Slow recovery at home for regional companies

The UK economy sometimes echoes one of comedian Eric Morecambe’s most famous jokes: it has all the right companies, but not necessarily in the right places. While there are many great businesses in every part of the country, economic activity has in recent decades become more concentrated in London and south-east England.

The market, of course, decides where the best location is for companies to succeed. But the spotlight is firmly on regional businesses: the government wants the private sector to create jobs to replace at least 330,000 likely to be lost in the public sector over the next four years, notably in Northern Ireland, Wales, Scotland and parts of northern England and the Midlands.

Corporate Britain, as it emerges from the recession, is not in bad shape. Insolvencies to date have been far lower than after previous recessions. Profitability is at its highest level since the beginning of 2009, and the corporate sector has built a substantial cash pile that can be deployed into new investment. But it has been tough, particularly for many small and medium-sized enterprises. There are difficult strategic decisions to take and the mood remains jittery.

“Bluntly, the further north you are and the smaller the region, the tougher it’s been,” says Lorna Moran, chief executive of Newcastle-based Northern Recruitment Group, which has offices in London, York, Edinburgh and Middlesbrough.

“A lot of our clients suffered badly,” she says. “Many companies went bust, a lot did pre-packs [rapid administrations in which the operating assets are sold at a pre-arranged price] and a lot survived by the skin of their teeth.”

Now they are hiring again, cautiously – in engineering, especially oil, gas and renewables, and in information technology. Turnover at NRG, which Ms Moran founded in 1976, is back above £20m ($32m) and profits rose 25 per cent in the past year.

Like many companies, NRG has had to adapt its business model. Bookings used to be split 50:50 between the public and private sectors, but now they are 80 per cent private sector. It also started running programmes for redundant executives.

At the start of the recession, many thought London and the south-east would be the worst hit, as a kind of punishment for their part in fuelling the financial bubble. But it was manufacturing and construction that felt the early onslaught, and manual workers in the West Midlands, Wales and parts of northern England who bore the brunt.

Things have evened out a bit since manufacturing started recovering, but there are signs of deterioration in some areas. Unemployment in north-east England has jumped to 10.2 per cent of the workforce, the UK’s highest, with the West Midlands not far behind at 9.8 per cent.

For businesses, the geographical picture is more mixed. According to surveys by the British Chambers of Commerce, Scotland and London suffered the deepest drop in UK sales of services, while the West Midlands, Yorkshire and north-east England had the biggest fall in manufactured exports. All are at varying stages of recovery.

The problem is not the quality of regional businesses, but that they begin from a smaller base. For every private sector job generated in the north and Midlands between 1998 and 2008, 10 were created in London and the south, according to the Centre for Cities think-tank. Even if enterprise can be unleashed, it has a long way to go.

“The regions have actually performed relatively similarly, but sectors have performed very differently,” says Sir Michael Bibby, managing director of Bibby Line Group, the Liverpool-based conglomerate. “The customer bases for a lot of businesses are more spread now, nationally and internationally.”

Bibby Line Group’s shipping and offshore businesses were hit, but its UK distribution and financial services businesses made record profits over the past year, while its Costcutter convenience-store chain has grown steadily. According to Sir Michael, demand for the company’s debt factoring services by SMEs has been “astronomical” because of constraints on bank lending.

Sir Michael is the sixth generation of the family to run the UK’s oldest surviving shipping company, which he has diversified into a group with a turnover of £1bn and interests ranging from logistics to supermarkets and burial sites. Of its 5,500 staff worldwide, fewer than 200 work in Liverpool and 4,800 around the UK. Over the long term, he is optimistic about job creation in the north but fears that a state-dependent city such as Liverpool will struggle to absorb public sector redundancies.

He says all UK businesses should have a contingency plan for surviving a double-dip recession. “It’s going to be quite a tough time in the UK economy, but we are seeing strong growth still from overseas demand,” he adds.

The recession has not so much changed Sir Michael’s strategy as improved the chances of implementing it: he wants to make more acquisitions in areas such as logistics, and prices of target companies have come down. Bibby entered the recession debt free, having already sold its ships, but will gear up as bank debt becomes available.

Malcolm Edge, head of markets at KPMG, says the professional services firm advises medium-sized companies on debt restructuring – a big problem, with many needing to refinance this year and next. He tells clients to negotiate early.

“The supply of money is still tough. We find banks are quite aggressive in exiting markets, and when they do decide to stay in, the rate can be quite onerous,” he says.

Banks say they are stepping up lending and investment, particularly to SMEs, as part of the Project Merlin deal with the government.

Mr Edge says there is a “massive nervousness” among companies about economic prospects, although he sees bright spots such as information technology and mail-order retailing. “You’ve got to batten down on your costs, but if you do just that, you are going to disappear,” he says. “You’ve also got to look for new markets and opportunities.”

He urges companies to plan for a range of scenarios, including rising inflation. “If you conclude under any reasonable scenario that your foundations are strong, that’s a basis from which you can invest.”

For John Hutt, chief executive of HTI, which claims to be the UK’s biggest independent toy designer and maker, the recession has underlined the importance of exporting. Five years ago, nearly all his company’s business was in the UK. Now a quarter of sales come from exporting to 73 countries, including the US and Australia, and he would like to raise that to 75 per cent over 3-5 years.

Founded in the 1950s, HTI is based in Fleetwood, Lancashire, but that has not impeded its expansion. It develops hundreds of lines, and invests in “hot” brands such as Hello Kitty as well as enduring ones such as Postman Pat and JCB.

“We feel that if we were to rely on the UK, we would be treading water for at least the next two years,” Mr Hutt says. Half of HTI’s 200 staff are in Fleetwood and half in Hong Kong, where it has a commercial hub. It does all its manufacturing in China but may consider doing some in Fleetwood in future for the European market. Sales grew by 12 per cent last year to £66m and are up another 10 per cent so far this year, helped by the retail sector’s resilience and an emphasis on low prices.

Opportunities are there for companies with sound business models and strong balance sheets, but for some time the best prospects may lie overseas.