- Buyer's Guide
For the first time since the second quarter of 2007, a majority (51 percent) of CEOs of the nation's leading private companies surveyed for PricewaterhouseCoopers' Private Company Trendsetter Barometer were optimistic about the U.S. economy's prospects over the next 12 months (up six points from the previous quarter and up 32 points from the same quarter in 2009). Similarly, the number of CEOs expressing pessimism fell four points from the previous quarter to 11 percent, a 30-point drop from the same quarter in 2009.
Private companies with international operations are slightly more optimistic than their domestic-only counterparts about prospects for the U.S. economy over the next 12 months (53 percent and 49 percent, respectively). International marketers' confidence in the global economy remains unchanged from the previous quarter (47 percent) but is up 32 points from the first quarter of 2009.
In line with this optimism, Trendsetter CEOs reset revenue growth projections for the next 12 months, up 1.5 points from the previous quarter's 8.5 percent to this last quarter's 10 percent. Both international marketers and their domestic-only peers reported increased revenue projections (11.8 percent and 8.5 percent, respectively).
Overall, more than three-quarters (77 percent) of leading private businesses plan for positive revenue growth over the next 12 months, with 38 percent expecting double-digit growth (same as the previous quarter and up 13 points from the first quarter of 2009) and 39 percent expecting single-digit growth (up six points from the previous quarter and 13 points from the first quarter of 2009). Only 5 percent forecast negative growth (down six points from the previous quarter), while 17 percent expect zero growth.
"As we've moved beyond the last few quarters, private business owners are more confident that the U.S. and global economies have hit rock bottom and are beginning to recover," says Ken Esch, a partner with PricewaterhouseCoopers' Private Company Services practice. "Consequently, we're now seeing more companies projecting growth. It's important to note, however, that these projections are still almost half of what private company CEOs were projecting in mid-year 2007."
Gross Margins Remain Tight, More Companies Planning to Hire
Gross margins recovered slightly in the first quarter of 2010, with approximately 26 percent of private companies surveyed reporting higher gross margins, while 22 percent reported lower margins, resulting in a net plus 4 percent (up three points from the previous quarter and 19 points from the first quarter of 2009). In line with these results, costs and prices increased during the quarter to net plus 5 percent and net plus 3 percent, respectively.
For the first time since the second quarter of 2008, a majority (53 percent) of Trendsetter executives plan additions to their workforce over the next 12 months, up six points from the prior quarter's 47 percent and up 22 points from 1Q09's 31 percent. Alternatively, just 4 percent of respondents are planning to reduce staff over the next 12 months, down four points from the previous quarter and six points from the same period in 2009. Surveyed CEOs project an average composite workforce increase of 1.5 percent - off slightly from last quarter's 1.7 percent but up from 1.1 percent one year ago.
"It's encouraging to see that private companies are backing up their expectations for growth by investing in their workforce," notes Esch. "The smaller companies in our sample are planning to hire relatively more employees than the larger companies. This could be the beginning of an upward trend in the labor markets."
International Sales Increase, Forecasts Promise Growth
Those private businesses already operating abroad reported a slight increase in international sales from the prior quarter, with 31 percent reporting increases (up two points from the prior quarter and up seven points from one year ago). Thirteen percent of private businesses operating abroad reported decreases in international sales, and 56 percent reported no change. Over the next 12 months, the average contribution from international sales to total revenues among private businesses operating abroad is expected to be 21 percent, three points over the previous quarter and up five points from the first quarter of 2009. Interestingly, those operating in the emerging markets of China, India, and Brazil expect a solid 30 percent contribution to total revenues.
"Given Europe's current situation, which reached a crisis point after this survey was conducted, it will be interesting to see what, if any, impact it may have on next quarter's results," says Esch.
Spending and Capital Investments Remain Steady
As in previous quarters, private companies doing business abroad - especially the 29 percent selling in China, India and Brazil - remain ahead of their domestic-only peers in prospective spending over the next 12 months. Approximately 32 percent (up three points from last quarter and eight points from the same period last year) of all Trendsetter executives plan major new investments of capital over the next 12 months; however, prospective spending as a percentage of sales fell from the previous two quarters to 7.2 percent.
A breakdown of spending and capital investments by international and domestic-only marketers is as follows:
International Domestic-Only Marketers Peers Marketing ------------- ------------- In China/ India/Brazil ------------ Plans over the Next 12 Months: 1Q10 4Q09 1Q10 4Q09 1Q10 4Q09 ---------------------- ---- ---- ---- ---- ---- ---- Major Capital Investments 44% 34% 22% 25% 58% 35% Expansion to New Markets Abroad 23% 28% 1% 1% 46% 53% Increased Operational Spending (net) 70% 70% 50% 55% 82% 78% --------------------- New Products/Services 38% 32% 15% 22% 42% 33% Information Technology 18% 29% 22% 27% 15% 33% Sales Promotion 24% 24% 17% 19% 33% 25% R&D 20% 17% 5% 9% 21% 20% Business Acquisitions 14% 14% 10% 10% 30% 13%
"Increased investment in the business, particularly in operational spending, is integral to laying a foundation for growth," says Esch. "Given the growth projected by all private company CEOs, but particularly the projections from the international and emerging market respondents, these increased levels of investment are a good sign that the surveyed CEOs are serious about expansion."
Bank Loans, Lack of Demand Remain Barriers for Growth
Despite a five-point drop from last quarter - and a 12-point drop from the first quarter of 2009 - concern about lack of demand remains a principal potential barrier to growth, cited by 74 percent of respondents. Other top concerns include legislative/regulatory pressures (48 percent; down two points from 4Q09); increased taxation (45 percent; up one point); and profitability/decreasing margins (40 percent; down five points). Lack of capital for investment was cited by 25 percent (down three points).
In line with concern over capital, in the first quarter of 2010, only 4 percent of respondents reported bank loans, off one point from the prior quarter and six points from one year ago. More smaller businesses (revenue under $100 million) completed bank loans in the first quarter than their large counterparts, at 5 percent and 2 percent, respectively.
"While there may be evidence that the credit markets are becoming more active, and quality borrowers are gaining access to capital at increasingly more favorable terms, the data so far doesn't reflect new loans," says Esch. "We do believe the number of loans will increase over time."