. The facts about solid growth rates, low unemployment, positive terms of trade, and low inflation are well known. Behind those great outcomes are a number of contributing factors including our plentiful natural resources, proximity to key markets, a history of market liberalisation, and solid economic and prudential management.

But it’s not all good news. While some sectors have seen and seized opportunities, others have struggled in the post- GFC world. Headlines announcing record profit announcements and low unemployment sit alongside stories of falling business confidence and high profile closures. There are clear winners but, below them, there are a range of experiences from solid if not stellar performance down to businesses fighting for survival. The Australian mid-market (businesses with turnovers in the $10m-$250m range) offers a fascinating lens on this complex picture. It may in fact hold the drivers to the long-term diversification and growth of the Australian economy.

Through a comprehensive research program surveying more than 5000 mid-market CFOs over a two-year period, GE Capital released a study entitled What Mid-Market CFOs think of now and the future. The study explores midmarket issues and concerns, comparing them to the smaller and larger business sectors through an index constructed to reflect current business orientation towards growth and future prospects for growth.

Mid-market businesses account for only 1.4 per cent (27,500) of all Australian business, however they generate nearly two-fifths (37 per cent) of all business revenue – more than one trillion dollars in 2010/11 – and they employ nearly onequarter of the full-time workforce.

Mid-market companies span all industries including construction, retail, manufacturing, business and property, wholesale trade, transport, storage and education. They pay the salaries of 23 per cent of all full-time employees (which adds a staggering $250 billion into the marketplace each year). They are also among the biggest employers in regional and rural areas (20 per cent of the sector is located there).

Overwhelmingly, the study found that the mid-market has performed more strongly than any other sector in the Australian economy. However, the mid-market is now at a crossroads, and the next six to 12 months will tell whether its strong performance to date starts to decline, or whether it continues to make a substantial contribution to the overall level of Australian economic activity.

The data since mid-2010 shows the sector’s expectations of growth have been declining steadily and is now at its lowest point since June 2010. The top three concerns listed by CFOs were the economic environment, the impact of interest rates and the restrictive nature of government regulation. However, while in decline, the mid-market’s future expectations for growth are still positive, tracking close to expectations of large business and consistently stronger than the small business sector. The mid-market’s fall in expectations have been driven by a combination of lower expectations of staffing growth and falls in expectations of revenue growth, which accelerated towards the end of 2011.

Despite the declines in future expectations of growth, the report outlines how, for the past 18 months, the mid-market’s view of current conditions has been consistently stronger (and less volatile) than either small or large business. These organisations have devoted their efforts to ensuring their businesses are prepared for growth by developing their company culture, investing in technology, and finding and keeping the best staff they can.

Differences between industry sectors within the mid-market:

  • Business & Property businesses remain strongly focused on growth, while Construction saw a virtual collapse in confidence over 2011. Retail trade, while lower than the mid-market as a whole, is demonstrating signs of recovery
  • Manufacturing, Transport & Storage and Other Industries (including Mining) hold the most positive expectations for revenue growth, closely followed by Wholesale Trade, Business & Property and then Retail Trade. The Construction industry trailed all other businesses in their expectations for revenue growth
  • The Business & Property industry had the most positive expectations for growth in staffing. Transport & Storage along with Other Industries (including Mining) followed. Manufacturing and Transport & Storage also held positive staffing growth expectations. Wholesale trade, Retail trade and particularly Construction all had relative pessimistic expectations for growth in staffing
  • The overall confidence in the sector is not evenly spread as a core group and those organisations with revenues of $20m-$40m showed the greatest decline in confidence over 2011. The smaller businesses ($10M-$20m) and larger ($40m-$250m) have held a more stable view of growth.

To read more about the findings of the report, visit www.australianmidmarket.com.au  

Mark Toohey is CFO of GE Capital.

Article last updated 31 January 2012