Punching above their weight

Mid-market companies make a significant contribution to the UK economy, but potential for growth remains untapped, writes Chris Johnston

It may have taken quite a while, but British business appears to have a smile on its face once more. Economic growth and consumer spending continues to rise, while unemployment is on the slide.

The twice-yearly snapshot of corporate Britain, published last month by Lloyds Bank, found that business confidence had hit its highest level in the survey’s 22-year history. Some 65 per cent of businesses expect total sales to rise in the next six months, while just 7 per cent think they will fall. More than 50 per cent of companies expect exports to jump in the same period, compared with 6 per cent forecasting a decline.

Most mid-market companies – typically those with annual revenues of between £15 million and £700 million – will also be looking ahead with renewed optimism. There are some 300,000 companies in this sector in Britain, according to Deloitte, and not all have been affected by the economic gloom of the past five years.

Despite being perhaps the least visible part of the business sector – accounting for fewer than 1 per cent of companies in Britain – the CBI says that firms with between 50 and 499 employees punch well above their weight by employing 16 per cent of workers and accounting for 22 per cent of total UK revenue.

Matthew Fell, director of competitive markets at the CBI, says that mid-market companies also accounted for a third of all private sector jobs created between 2010 and 2013, helping Britain to recover from the economic downturn, underlining their role as a business bellwether. He believes that companies in this sector have been somewhat unloved because they are too large to take advantage of government schemes to help small businesses, but lack the scale to compete with big business.

The CBI says that more mid-market firms need help to become “gazelles”, with high rates of growth, which would make a significant contribution to raising GDP in the coming years. “A big part of that is getting more confidence and ambition into that mid-category after they reach a respectable size and growth rate – encouraging them to upskill and kick on to that next level of professionalism,” says Mr Fell.

More than 50 per cent of companies expect exports to jump during 2014

Getting some mid-market companies out of their comfort zone, particularly those that are well established, family run and generate respectable returns, is a particular challenge. Part of the problem is their reluctance to highlight the mid-sector success and their contribution to the economy in the same way that Germany reveres its equivalent Mittelstand, for example.

While UK Trade and Investment has conducted trade missions for mid-market companies to emerging markets such as Turkey and Brazil, Chris Gentle, head of Deloitte Insight, believes there is more that government can do, including making it more culturally acceptable to work for such firms. Despite this he says that, in the wake of the economic downturn, more graduates now want to work for smaller companies or take advantage of technological advances to set up their own enterprises.

THREE GROWTH RULES

According to Deloitte’s Businesses Leading Britain report, which examined the fastest-growing 1,000 companies with revenues between £30 million and £1 billion, there are three rules for growth. Many of these firms operate in niche business-to-business markets, which means they are not household names, but are highly successful because they have capitalised on the development of intellectual property.

Many chief executives of these 1,000 companies have a long-term vision that can drive growth and know how to recruit and retain the right staff to make that happen, Deloitte found. The third common factor was being adept at exploiting export opportunities. Establishing a factory in central Europe had allowed one eyecare specialist to double turnover to £100 million in just five years.

Yet companies can only expand into new markets with access to sufficient finance, something that has not always readily available at reasonable cost. The CBI calls for more incentives for companies to invest in innovation, making it easier for mid-market companies to issue debt and access a broader range of funding sources.

Despite the many challenges, the outlook for mid-market companies is promising, according to research conducted by CEB, the member-based advisory company. It found that 77 per cent of the companies it works with are expecting to expand in the next 12 months.

However, CEB’s Scott Engler warns there is a danger that expectations are preceding actual growth. He also points out that while almost all executives in mid-market companies surveyed by CEB agree growth was a priority, only 28 per cent of chief financial officers in these firms have faith that their corporate strategies will result in such expansion.

To that end, the Deloitte report calls on big business in the UK to play their part in helping their mid-market counterparts to grow by mentoring and guiding them.