“Brittlestand” arise: Mid-market companies’ importance to the UK revealed

Posted on 28 Jun 2013

The revenue growth of UK mid-market firms is close to matching that of the German Mittelstand, according to a comprehensive report on the European mid-market by GE Capital.

British manufacturing’s interest in the German Mittelstand was put in perspective today, as a new report reveals that the UK’s mid-sized companies actually perform well on a range of metrics compared with their European peer group.

Perhaps surprisingly, the UK is home to the highest proportion of ‘growth champions’ – firms that have posted revenue growth of more than 10% in the last year – across the big four EU markets of France, Germany, Italy and the UK, where the research was focused.

These champions represent 17% of UK mid-market firms, compared to 13% in Germany, 11% in France and 13% in Italy. Forty-nine percent of UK mid-caps have recorded flat or falling growth, while this group makes up 52% in Germany and 66% in Italy.

“Leading from the Middle 2013” by GE Capital with Warwick Business School, possibly the biggest research project on the EU4 group of mid-market companies, shows that in Britain the mid-market represents just 1.67% of all companies but that contribute over a third of all private sector GDP.

The mid-market is defined by the report as companies within a revenue range which differs by country. In the UK, they are companies with annual revenues of £15m to £800m. Publically listed companies are included but many are privately owned or family owned.

Despite the sluggish economy, the UK mid-market added £55.4bn in sales in the 12-months to April. However, this has not translated into equivalent jobs growth so far. Net workforce growth in the UK mid-market was just 0.6%, compared with 1.4% in Germany, 0.6% in France and zero net growth in Italy.

This amounted to 67,000 new jobs from the mid-market in the last year but, the research says, an extra 80,000 jobs could have been created had the UK matched Germany’s job growth.

Net growth in the UK mid-market fell to 2.3% from 3.2% in 2012. The fall of 0.9% is the lowest fall in growth across the group of four, suggesting UK mid-caps have been more resilient to economic conditions.

The manufacturing sector across the EU4 group grew by only 1.3% in the past year, compared with 3.1% growth in 2012. Transport was down from +4.3% in 2012 to +1% and IT was down to 2.5% from 5.5% last year. In all sectors, gross revenues increased for a higher percentage of companies than decreased, with 44% of manufacturing showing a pick-up in revenues.

“Our research shows that mid-market firms really are the drivers of UK GDP and are absolutely essential to future economic prosperity,” said Ilaria del Beato, chief executive of GE Capital UK.

“Increased confidence is translating into investment decisions and will hopefully start to be matched by employment growth as well”

UK mid-market firms are also the most bullish about the next 12-months, predicting 2.1% growth compared to 1.7% in Germany, 1.4% in France and 0.5% in Italy.

Strong investment plans back up this confidence in future growth. On average, 87% of UK mid-market firms are planning to either increase investment or maintain investment at existing levels over the next year.

Manufacturing and construction, however, did not perform brilliantly on research and development and marketing spend for the EU4 mid-market. This sector scored the second lowest of six main industry sectors, spending 5.2% of turnover on marketing and just 4.2% on R&D. This compares with 6.2% spent on R&D in the IT sector.

Other key findings from the report include:
• Only 44% of UK mid-market firms believe remaining in the EU is vital for their business growth. This compares to 58% in Germany, 63% in France and 67% in Italy
• Keeping business costs down is the number one strategic challenge for UK mid-market firms, perhaps explaining the lower employment growth
• Mid market firms in the UK perceive business costs, the state of the overseas economy and regulation abroad to be the most significant barriers to exporting to new markets
• Just 30% of UK mid-market firms believe the Government has appropriate measures in place to support economic growth, (vs 45%: Germany, 41%: France and 44%: Italy)

Regional differences
The report’s author, Prof. Stephen Roper of Warwick Business School, said: “The UK mid-market is confident of future growth, however there are elements of the UK business ecosystem which need further attention in order for it to reach its full potential.”

He observed that “a clear regional divide is evident, as firms in the south are growing at a quicker rate than northern counterparts. This needs to be addressed to enable the rebalancing potential of the mid-market to be achieved.”

In fact the UK mid-market’s overall strong performance masks considerable regional differences. Growth in the South of England reached 3% last year, making it the highest performing region across all four of Europe’s largest economies, whilst firms in the North of England only grew by 1.2%.

John Cridland, CBI director-general, said: “We’ve been banging the drum for medium-sized businesses and the important role this forgotten army will play in the UK’s economic recovery. Though small in numbers, these firms are big on impact, punching well above their weight in terms of revenue contribution and job creation.”

The report defines the mid-market in Germany as companies with revenues of Eu20m to Eu1 billion, in France from Eu10m to Eu500m and from Eu5m to Eu250m in Italy, reflecting different market dynamics in these countries.

The UK punches above its weight in the mid-market among the four primary EU nations, though falls behind on job creation in mid-sized firms

Click to see a graph on Research & Development in the EU4 mid-market