New Zealand Mid-Market Report 2015
After New Zealand's predicted "rockstar economy" failed to emerge in 2014, Mid-Market businesses are unsurprisingly approaching this year's growth expectations - their own and the country's - with more caution.
Mid-Market firms are still feeling optimistic about their businesses in 2015 but they are more realistic than they were last year.
All indications are that New Zealand is moving into a period of sustained economic growth, meaning there are undoubtedly attractive opportunities for growing Mid-Market businesses. At the same time, the number of Mid-Market firms who believe business in New Zealand is getting harder, has risen. They are also finding it more difficult to find time to focus on business strategy and growth.
More than a quarter of Mid-Market businesses export and a further 11 per cent are planning to do so.
Auckland firms are most likely to export or are planning to start. South Island businesses, outside Canterbury, are much less likely to export.
Although 62 per cent of companies are not exporting, it is believed that many products or services that Mid-Market companies provide are included or embedded in future export products. For example, a packaging manufacturer may not export but the packaging may be used to protect goods for overseas.
For Mid-Market businesses that do export, a fifth of their revenue is coming from their exports. The bulk of their revenue, 77 per cent, still comes from their domestic business.
Mid-Market businesses are most likely to export to Australia, other Pacific countries and China. Also other Asian countries, the US, the UK and Europe are the next most common export markets.
Businesses say Australia, China and other Asian countries are their most likely future export markets.
Most Mid-Market firms who already export are planning to expand their international trading further either in existing markets or by entering new ones. Fewer than one in five firms are already exporting but are not looking at growing their overseas business further.
Some Mid-Market firms are holding off on their exporting plans due to the high New Zealand dollar.
Firms from New Zealand's three key exporting industries - agriculture, forestry and fishing, and manufacturing - are most concerned about the value of the NZ dollar.
Finding the right distribution partners is a barrier, said exporters. Competition in the overseas markets and complex regulations can also be a problem. Meanwhile, finding good contacts in new markets remains an obstacle.
The Upper North Island, with bustling towns such as Whangarei, Hamilton and Tauranga, is an important regional economy contributing 17.10 per cent of the country's Mid-Market sales from 17.50 per cent of the nation's Mid-Market businesses. It also provides 19.10 per cent of the nation's Mid-Market jobs.
This large region has a number of industries including forestry and logging, fishing, hunting and trapping, as well as construction services and agriculture. The Upper North Island has several important regional airports, including Tauranga and Hamilton, which feed into the wholesaling industry.
Key decision makers in the Upper North Island Mid-Market sector are concerned about credit market liquidity and the impact it might have on the New Zealand economy. They strongly agree that being a successful business in New Zealand is getting harder.
Mid-Market firms in the Upper North Island are more likely to feel that interest rates are an important issue with their Waikato agritech and agriculture industry in mind. High and or multiple taxes are also a real concern for businesses in meeting their growth targets.
Upper North Island businesses believe the nation's economic outlook for 2015 is relatively good, with expectations of 1.31 per cent growth for 2015, but just 0.59 per cent for the local regional economy. They are more positive about their own businesses, estimating there will be growth and they expect the same for their key customers.
Breaking down their own business outlook, Upper North Island firms in the Mid-Market sector forecast their own domestic revenue will grow by 1.86 per cent, and their export revenue to increase slightly. Staffing levels are forecast to increase slightly and debt figures will dip a small amount.
These conservative numbers are not as positive as they achieved for 2014, but are well in line with Mid-Market businesses in other regions.
Auckland, the largest Mid-Market region, is seen as the most outward-looking of them all. Many Auckland firms are going overseas to grow revenue and they are working actively to increase their global connections.
More than a third of Auckland firms are currently exporting compared with the national average of 27 per cent. A further 16 per cent would like to export in the future. Auckland's local economy is driven by three industries – machinery and equipment wholesaling, professional, scientific and technical services and food product manufacturing. The professional scientific and technical services industry is an important source of revenue for the region and has an excellent talent pool and research base to draw from thanks to the three main universities of the area, namely the University of Auckland, AUT University and Massey University. As the head office location for many of the country’s food manufacturers, including Fonterra, New Zealand Beef and Lamb and The Dairy Collective, food product manufacturing is a growing export business.
In this growing city, residential and non-residential construction projects are keeping Mid-Market firms busy in Auckland. Transport infrastructure projects such the Waterview Connection are having a positive effect on the regional economy and ambitious housing projects in the pipeline augur well. The city has 80 special housing areas allocated which could bring up to 41,500 new houses on stream in the coming years.
In 2014, Auckland accounted for 36.60 per cent of total Mid-Market sales, representing 34.5 per cent of the country's Mid-Market businesses and provided 33.80 per cent of the Mid-Market sector's employment.
With a population of more than 1.4 million to draw on, employers of Auckland Mid-Market firms are more relaxed about having a company culture that nurtures talent to help retain people. Auckland businesses also seemed slightly less concerned about having an effective senior management team.
Price competition from low cost or quality competitors is something which particularly concerns Auckland firms.
Mid-Market businesses in Auckland are more positive than some other regions about their local economy, believing that it will grow by 1.39 per cent. They forecast that the national economy would be up by 1.42 per cent in 2015. They are also relatively confident about their own industry, believing it will advance by 1.34 per cent and that key customers will grow by 1.66 per cent.
Auckland Mid-Market firms forecast that both their domestic and export revenues are set to increase. They are forecasting staff numbers to rise and debt levels to go down. Their own firm's growth in 2014 was higher overall than their 2015 forecasts.
Mid-Market businesses from the Lower North Island are clustered in key economic areas such as the wine-growing area of the Hawkes Bay and the exploration and mining services industry that support the region's oil and gas businesses in Taranaki.
The Lower North Island Mid-Market sector is seen as a big player in manufacturing including sub-sectors such as food product manufacturing, machinery and equipment manufacturing and fabricated metal product manufacturing. All have a strong tradition of exporting along with other regional industries including agriculture and forestry and logging.
North Island firms see new international markets as important for growth. These Mid-Market firms are following interest rates closely and their potential impact on the New Zealand economy. They feel rising interest rates will be a key barrier to meeting growth targets. The Lower North Island region contributed 11.30 per cent of the Mid-Market sector's sales in 2014, has 11.90 per cent of the country's businesses and provides 12.80 per cent of Mid-Market jobs.
As they go into 2015, the Mid-Market in this region believes new product and service development will help them grow.
These businesses want to become more customer-focused and they want to use technology to reach new customers. They place a high value on customer retention or increasing sales volumes with existing customers. The Lower North Island firms believe the dearth of quality, available talent is a big barrier for meeting their growth targets.
While Mid-Market firms here forecast the national economy will grow by 1.20 per cent in 2015, they think their region will only expand slightly. Their industry is likely to grow by 1.12 per cent and key customers by 1.14 per cent.
They are cautious about their own business forecasts for 2015, predicting their domestic revenue will be up 1.59 per cent, compared with 1.42 per cent in 2014.
Wellington's Mid-Market businesses range from government organisations to those related to the region's well-known film industry. The region's main industries are professional, scientific and technical services, public administration and administrative services. A number of well-known tech start-ups are based in Wellington, supported by a computer system design and related services industry.
New Zealand's capital city holds a 10.40 per cent proportion of Mid-Market sales, represents 10.70 per cent of Mid-Market businesses and provides 10.30 per cent of the nation's Mid-Market employment.
In good news for the tech sector, 71 per cent of these Wellington businesses are expecting IT spending budgets to grow compared with 48 per cent last year. This forecast is in line with the central Government's announced intention to move a number of functions for businesses and households online.
The biggest issues facing Wellington Mid-Market business are the current economic environment and gaps in staff skills and expertise. This skills gap is being felt already with 43 per cent of these businesses actively attempting to recruit new staff and business expertise to help their firms meet growth targets.
Their own firm's growth in 2014 rose by 1.82 per cent in domestic revenue and by 0.74 per cent in exports. Staffing levels rose 1 per cent and debt levels went up 0.55 per cent, while R&D budgets increased by 0.60 per cent.
These Wellington businesses expect the national economy to grow by 1.79 per cent and believe the local Wellington economy will grow by 0.79 per cent. They do believe however that their industry will grow by 1.47 per cent in 2015 and key customers to grow by 1.36 per cent.
Wellington businesses remain upbeat about their ability to raise domestic revenue by 2.05 per cent in the next year and export revenue by 0.99 per cent. Staff levels should rise by 1.26 per cent and they forecast debt levels to decrease by 0.52 per cent.
Only a small proportion of companies from Wellington rate their key customers growth strongly. This could be explained by the fact that government departments have been streamlining activities and cutting budgets in the past few years. Wellington firms remain positive about business prospects, but not as positive as Mid-Market firms in other regions.
They hope that the runway extension at Wellington Airport could create additional opportunities for the region. The end of the Hobbit film trilogy, however, could be bad for the region's film industry, they said.
This part of the country, which includes important regional economic hubs such as Marlborough, Nelson, Invercargill and Dunedin, has 11.70 per cent of the Mid-Market's businesses. It made 11.70 per cent of the Mid-Market sector's sales and provided 11.50 per cent of the sector's employment in 2014.
Primary industries feature strongly in the remote parts of the South Island. This has led to strong heavy and civil engineering industries, as well as construction and forestry. There are also a number of associated manufacturing sub-sectors, including food product, wood product and beverage and tobacco product manufacturing. Due to the South Island’s rich outdoor environment, aquaculture, fishing, hunting and trapping are local industries as well as professional, scientific and technical services. These are well supported by the University of Otago.
Businesses in this region are less upbeat about the nation's economy than others – they estimate New Zealand will grow by 0.86 per cent next year and that its local region will increase by 0.56 per cent.
For their own firms, they are looking forward to a 1.56 per cent increase in domestic revenue. Staffing levels should rise by just over 1 per cent.
This regional sector has fewer action plans prepared for its businesses than the rest of the country. They are exploring new markets and very few are looking to expand through M&A. Businesses in this region are not as likely to be using technology to reach new customers and are less likely to be exporting. Almost half of these firms see compliance with government regulations as a key issue.
For Canterbury, a region with its own specific and extraordinary economy, the Christchurch rebuild started in earnest this year. Its Mid-Market businesses are expecting a 3.04 per cent increase in growth for Canterbury in 2015 compared with 1.66 per cent for the national economy.
In contrast with other regions, Cantabrian firms are less likely to find cash flow a barrier when meeting growth targets and are more open to M&A.
While construction services are naturally strong in Canterbury due to the earthquake rebuild, the region’s Mid-Market firms also play large business roles in food product manufacturing, machinery and equipment wholesaling as well as professional, scientific and technical services. Much of the latter is supported through the region’s two universities, the University of Canterbury and Lincoln University.
Canterbury accounts for 12.90 per cent of the nation's Mid-Market sales and is where 13.60 per cent of the country's Mid-Market businesses are based. It employs 12.60 per cent of the Mid-Market jobs.
Businesses in this region, especially those in a rapid growth phase are looking closely at their ability to hire. They say it is crucial to have an effective senior management team, a company culture that nurtures and develops talent and generally good recruiting power for the skills they require.
These Cantabrian businesses are intent on retaining staff and dealing with poor strategic and business planning.
Meanwhile with reconstruction underway, it is also vital for them to have access to raw materials and few supply chain constraints. They also want good access to logistics and infrastructure.
Cantabrian firms believe their own industry will grow by 2.17 per cent and that their key customers will expand by 1.97 per cent in the next year. Meanwhile, in their own businesses, they are looking at growing staff by 1.44 per cent in 2015, thanks to an upbeat domestic revenue forecast of 2.54 per cent for 2015.
Mid-Market firms in this region saw good growth in 2014, with domestic revenues up 2.40 per cent and staffing levels up by 1.39 per cent.Download PDF of Case Studies
Mid-Market Contributes73 Billion
On the national stage, the Mid-Market sector plays a strategic role in the New Zealand economy. It connects production activities, users and markets throughout the country. The Mid-Market sector's 33,210 firms, whose average turnover ranges between $2 million and $50 million, recorded sales of $159 billion in 2013. This contrasts with 477,130 small businesses generating $97.4 billion, while 1,190 large businesses made 48.30 percent of sales, totaling $239 billion.
Mid-Market firms are active in the country's strongest industries, the New Zealand Mid-Market provided $73 billion in Value Added contribution (VA - see side note) to the New Zealand economy in 2013 up from $66.9 billion in 2012. Seven of the Mid-Market industries accounted for 76.90 per cent of the Mid-Market's total VA contribution to the economy: manufacturing, $10.6 billion; wholesaling, $9.4 billion; retailing, $9.8 billion; construction, $7.7 billion; professional scientific and technical services, $6.9 billion; agriculture $6.1 billion; and transport, postage and warehousing $5.7 billion.
Number of employees
An average Mid-Market firm has 22.6 employees, generating annual sales of $4.77 million.
Auckland, Canterbury and Wellington account for 59 per cent of Mid-Market firms and 60 per cent of national sales. Auckland-based firms are bringing in 36.60 per cent of total Mid-Market sales; Christchurch, 12.9 per cent; Wellington, 10.4 per cent; Waikato, 9.3 per cent; and the Bay of Plenty, 5.5 per cent.
Mid-Market firms tend to be concentrated in sectors where the region enjoys comparative advantages based on local factors. Their business is directly related to regional economic structures and activities. In Nelson, for example, there is a strong horticulture base with connections to processing. In Southland the Mid-Market wholesaling sector is associated with sheep, beef and dairy farming.
With strong industries in forestry, agriculture, fishing, wholesaling and manufacturing, meanwhile, the Upper North Island region (outside of Auckland) with the Bay of Plenty and the Waikato, provides a substantial 19.10 per cent of the Mid-Market sector jobs and is home to 17.50 per cent of New Zealand's Mid-Market businesses.
In some regions, Mid-Market firms represent a business core, acting as the large employers or ‘big’ businesses of the area. The Mid-Market can provide a solid business foundation in the smaller regions.
Mid-Market customers were made up of 19 per cent consumers, 29 per cent businesses, and 52 per cent a mix of consumers and businesses in 2014.
The New Zealand Mid-Market is concentrated in four main industries – wholesaling, retailing, manufacturing and construction. They generated more than half (55 per cent) of the Mid-Market's total sales. Wholesaling contributed $34.2 billion, retailing, $24.7 billion, manufacturing, $20.1 billion and construction, $13.9 billion.
The Mid-Market has 20 top sub-sectors largely from these four main industries, including basic material wholesaling, grocery liquor and tobacco product wholesale, food product manufacturing and preschool and school education. Combined, these generated $109.8 billion turnover in 2013, up from $96.1 billion in 2012.
While the overall manufacturing industry, with sales of $102 billion, has experienced a net decrease since 2010, Mid-Market manufacturing has thrived in this period, and makes up a substantial part of the growth in the sector. The Mid-Market accounts for 19.60 per cent of manufacturing activity and more than a quarter (25.6 per cent) of the country's manufacturing jobs are provided by Mid-Market firms.
Retailing is an important industry for the Mid-Market, generating around $24.7 billion of sales in 2013 and a share of 46.80 per cent, up from 40.30 per cent in 2010. This equals compound growth of 8.60 per cent for the Mid-Market, compared with small and large businesses, which recorded sales growth of 5.30 per cent and 2.80 per cent respectively. Mid-Market construction firms only took a 6 per cent share of the industry in 2013 but this 6 per cent generated $13.9 billion, an increase from $10.1 billion in 2010. Part of this is due to small firms moving up to Mid-Market size.
Value Added Definition
Rather than giving GDP figures, this report uses the Value Added (VA) measurement which includes compensation of employees, gross operation surplus, consumption of fixed capital and other taxes on production but it excludes taxes on products and subsidies.
Despite the non-event of New Zealand’s ‘rockstar economy’, a quarter of Mid-Market businesses rated the New Zealand economy as strong in 2014, and said the same for their own local economy and industry.
This Mid-Market sector judgement tallies with other national data that the NZ economy is in a relatively healthy state and economic growth is steady and consolidating.
Total national sales growth across all sectors bears this out with an estimated $495 billion in sales for 2013 up from $440 billion in 2010, representing 3.90 per cent compound growth between 2010 and 2013.
The Mid-Market made an important contribution to New Zealand's overall economic growth, between 2010 and 2013, accounting for 55 per cent of New Zealand’s total sales increase. The market was also responsible for 33.90 per cent in GDP growth during 2013 and provided 34 per cent of all the job opportunities in 2013.
Mid-Market businesses' confidence in the national economy for 2015 is in line with the Quarterly Survey of Business Opinion (QSBO), which showed that business confidence has stabilised at 21 per cent net optimism. While not as upbeat as late 2013 and early 2014, which proved over-optimistic, Mid-Market firms are relatively positive and are intending to hire over the next year. Another good sign for the economy is that residential building is on the move once more.
The general high business and consumer confidence is due to economic growth happening across all the main industries. This is despite ongoing economic issues with trade partners in Europe, geopolitical uncertainties and a slowing growth in China.
While remaining positive, we have seen Mid-Market firms lower their 2015 growth forecasts for the NZ economy from 2.80 per cent to 1.40 per cent. A figure that is still higher than what they are expecting from their regional economies.
Economic optimism is lifting and the business outlook for the New Zealand economy remains good, despite pressure on dairy prices and other commodities.
A substantial part of the New Zealand economy's growth is happening in wholesaling and retailing. These two industries, where Mid-Market businesses make a big contribution, accounted for 24 per cent of nationwide growth between 2010 and 2013.
The Christchurch rebuild is partially responsible for the healthy economic picture, providing excellent conditions for the construction industry. Construction projects outside Christchurch are also buoying the economy with large residential and commercial/transport activities in Auckland such as the proposed Auckland City Rail Link and the Auckland Manukau Eastern Transport Initiative.
Retail, a central part of the business landscape, is growing well, with the Mid-Market VA contribution up 13.50 per cent at $9.8 billion. Retail growth reflects strong consumer confidence and high levels of job security in the post-GFC environment. Along with the Mid-Market’s strong performance, the number of Mid-Market retail firms has risen, up 5.30 per cent compounded since 2010, coinciding with a 2.80 per cent lift in employment.
Mid-Market businesses associated with agriculture have had to make some economic forecast adjustments due to a disappointing drop in milk payouts, drought conditions and reduced farm spending in Hamilton, Whangarei and the Manawatu. North Island firms outside Auckland and Wellington expect lower levels of growth from their regions.
The value of the New Zealand dollar is worrying Mid-Market firms. A quarter of Mid-Market firms said growth and stability of the NZ dollar are a concern and a further 18 per cent see the exchange rate as a potential problem.
Businesses from the key exporting industries – agriculture, forestry and fishing, manufacturing and wholesale trade - are most anxious about these two issues.
Mid-Market firms said competition from low cost and other competitors is making it difficult to raise prices despite high optimism and confidence. This does mean, however, that there is low risk of asset bubbles forming or an overheating of the economy. Headline annual inflation is expected to be below the target band in 2015 and could become negative for a period before moving back to 2 per cent.
The housing market and interest rates are also an issue for a quarter of Mid-Market businesses when looking at the national economy. With house prices continuing a steep rise across the country, particularly in Auckland, this could pose potential risks to the stability of the financial system and households' budgets.
Despite these concerns, as well as unfavourable climate conditions and pressure on commodity prices, confidence levels are remaining generally buoyant.
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For this research, Colmar Brunton spoke to 462 Mid-Market businesses (with turnover of between $2M - $50M) via a phone and online survey during October to December 2014. The sample includes all industries, sizes and states. Survey results are projected to the total population of the Mid-Market businesses using Statistics New Zealand information. The interviews were conducted with the key decision maker actively involved in the financial decisions in all areas of their organisation – CFO, Financial Controller, Treasurer and Finance Director. The survey measured CFO’s concerns and expectations on a wide range of topics.