Gresham Monitor No. 2 - January 2001

Middle market companies want the government to get to grips with the strong pound and the unresolved question of UK entry to the European Monetary Union. These issues are causing sleepless nights for the bosses of the UK's backbone companies. But, while they seek decisive government action, more than two-thirds of middle market companies have no official boardroom stance on whether or not the UK should join EMU. Those that do have a corporate view are sharply split three to two in favour of entry.

These are just some of the findings in the latest edition of the Gresham Monitor. The Monitor is a survey of the middle market commissioned by Gresham Trust, the private equity house which specialises in backing companies in this key sector of the UK economy.

Highlights:

Only 30 percent had an agreed boardroom view on EMU entry, of which 18 per cent were in favour and 12 per cent against.
Skill shortages, especially in management, IT, design,sales and production, plagued half those surveyed and 50 per cent companies facing a shortage of skilled staff said the situation had worsened since the last survey.
41 percent plan to give inflation-busting pay rises of more than 4 percent.
Optimism has dampened: two-thirds are optimistic about prospects over the next 12 months compared to three-quarters six months ago. ␣
There are signs of a down turn with half experiencing higher overheads compared to just over a third last time and a third reporting lower profits (compared to a fifth in the summer survey).

The Monitor found that some 83 per cent of middle market managers are kept awake by a range of external factors over which they have little control such as the level of the pound and interest rates, bureaucratic red tape and the dearth of skilled staff. And they question whether their needs will feature on political agendas in the next election. The survey also tracks this sector's financial performance and prospects. The drop in optimism about prospects in the year ahead compared to their view six months ago partly reflects a slowdown in performance over the past half year.

On a more positive note, half the companies are planning to increase their internal investment and a third of those surveyed said they would consider private equity as a source of funding.

Paul Marson-Smith, managing director of Gresham Trust, said today: "Uncertainty about the direction of key economic influences creates major difficulties for all companies. Although their performance is less buoyant than in our last survey, middle market companies are learning to cope with less than ideal conditions. These companies form the bedrock of UK plc and it is vital that future governments put their needs firmly on the political agenda to create the long-term conditions which will foster their success."

The Monitor uncovers regional differences. For example, more companies in the Midlands are keeping a tighter rein on their pay budgets. Sixty-five per cent plan rises of between one per cent and three per cent against just over half in the North and a third in the South. Companies in the South showed the strongest growth in turnover (63 per cent up) and profitability (47 per cent higher) than the other regions, but also the most companies experiencing higher overheads (57 per cent). Some 31 per cent of North firms reported falling turnover, against a fifth or less in the South and Midlands. (See Notes to editors: appendix for further regional information).

The survey also points out the variation in responses to certain issues from manufacturing and service companies. Manufacturers were the most pro-EMU - more than half already use the single currency. Some 28 per cent of the manufacturers surveyed felt that interest rates were having a negative impact on their business compared to 18 per cent of service companies. When it comes to pay, 48 per cent of service companies plan to give rises of between four per cent and six per cent. That contrasts with just 22 per cent of their manufacturing counterparts planning a similar increase. The decline in optimism from the last Monitor is particularly marked for service companies with just 17 per cent very optimistic about prospects in the next 12 months compared to 42 per cent last time. While manufacturers faced skill shortages mainly in the areas of sale and design, service companies suffer from a dearth of good managers.

Regional Highlights (North):

40 percent said profits have fallen (32percentnationally).
Northern companies are dealing better with the current level of interest rates: just a quarter said rates were having a negative effect (24 per cent nationally) against 36 per cent in the last survey.
Although harder hit by the strong pound, with 44 percent affected negatively, (41percent nationally) than companies in the South, Northern firms were coping far better than last time when 61 per cent were badly affected.
Skill shortages were less of problem than six months ago- 27 percent reported them as an issue against 47 per cent previously (49 per cent nationally).
54 percent of managers favour Britain joining the European Monetary Union (47 percent nationally)

Regional Highlights (Midlands):

35 percent reported lower gross margins in the past 12 months-five percent fewer than last time. The gap with the other regions (24 per cent in the South, 18 per cent in the North) is narrower - but still marked(27 per cent nationally).
45 percent suffered higher overheads (lower than in the South - 57 percent) but sharply upon last time when the figure was 25 per cent (35 per cent nationally).
39 percent increased staff numbers (against 25 percent six months ago and 41 percent nationally this time) and just 28 per cent trimmed the workforce (compared to 43 per cent last time and 32 per cent nationally in this survey).
31 percent said interest rates were having a negative effect compared to a quarter last time (24 per cent nationally).
45 percent said the strong pound was having a negative effect, the most of all the regions, but that was far less than the 65 per cent affected in the last survey (18 per cent nationally).
55 percent were suffering from skill shortages, in production and design especially, up from 42 per cent last time (49 per cent nationally).
65 percent plan pay rises of one percent to three percent (50 percent nationally).

Regional Highlights (South):

54 percent plan pay rises of four percent to six per cent (36 percent nationally).
While 70 percent were optimistic about the year ahead (67 percent nationally), that is down

from 82 per cent in the last survey.