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Investment Key to Surviving Longer than Expected Downturn

Media Release: 4th December

Investment Key to Surviving Longer than Expected Downturn

• Economic downturn much longer than most businesses expected
• Businesses who have invested through the recession performing better
• Businesses revenue projections over last four years have been too optimistic

The economic downturn has lasted far longer than expected, but businesses that have invested in business development have been the most likely to find a path back to growth, according to a new study.

A New Zealand Institute of Economic Research (NZIER) analysis of four years’ worth of results from the MYOB Business Monitor found that the majority of businesses had expected the economy to recover by the end of 2011 and had been overly optimistic in their revenue projections over the last four years.

In April of 2010, 78% of businesses said they expected the economy to be fully recovered by the end of 2011. The recovery, however, has disappointed, with 48% of businesses saying they believed that economic recovery would still be more than 18 months away in June of 2012.

In the slow recovery from recession, business owners who classified their strategy as “business building” – focused on business development and upgrading their systems and processes – have seen their business performance improve over the last four years. However, businesses which tried to wait out the downturn by cutting costs or deferring investments have struggled.

Businesses focused on business development have seen revenue growth over the previous 12 months improve from -9% in early 2010 to +17% in June 2012. In contrast, other businesses report sales have slowed from -6% in early 2010 to only +8% in June 2012.

NZIER Principal Economist Shamubeel Eaqub says that these results confirm that this recession is different to recent downturns and that a different business approach has been needed.

“All the economic data shows this has not been a typical downturn. The recession lasted nearly twice as long as other recessions in the last 50 years, and the recovery since has been quite shallow.

“This has meant that businesses who have taken the approach of tightening their belts during tough times and trying to wait out the downturn have actually not performed as well as businesses who have focused on their core strengths and invested their way through the recession.”

Market Share, Staff, and IT Key Areas for Business Development
Three of the most productive areas for businesses to invest in were securing market share, hiring talented staff and increasing use of information technology.

12% of businesses that said they were focused on business development were increasing the amount of fulltime staff in their business, compared to just 4% of other businesses. A business development approach was also more likely to lead to higher wages for staff, with 24% of businesses following an investment approach looking to increase their staff’s wages.

An even more appealing investment was an increased emphasis on retaining existing customers, with 49% of businesses taking an investment approach saying they had increased the amount they spent on customer retention, compared to just 29% of other businesses. Customer acquisition was also a key area for investment, with 42% of those with a business development approach investing in new strategies, compared to just 18% of other businesses.

Finally, businesses looking to grow their way out of recession were also far more likely to make a sizeable investment in information technology over the last four years, with 23% increasing their spend on IT systems, compared to just 11% of other businesses.

MYOB general manager Julian Smith says that businesses that took an investment approach to the recession could find themselves coming out of the downturn with their market positioning improved.

“If you are in an industry where many of your competitors are losing market share or failing to make new investments, and your focus is on growing your business through better systems and staff, that is a real competitive advantage.”

Business Revenue Projections Over-Optimistic
Perhaps unsurprisingly, given the unexpected depth and length of the economic downturn, many businesses have found that their revenue projections have been overly optimistic during the last several years, making it even harder to survive through cost cutting alone.

In 2009, a net 20% of firms were forecasting an increase in revenue whereas a net -14% had actually experienced revenue growth. That trend stayed consistent right throughout the slow recovery, with nearly a net 25% of businesses expecting revenue growth in the year ahead at the start of 2011, but only a net -4% having actually seen revenue growth over the last year. In the most recent survey in June 2012, a net 24% of businesses were forecasting revenue growth, but only a net 1% had actually seen revenue growth in the last twelve months.

Julian Smith says this uncertainty was another reason that business development had proven to be the right course of action over the last four years.

“It can be very hard for businesses to plan ahead at the best of times, but the longer than expected economic downturn has made planning even more difficult. Especially for small businesses which may not have a lot of capital, the first instinct is often to be cautious and hold off investment until the economy recovers, but what these results show is that now isn’t the time for a business as usual approach.

“Those businesses that continue to invest in staff, customers and IT systems – while it may have been a brave move at the time – are now reaping the rewards of their strategy.”


-ends-

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