Gearing for Growth
The Regus Business Confidence Index 4th Edition April 2011
Gearing for Growth Global business optimism, having undergone a slight decline in 2010, has now surged ahead, according to the latest half-yearly Regus Business Confidence Index. This regular global survey shows a significant increase in the proportion of firms reporting a rise in revenues and profits, as well as a growing alignment between future outlook and actual results, with real revenues coming into alignment with previous surveys’ predictions. The survey also reports departmental spending mainly on the rise, showing that companies are keen to invest in catching the wave of economic recovery. However, there is one notable exception to this trend – property costs. Having been caught out by inflexible commercial property arrangements during the recent economic downturn, firms remain committed to scrutinising and, where possible, reducing fixed premises costs in favour of more flexible workspace solutions that can easily scale as growth is achieved. This reflects previous Regus surveys which have shown a trend away from fixed office working towards more flexible working practices.
Regus Business Confidence Index | Gearing for Growth | Issue 4 | April 2011 | Page 2
Management Summary •
New research by Regus shows that expectations expressed in October 2010 by 61% of respondents that their revenues would grow in the following year, have been confirmed, with 50% of companies reporting revenue growth in March 2011. This contrasts with previous editions of the Regus global survey, where predictions of revenue growth were not being met by actual rises.
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This positive outlook is matched by predicted rises in departmental spending this year. 36% of companies expect to increase their marketing spend; 41% will invest more in sales; and 21% envisage putting more into product development
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However, there is one area of departmental spending that is expected to experience little growth or even actual decline – the property department.
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The report reveals 81% of companies globally intend to reduce or freeze their property or premises costs this year. This result indicates a strong will on the part of businesses to enthusiastically drive growth, but at the same time steer clear of incurring unnecessary fixed costs related to under-used or unused premises space.
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The Regus Business Optimism Index, which analyses aggregate positive forward-looking statements reveals that global optimism has grown 25 points since autumn 2009.
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Globally 41% of companies are also reporting that revenue growth is closely mirrored by profit growth - a positive indicator that economic advance is mostly solid with a majority of companies investing on the basis of increasing profitability.
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Most companies (54%) believe that the full momentum of the economic recovery will take place in the latter half of 2011 or the first half of 2012. This prediction highlights that expectations for the peak of recovery have slipped a little to the end of 2011, rather than the first quarter of 2011.
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Geographical Highlights •
Asian giants continue to lead growth with 60%+ of companies experiencing both revenue and profit growth in the past twelve months in China and India. China takes the lead with 72% of companies reporting revenue growth compared to 67% in India. The trend repeats itself in the profits outlook, where 62% of Chinese companies report profits rising compared to 60% of Indian firms.
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Germany and Belgium are close behind, however, with 64% of German and 61% of Belgian companies reporting revenue growth. The proportion of companies experiencing profit growth over the past year is also positive, at 54% in Germany and 55% in Belgium.
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At the other end of the scale we find Japan, in contrast with other Asian countries, with a low proportion of companies reporting profit growth at 23%, and Spain where only 18% of companies reported profits rising. Nevertheless these results are highly positive when compared to the October iteration of the survey where Spanish profit growth was negative (-21%) and Japan only had 6% of companies experiencing profit increases.
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Optimism is highest in China, Belgium, Germany and India and lowest in Spain. The UK and the USA remain towards the lower end of the optimism scale with other western economies such as France and the Netherlands.
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Optimism growth in the last six months has been high in Japan (+36 points) and Spain (+33 points) indicating that although conditions for business are not yet optimal, a significant improvement has been achieved. It is worth noting that due to natural disaster and nuclear hazard Japanese optimism may have taken another turn for the worse after the collection of this data.
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Introduction Reports globally confirm that the economic recovery is advancing, Asian giants continue on their high growth path as Western Economies recover from the downturn, but governments warn that the speed of recovery is not as fast as hoped.1 The IMF is predicting global growth of 4.2% in 2011
Nevertheless, the differing conditions that economies face affect their outlook for the coming year with the IMF predicting 4.2% global growth for 2011; developed countries are expected to grow at half that pace, whereas and India and China are expected to move faster at more than 6%.2 In Asia, potential effects of the Japanese tsunami and earthquake disaster are not expected to excessively impact the bilateral trade with China, although Japan is China’s largest source of imports particularly in the high-tech automotive products arena. Effects on the Eurozone are also regarded as negligible.3 China’s industrial activity, is reported by Markit to have risen in March after a slower February. Positive indication of the success of government’s policies to contain inflation without affecting growth was found in the slowing of input and output prices sub indices growth.4 India remains positive with the sharpest growth in the services sector since July 2010 being recorded in February, whilst manufacturing remained unchanged since the start of the year.5 In the Eurozone, Markit’s PMI highlights that economic activity continues to expand at a rate of growth which is second only to that recorded in July 2007 with manufacturing taking the lead (although the services sector also expanded). Germany and France fared particularly well in March, while the situation in the rest of the currency zone was reported unchanged or weaker than February. Output prices rose for the eighth month running keeping inflation close to high February levels.6 In particular the UK government reports that inflation will remain between 4% and 5% this year before dropping to its 2% target in 2013. Mr Osborne, the UK Chancellor, has also highlighted that the pace of growth has not been as rapid as expected and the Budget indicates that unemployment is expected to rise to 8.3% in the last quarter of 2011.7 The UK is not alone in bemoaning the slow speed of recovery in the last year - US GDP has only grown only 2.8% instead of the original government projection of 3.2%. Lower consumer spending and a fall in demand for long-lasting consumer goods exports are partially to blame for this figure, contrasting with Germany where the IFO Institute found in February that growing export demand is boosting business confidence.8 In spite of this, the USA labour market appears to be recovering with the advance unadjusted insured unemployment rate down to 3.4% during the week ending March 12th compared to 4.1% a year before.9
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Introduction In South America, high levels of confidence are reported by Grant Thornton’s IBR (International Business Review) and the Mexican government is bullishly raising its growth forecast for 2011 on the basis that strong domestic demand will fuel economic momentum. Ernesto Cordero, Mexico’s Finance Minister is reported to have declared that Mexican economy will expand 4%-5% in 2011.10
Grant Thornton, IBR, 2011, PwC , Growth re-imagined, 2011; 1 IMF World Economic Outlook (October 2010). Estimates for shares of the world economy made on a purchasing power parity basis. Reuters, Global recover marches on, prices soar in Europe, 24th March 2011 4 Markit, HSBC Flash China Manufacturing PMI, 24th March 2011 5 Markit, HSBC India Services PMI, 3rd March 2011 6 Markit, Flash Eurozone PMI, 24th March 2011 7 The Daily Mail, Economic Recovery is taking longer than we expected admits Osborne, 24th March 2011 8 The Financial Times, US economic recovery weaker than thought, 25th February 2011; Reuters, Global recover marches on, prices soar in Europe, 24th March 2011 9 United States Department of Labor, Unemployment Insurance Weekly Claims Report, March 24th 2011 10 Bloomberg, Cordero Says Mexico’s 2011 GDP May Expand Up to 5% on Domestic Consumption, 22nd March 2011 1 2 3
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2011: Where prediction and outcome meet Now in its fourth edition, the Regus Business Confidence Index has found that optimistic business expectations are at least being matched with the reality of revenue increases. 50% of companies have recorded a revenue increase
Compared to the revenue growth levels recorded a year ago in April 2010, 38% more firms have achieved their objective in April 2011 (50%). In late 2009 the Business Confidence Index survey found that only 55% of firms expected to experience a rise in revenues in the following year. Of this modest group of optimists many must have been disappointed as only a 19% total of firms could report a revenue rise a year later in October 2010. Similarly in early 2010 only 12% of companies reported a rise in revenues and fully 64% optimistically expected a rise in revenues. Six months later only 19% reported a revenue increase, but a year on and finally the 50% of companies actually recording a revenue increase begins to align with the 64% expecting to achieve it a year earlier. This alignment looks even closer if we consider that 6 months ago, 61% of companies expected a revenue rise within the next year and half way through the period 50% have already achieved this.
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The Regus Business Confidence Index The current economic climate is nevertheless exceedingly volatile with unpredictable events such as the natural disasters that blighted Australia and Japan in the past few months adding instability to what is a period of slow recovery in Western Economies, and a period of great but also extremely speedy, and therefore difficult to manage, growth in emerging economies. More than 17,000 respondents in 80 countries
In order to align their plans for the coming twelve months with global sentiment and trends, businesses rely on timely and realistic information from peer companies around the globe. The Regus Business Confidence Index Survey was devised specifically with this objective in mind: to provide businesses with up-to-date information on the views and confidence of other businesses around the globe to inform their future decisions. The survey is based on over 17,000 responses from businesses around the world. The pool of respondents is highly representative of senior managers and business owners and is broadly representative of industries in each geographical region. Companies in 80 countries were asked about their revenues and profits over the past year, about their intentions to invest in specific departments within their organisation and about their revenue expectations for the next 12 months.
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Revenues and profits around the globe Globally revenue and profit growth were found to be roughly aligned with 50% of companies reporting a revenue increase and 41% declaring that profits were on the rise. This is an important indication that rates of growth are sustainable and therefore that the recovery is overall strong enough to result in improved profitability for more and more businesses if they are able to ‘read’ the global market and react accordingly. China and India continue their course of remarkably fast growth with the former in the lead. An enormous 72% of Chinese businesses reported a rise in revenues in the past year and 62% noted an increase in profits. In India also 67% of companies recording revenues rising was matched by 60% of firms where profits rose, indicating that these emerging economies are harnessing growth while containing overheads. This contrasts widely with Japanese results which indicate the second lowest score of rising-profit companies (23%) after Spain (18%). China and India are also optimistic about their future revenues as nine out of ten Indian companies (89.5%) expect their revenues to rise in the coming year and 80.5% of Chinese companies expect the same. I expect my company revenues to rise in the next twelve months
India SA Canada Mexico DE China Global Average USA Belgium Spain FR Australia ND UK Japan 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Regus Business Confidence Index | Gearing for Growth | Issue 4 | April 2011 | Page 9
Revenues and profits around the globe 54% of companies recorded a rise in revenue
Close behind these vibrant economies we find Germany, which has been benefiting from strong export demand. Although reports indicate that confidence has slipped slightly since February due to concerns over the possible consequences of the earthquake in Japan and unrest in the Middle East,11 the survey found that 64% of companies recorded a rise in revenues and of 54% a rise in profits in the past year. Apart from Belgium, which also reports profitability increases for 55% of companies, the rest of the Eurozone is less profitable, with Spain confirming its place as country with the lowest proportion of rising-profit companies (18%) and France (32% ) also straggling. In the UK and the USA, where the economic slowdown is proving harder to shake off than initially hoped, around a third of companies report their profits increased in the last year. Over two fifths of companies in both Australia and Canada also reported a rise in profits. Global business revenue - expectations and reality converge
90%
70%
80%
60%
70% 50% 60% 50%
40%
40%
30%
30% 20% 20% 10%
10% 0% Sep 2009
Mar 2010
Sep 2010
Mar 2011
I expect my revenues to rise over the next year My revenues have risen in the last six months
11
The Financial Times, German Business unruffled by the Japan quake, 25th March 2011
Regus Business Confidence Index | Gearing for Growth | Issue 4 | April 2011 | Page 10
Revenues and profits around the globe Profits and revenues risen in the past year
China India DE
Belgium Canada Australia ND SA
Global Average FR
USA UK
Mexico Spain Japan 0%
10% Revenues
20%
30%
40%
50%
60%
70%
80%
Profits
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The Regus Business Confidence Index In every edition, the Regus Business Tracker presents an updated Business Confidence Index. This index, a measurement formed on an aggregate of positive forward-looking statements combining year-to-date revenue and profit trends with views on the expected economic upturn in the coming six months, aims to provide businesses with a single point of reference of the survey’s key findings. Its benchmark average was set at 100 in the first publicly published edition of the Regus Business tracker in September 2009.
Business Confidence Index, April 2011
Spain UK Australia France USA Japan Netherlands Mexico Global Average Canada South Africa India Germany Belgium China 0%
20%
40%
60%
80%
100%
120%
140%
160%
It is immediately evident that overall confidence has climbed up the scale by 25 points and now, at 125, is at its peak since the first edition in October 2009, as well as being some 31 points up on its lowest trough in April 2010. This positive forward indicator provides a strong endorsement for the recovering global economy and provides solid grounds for businesses to enjoy a rosier outlook.
Regus Business Confidence Index | Gearing for Growth | Issue 4 | April 2011 | Page 12
180%
The Regus Business Confidence Index The Regus Business Confidence Index - Global Average 130 125 120 115 110 105 100 95 90 85 80
October 2009
April 2010
Unsurprisingly, countries that have achieved more satisfying results in the past 12 moths are also more bullish about the future, with China (155), Belgium (139), Germany (135) and India (134) topping the scale for optimism. At the other end of the scale we find Spain (92), the UK (108) and Australia (118), the latter lately affected by natural disaster and the slowing of the Asia Pacific region. The USA remains close to, if slightly below, the global average at 119 points, although the increase in optimism in the region is 32 points up on six months ago, confirming Grant Thornton reports which show that business leaders in the USA are more optimistic that recovery will take hold in the next six months.12 12
October 2010
China Belgium DE India Canada SA Global Average Mexico Japan ND FR USA Australia UK Spain
April 2011
April 2011 155 139 135 134 132 132 125 122 120 120 119 119 118 108 92
Oct 2010 127 99 93 119 99 108 98 96 84 95 95 87 107 100 59
Grant Thornton, IBR, 2011
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Investing in growth, but cutting property costs The latest Regus research uncovered an important strategic trend and identified that a positive proportion of companies globally are keen to invest in growth, starting from increasing sales (41%) and marketing (36%) budgets, and even investing more in the creation and launch of new products (21%). More interesting still, however, is the evident intention of companies to hold true to the lesson learnt during the economic downturn and avoid making property or premises investments that may become underused and expensive fixed costs. This downward pressure on property costs is consistent with findings from previous Regus global surveys, particularly a trend away from fixed premises working and towards more flexible working practices, along with an enthusiasm across the globe to employ more part-time employees and working mothers. If attitudes towards fixed premises working had remained as enthusiastic as in the past, then a growing global economy combined with depressed rentals and an increase in new staff employment would be expected to generate increased investment in traditional commercial property, not less.13 While in a few economies we find a very modest increase in premises is planned, a majority of companies intend to downscale with the exception of Canada that plans to make no changes to premises budgets. Spain (-28%) and Japan (-21% ) are the most likely to reduce their premises costs shortly followed by the Netherlands (-14%) and the UK (-12%) where businesses are also being very careful about incurring fixed property costs. Even where they exist, plans to increase premises expenditure are much less pronounced than plans to increase sales and marketing or product development budgets with a modest 9% of Chinese businesses the most likely to expand their premises.
13
Regus, Renewal and Recovery, October 2009; Regus, Taking the Pulse of the Global Recovery, April 2010; Regus, People Power, October 2010;
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Investing in growth, but cutting property costs On the other hand sales budgets will be increased ranging from 64% of companies in Mexico to 21% in the UK. Marketing departments globally can expect more budget, but this is particularly the case if they are in China or India (58%), South Africa or Mexico (44%). There is also investment in new products on the cards for many businesses, with China leading (44%), and Spain (6%t) and the UK (7%) stragglers in this field. Net increase of departmental spending
Spain Japan ND UK USA Belgium Global Average Mexico Canada SA DE India Australia FR China -70
-56
-42
-28
-14
Product management & development
0
14
Marketing
28 Sales
42
56
70
Property/Business Premises
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Optimism and size correlation Overall fewer small businesses have experienced profit or revenue growth over the past twelve months with only 46% of small companies realising an increase in revenues compared to 65% of large businesses. Similarly only 36% of small companies have experienced a profit increase compared to 61% of large businesses. This, however, has not dampened their enthusiasm as the proportion of companies expecting a rise in revenues is equal (77%) in all three segments. I expect my revenues to rise in the next 12 months:
Small 0-49 employees
Medium 50-249 employees
Large 250+ employees
77%
77%
77%
Revenues and profits increase in the last year by size of business
LARGE
MEDIUM
SMALL
0%
10% Revenues
20%
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Optimism and size correlation Size does, however, seem to impact future budget allocation. More large businesses are inclined to reduce their premises or property costs (-12%) indicating that unused or underused premises are regarded as a particularly heavy burden by larger businesses whose size impacts their flexibility and agility in reacting to the volatile recovering market. By reducing fixed premises costs, large businesses can achieve some portion of that agility which characterises smaller businesses. Small firms are also keen to reduce property costs with -4% wishing to break free of unnecessary property expense.
Impact of size of business on intention to cut or increase premises costs
LARGE
MEDIUM
SMALL
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
In spite of less satisfying results than large businesses on the profit and revenue growth front, small businesses are more keen to invest in sales and marketing than large businesses. 41% of small companies plans to divert more budget to sales, and 39% to marketing, in the coming year compared to 36% and 23% of large businesses, once again giving proof of that entrepreneurial spirit that characterises smaller firms. Larger businesses (25%) are instead a little more likely than smaller firms (20%) to invest extra budget into product management and development, highlighting that they are willing to take on long-term investments in equipment and R&D which smaller businesses may have difficulties in funding after a long downturn and in light of the difficult business lending conditions experiences by this segment globally.14
The Euro Area Bank Lending Survey, January 2011, The European Central Bank; Trends in Lending, January 2011, Bank of England; The January 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices, January 2011, The Federal Reserve Board.
14
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Country Highlights Country
Profit rise
Revenue rise
Increased sales budget
Increased marketing budget
Property cut
Expect revenue increase in the next 12 months
UK
31%
38%
21%
18%
12% - 25% of large businesses
63%
USA
37%
44%
28%
30%
9% - 11% of large businesses
75%
France
32%
49%
45%
33%
75%
Germany
54%
64%
45%
31%
14% of large businesses 1% plan to increase
China
62%
72%
58%
58%
9% plan to increase
81%
India
60%
67%
61%
58%
4% plan to increase
90%
Belgium
61%
55%
44%
38%
75% 5% - 37% of large businesses
52%
34%
34%
70% 14% - 16% of small businesses
Netherlands
82%
Spain
18%
32%
28%
22%
32% of large & of 75% small businesses
South Africa
37%
50%
44%
44%
14% of large businesses
86%
Japan
23%
25%
32%
28%
21% - 32% of large businesses
62%
Australia
46%
53%
32%
33%
74%
Canada Mexico
44% 26%
53% 38%
41% 64%
29% 44%
7% plan to increase 0% 4%
85% 82%
Note: highlights are in bold
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Conclusion With profits and revenues rising across the board, it is not surprising to find that global business optimism has reached a peak since the bleak conditions of late 2009. As a result of this optimistic mind set, companies are reconsidering their investment strategies and deciding to channel budget into different areas that they judge will help them catch the wave of economic recovery. In particular businesses are keen to invest more in sales and marketing departments, upon whose skills and activities they will rely to take full advantage of economic recovery. Firms globally also revealed the intention to invest in the development and management of new products revealing that where capital is available or loans are achievable, there is the expectation that benefits will be long-term. The notable exception to this enthusiasm for investment is the issue of premises and property costs. Aside from emerging economies, which are growing at breakneck sped and needing to accommodate new staff faster than they ever imagined, the majority of world businesses is intent on reducing premises costs regarded as a fixed expense which is often unnecessary and underused. By cutting down on premises costs businesses can easily adapt to the changing economic landscape and manage unexpected events such as temporary peaks in growth and sudden reduction of activity without wasting desk and office space as well as the lighting, heating and cooling associated with each desk position. Fortunately savvy businesses have taken from the downturn an important lesson of agility and are making use of the more flexible workspace arrangements on the market.
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About Regus Regus is the world’s largest provider of workplace solutions, with products and services ranging from fully equipped offices to professional meeting rooms, business lounges and the world’s largest work of video communication studios. Regus enables people to work their way, whether it’s from home, on the road or from an office. Customers such as Google, GlaxoSmithKline, and Nokia join hundreds of thousands of growing small and medium businesses that benefit from outsourcing their office and workplace needs to Regus, allowing them to focus on their core activities. Over 800,000 customers a day benefit from Regus facilities spread across a global footprint of 1,100 locations in 500 cities and 86 countries, which allow individuals and companies to work wherever, however and whenever they want to. Regus was founded in Brussels, Belgium in 1989, is headquartered in Luxembourg and listed on the London Stock Exchange. For more information please visit: www.regus.com
Methodology Over 17,000 business respondents from the Regus global contacts database were interviewed during February 2011. The Regus global contacts database of over 1 million business-people worldwide, is highly representative of senior managers and owners in businesses across the globe. Respondents were asked about their recent revenue and profit trends, along with their future views on a number of issues including plans for investment in various departments. The survey was managed and administered by the independent organisation, MarketingUK.
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Whilst every effort has been taken to verify the accuracy of this information, Regus cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report.