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Mid-sized British companies are important. They may not be as significant in number or performance as Germany’s Mittelstand, the collection of mid-sized companies famed for being the engines that drive Europe’s largest economy, but they do punch well above their weight.
Mid-sized companies in the UK account for about 1.4 per cent of the approximately 4.5m businesses trading at present, but they generate 32 per cent of private sector gross domestic product and more than one in three British jobs, according to a recent report commissioned by GE Capital, the financing arm of the industrial group.
These businesses have advantages in that they seem to find it easier to cope with regulation and have not had so many of the problems other companies have faced in accessing capital, according to Stephen Roper, professor of enterprise at Warwick Business School and joint author of the report.
They have also weathered the economic turbulence of the last few years better than many larger companies. The UK’s largest companies cut 692,000 jobs from the beginning of the credit crunch in 2007 to 2010. During the same period, the UK’s mid-market companies added 26,000 jobs.
Being big enough to survive the battering of a turbulent economic environment is critical to the success of mid-sized companies at the moment, according to Emma Wild, who led a report by the CBI, the employers’ group, into these types of businesses.
“It is a very tough environment out there and when you talk to medium-sized businesses they are conscious of that,” she says. “The medium-sized businesses I talk to are doing well despite the tough environment.”
Mid-sized companies differ from smaller, and perhaps some larger companies, in that they tend to be “quietly optimistic”, according to Ms Wild.
“The attitude is that some growth is better than none,” she explains. “It is a glass-half-full approach to life.”
However, British mid-sized companies can learn a lot from their German counterparts. If their performance matched those of the Mittelstand, they would generate an additional £35bn of turnover and 241,000 jobs in the UK, according to Prof Roper.
“There is a bit of strategic cramp in the UK market because of the broader economic situation being more difficult,” he says. “Twenty-six per cent of the firms we spoke to in the UK said they were focused solely on survival, compared to 14 per cent in Germany. That is a significant difference and it will affect the strategies those companies are adopting in investment, research and development and new market expansion.”
The top challenge for British mid-sized companies is attracting employees with the right set of skills, followed by finding talented people in their local area and retaining these people once they have been hired, according to the GE Capital research.
One mid-sized business very aware of this issue is British Engines, a manufacturer of high-pressure valves, cable glands and hydraulic pumps among other things for companies around the world. It employs 1,100 people in 10 countries, although many are based around its headquarters in Newcastle.
British Engines has trained 600 young north-easterners since setting up its apprenticeship programme in 1966, with many reaching senior positions in its group of companies. However, it has recently expanded the scheme, partly in recognition of the increasing importance customers place on high-quality products, particularly those in the oil industry, according to chairman Alex Lamb.
“Our strategy has never really changed in recent years, in that what we are trying to do is offer high-integrity products to our customers, but that has become a more relevant subject in our customers’ minds in terms of some of the accidents that have happened in the oil industry.
“Control of processes has been ramped up considerably. We have needed to make sure people are trained and we have the right information technology systems to back it up.”
British Engines previously recruited 12 apprentices a year, but in 2012 that will double. The company is also trying to broaden the training it provides by not only sending apprentices to study for formal external qualifications, but also setting up its own in-house training function that can organise courses on personal development and more advanced engineering skills.
The extension of the scheme is in part a recognition of skills shortages, but also a realisation that modern engineering companies need to train people to move up in the business, Mr Lamb says. “We need to give them an even greater range of skills to make them appropriate for the organisation.”
. . .
One of the most significant areas where UK mid-market companies could perform better is in exports, according to the GE Capital study. Only 17 per cent of UK mid-market company revenues come from outside the EU, lower than their counterparts in Germany, France and Italy. The higher growth trajectory of the Mittelstand is put down in part to the companies within it gaining 25 per cent of their revenues from non-EU countries.
Companies such as British Engines do not have a problem with this, but exporting is not even an option for many British mid-sized companies, whose services are UK focused.
Larkfleet Group, a privately owned group of construction and development companies based in Bourne, Lincolnshire, is more concerned about access to finance than expanding into new markets.
Karl Hick, the managing director, says that nearby Peterborough is one of the fastest-growing areas of the UK, so offers plenty of opportunities for companies like his that build the right kinds of properties.
The biggest barrier to growth in the housing market is banks’ unwillingness to lend to builders, and being mid-sized as opposed to small is little help in this area, according to Mr Hick.
He has found opportunities by innovating, such as creating a joint venture with a local housing association. This is providing the finance for Larkfleet to build smaller homes for retired people, who are still able to move house relatively easily because they have already repaid their mortgages.
Survival is often a matter of drawing upon experience gained through surviving previous recessions, and celebrating the victories, no matter how small, says Mr Hick.
“To be honest, mid-sized and small businesses in this sector have been going out of business all the time,” he says. “But those that have been here for a while have a better chance.”
The differences in the challenges Larkfleet and British Engines face highlight how difficult it is to talk about problems affecting these businesses as a whole. Mid-sized companies may be a select group in the UK but they are in no way homogeneous.
Case study: For Benfield Motor Group the middle is just right
One company that is doing well in a tough market is Benfield Motor Group, the family-owned chain of car dealerships spread across the north of England and the Scottish borders.
Like most other companies, it was hit by a loss in consumer confidence in the wake of the collapse of Lehman Brothers, the bank, in September 2008. “We had to start thinking about cash management,” Mark Squires, chief executive, recalls. “As a low-geared company we never really had to think about that before then.”
However, Benfield’s fortunes quickly recovered, and 2009 was the company’s most profitable year ever. “The economic fundamentals for our customers were very strong,” Mr Squires says. “There were cuts in value added tax, a low interest rate regime, the used car scrappage scheme and people weren’t [yet] being made unemployed. There was also a shortage in the supply of cars to the market so for the first time we had a really good balance between supply and demand, which drove strong prices and margins.”
Although consumer confidence dipped again in 2011, Benfield was able to still find sales by switching to smaller cars as people traded down to save money. “People are not moving house but they still say it is time to change the car,” Mr Squires explains. “They can save money because a newer car will be more fuel efficient.”
Benfield has invested in its online sales function. People are not buying cars online, but they are using the internet for research before visiting the dealerships. Benfield has spent money to make sure its website is high in the rankings for website searches.
Another opportunity for the company has been the corporate market. “There was a gap in the market for us between the bedroom brokers [online, sole-trader fleet brokers] and big fleet providers,” Mr Squires explains. Benfield had the physical infrastructure with its network of dealerships but spent money on information technology to make it work.
It has also invested in improving its customer service through a staff training scheme called Be Benfield. “Those are not just pretty words,” Mr Squires says, noting that the training has helped the company strengthen its brand and present itself as more upmarket, able to charge a premium for its service.
All of this costs money and Benfield has gone from a situation of little or no outside funding to about 50 per cent from a mix of asset-backed borrowing. Mr Squires has found the banks supportive, but admits that this is largely because of the company’s size and the fact that it owns the freeholds to almost all of its dealerships.
Benfield benefits from being a mid-sized company, small enough to adjust to new market conditions quickly but large enough to be able to secure the necessary funding.
It is all about watching your customers’ behaviour and adapting, Mr Squires explains. “This is not to say that the marketplace isn’t challenging for us, but we have adjusted to what I would call the new normal.”