After a difficult year for businesses, 2023 doesn’t look like it will provide much respite. Economists are predicting one of the longest recessions on record in the UK as the cost-of-living crisis, war in Ukraine, high energy prices and ongoing supply chain issues impact consumer and business spending.
These latest economic difficulties come just three years after the Covid recession of 2020 and poor growth in the UK since the 2008 credit crunch. But as Julio Bruno, chairman of Mercato Metropolitano and board director at Pacha Group, points out: “Recessions are logical.” So businesses must learn how to navigate them.
“A lot of people think ‘recession’ is a bad word but the economy goes up and down and we should demystify what a recession is – nothing other than a correction or a dip,” he says.
Adapting to changing customer needs
Nevertheless, there are changes which businesses will need to make. This recession is likely to see a shift in how and on what consumers spend their money, as rising energy bills and the increasing cost of everyday items leave less for life’s luxuries.
Kantar’s latest Global Issues Barometer, conducted in November, found that 71% of UK consumers spontaneously mention the economy when asked to mention their concerns, ahead of war (58%). Work and unemployment are also rising up the list of worries, spontaneously mentioned by 40% and overtaking climate as their third biggest source of anxiety.
During difficult economic times, one key expectation of businesses is to treat employees well by, for example, paying a decent wage and supporting local communities, says Sarah King, senior partner at Kantar’s sustainable transformation practice. That was something that came out during the pandemic and has remained.
“Expectations of business have raised. People don’t see them as separate entities, they are absolutely part of the communities where people live and their role is really important,” she says.
The survey also found that 53% of people struggle to meet their monthly outgoings. To cope with this, 27% of consumers say they are reducing general expenditure, 26% are looking for promotions, 22% are shopping in cheaper stores and making shopping lists, and 20% are staying within their spending limits.
Luxuries – large and small – are being sacrificed to help people weather inflation. Some 55% say they will deprioritise luxury items, 46% will cut down on entertainment activities and holidays, and 44% will reduce how often they visit restaurants and coffee shops.
For businesses this means avoiding opportunistic price rises, understanding when and why shoppers might be in the market for their products and finding ways to tap into new customer needs. But King believes the outlook currently remains one of “prudence rather than panic”.
“A small group of people are clearly right on the edge and finding things really hard. Everybody is finding it a bit more difficult, everybody is being careful. But it does look as if most people are coping,” says King.
Nigel Vaz, CEO of digital transformation company Publicis Sapient, agrees. He sees that consumers want to do more with less, so they’re typically substituting products for others they see as better value or choosing cheaper delivery slots. That means, he says, that businesses will be fighting with competitors to keep their current customers, rather than trying to find new ones.
“In almost every sector businesses will have to avoid customer churn by creating better products, services and experiences that make people choose them over someone else,” he says.
Focusing on the core business
For that to work, Bruno says companies will return to focus on their core businesses to ensure they are fit for purpose and can generate as much revenue as possible. This could involve a business reorganisation, an efficiency drive or increasing prices.
“Business leaders must concentrate on their core, on finding growth from what you’re doing already. Too often, people and companies want to do new things but sometimes that can lead to forgetting that it was that core activity which made money for the company in the first place,” he says.
“Concentrate on knowing what you already know very well; where you are efficient already, drive to be more efficient. Look at your prices – are they in line with the realities of your cost base?”
Vaz sees improving core products and services as key but warns that all too often that could involve a big bet on digital technology. Getting sign-off during a recession can, he says, be difficult if the business is focused on the short term but leaders need to know where their markets are headed and remain competitive.
He cites the example of a large financial services company that Publicis Sapient is working with, which invested in reducing the amount of time it took to get a mortgage from 12 days to 10 minutes. “For them, it was more important to make savings on operating expenses by using capital expenditure, than the other way round,” he adds.
Another example is in customer service, where businesses are investing in chatbots and AI to make call centres more efficient and better at helping customers. “The cost often has to be found within the business to fund the new – but the new is going to reduce their exposure to costs.”
A pragmatic approach to M&A
Businesses often batten down the hatches during recession, conserving cash for the good times that hopefully lie ahead. That is even more important in 2023 with rising interest rates making borrowing less appealing for businesses.
“Cash is always king but much more so in a crisis,” says Bruno. “If you can generate cash because of the type of business you are in, conserve it.”
But he does see opportunities for cash-rich companies to consider mergers or acquisitions, partly because there will be some good deals.
“Many companies will get into trouble, I’m afraid, and that is always when you can find bargains. Those businesses with cash will go out there and be more aggressive.”
Data from previous recessions also shows that those companies which can afford to make deals come out of recession better. A PwC analysis of data during the 2001 recession found that companies which made acquisitions had a 7% higher shareholder return than industry peers one year later, while those that did deals in the first half of that downturn had 10% higher returns.
Jonathon Parkinson, managing partner UK at M&A adviser Marktlink, thinks this is down to those companies that are making deals doing so because it is part of their DNA. “They’re staying true to the values that got the business to where it is. They’re being entrepreneurial, flexible and optimistic.
“It’s easy to be conservative and focused internally during a crisis. But that’s when you want to look out for opportunities.”
He also doesn’t think that it’s just companies in distress that will be bought, suggesting some leaders need to shift their mindset. “There will still be a lot of competition for the businesses which can demonstrate they are resilient through everything that’s going on, show strong growth, strong margin retention and are still cash-generative.”
For those looking to be purchased, he suggests getting the groundwork done as soon as possible. The key thing is to first decide what kind of strategic funding or acquisition might be suitable – UK or international, private equity or another business – then tailor the business to appeal to that audience.
“Business owners should recognise that selling a business isn’t necessarily about exiting. The analogy I use is that when the waters are getting choppy, the journey can be smoother in a bigger boat. So sometimes, finding a good strategic or financial partner can give you the extra confidence and security that no matter what is to come, you will be able to overcome it. There is value in that. As long as it’s the right buyer,” he says.