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February 17, 2013 6:00 pm
There are ripples on the surface of even the calmest waters. While the UK economy has flatlined over the past year, UK companies have – to varying degrees – failed, faltered and flourished.
This FT five-part series examines some of those that have struggled, and some that have succeeded, as the British economy has been in the doldrums.
Their stories have not been told by stock market indices. It is widely recognised that the FTSE 100 index of London’s largest quoted companies – which rose almost 6 per cent last year – no longer reflects the realities of doing business in British high streets, offices and factories: more than one-quarter of its market value is made up of mining groups and oil and gas companies that are largely detached from the UK.
At the same time, the largest consumer goods companies are less reliant on the whims and wallets of British customers than they would once have been. Diageo, for example, derived just 7 per cent of its net sales came from the UK in 2012 – while more than 40 per cent came from emerging markets.
For these reasons, this series looks across five broad sectors – energy, industry, consumer, TMT and finance – for those UK companies where domestic circumstances have shaped their experience.
Among the companies brought low by the economic slowdown, some common themes emerge.
One is high debt levels. Companies carrying debt taken on in good times can find it too onerous when times are tougher, even when interest rates are low.
“If debt was taken on board when covenants were less restrictive, they may find they have limited room for manoeuvre now,” says Charles Cara, an analyst at Absolute Strategy Research. “If their earnings have fallen, then they could find themselves under further pressure.”
Two other common factors also crop up. One is the aftermath of a significant acquisition. Even if the deal appears a good long-term move, in the near term it can be an additional challenge to integrate the new business.
Another is operating in a sector facing structural change – for example, the media sector, where companies are having to adjust to the shift away from print. This creates a unforgiving environment for decision-making. A wrong move can carry the penalty not just of a short-term loss of revenues but also more serious failure.
However, companies in other sectors have gained from government stimulus measures aimed at easing the economic climate.
Housebuilders, for example, have benefited from assorted initiatives to boost the housing market, as they have built on land in southeast England acquired cheaply during the downturn. Companies well-placed to win outsourcing contracts may also have the advantage of relatively reliable income streams.
For those companies suffering, the obvious course of action might seem to be cost-cutting and sticking to core business activities.
But business schools points to other ways forward.
Freek Vermeulen, associate professor of strategy and entrepreneurship at London Business School, is clear about the limitations of cost-cutting and the need for companies to expand.
“Often in good times we see companies start to diversify, while in lean times they refocus on the core. Really, it should be the other way around. You can cut costs only for so long, and when life is difficult companies need to look for different sources of revenue.”
One example of this is in the airline sector, where low-cost carriers have increased their numbers of business passengers as travellers trade down from full-service airlines.
Charles Baden-Fuller, professor of strategy at Cass Business School, sees an essential difference between doing business in times of growth and no growth.
“Companies need to be asking themselves the same sort of questions as in the 1980s when the UK was coming out of another complex recession: how must we change our business model?
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