Mid-size businesses are powerful, often underappreciated drivers of the U.S. economy. Defined as companies with annual revenues between $10MM and $1B, mid-size businesses account for one-third of private sector Gross Domestic Product and employ about 43 million people in the U.S.
It’s also a sector that might be finally turning a corner, according to a recent survey of industry executives, including leaders at mid-sized retailers. The National Center for the Middle Market (NCMM), a partnership between The Ohio State University’s Fisher College of Business and GE Capital that tracks more than 1,000 Chief Executive Officers and Chief Financial Officers in private and public businesses, found that revenue growth among middle market companies began to pick up by the end of 2012. Mid-sized businesses showed average revenue growth of 7% during the past year, and retailers project revenue increases of 5.2% in the next 12 months, outpacing their peers in all other surveyed industries.
A close look at other measures in the NCMM survey underscore that middle market retailers are preparing for better days. Key areas of investment are ticking up, which shows both cautious optimism and expectations for an economic rebound, especially if these companies can access financing alternatives to augment their cash on hand.
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Cash Moves Off Sidelines
To understand the mood of the middle market and its future financing needs, the survey asks what executives would do if given an additional dollar. The report indicates 41% would hold it in cash or invest in marketable securities. This is a decrease from 50% at the midyear point. Clearly, corporate America is still hoarding cash, but the results show that companies are beginning to put some of their cash stockpiles to work.
More Focus On IT
There are several areas where mid-sized retailers are planning to make strategic capital investments, including keeping pace with information technology. To grow and compete, it’s critical for retailers to integrate physical stores, websites, warehouses and distribution. For example, if a customer places an order online and chooses the “in-store pick up” option, the retailer’s point of sale technology must integrate warehouse distribution with stores. This infrastructure creates flexibility for the consumer and efficiency for the business.
Other Capital Expenditures Tick Up
IT is not the only area where many middle market businesses are considering stepping up investment. The latest report indicates executives of mid-sized businesses will increase their allocation to various capital expenditures—such as equipment and facilities—to 22% from 19% in the third quarter of 2012. In the retail industry, many businesses are experimenting with new, smaller store formats that hold less inventory as a response to the trend toward online sales. Retailers are also investing capital in energy efficiency improvements, which have become more affordable in recent years and can recoup costs quickly.
Hiring Remains Resilient
As a whole, the middle market plans to continue adding jobs next year. Retail is among the industries with the highest growth expectations, as there exists a strong pool of available workers and simultaneous interest amongst middle market retailers to invest in new talent.
The retail sector finished Q4 2012 with a significant 2.8% increase in employment, following lackluster second and third quarters (although a portion of this growth can be attributed to holiday hiring). Going forward, 41% of middle market businesses expect to add jobs over the next 12 months, with retailers optimistically projecting 1.8% growth in the next 12 months.
A Growing Need For Financing
When the time comes to put this talent to use and capture growth, accessing adequate financing will once again become a priority for companies. Just over one year ago, 55% of middle market companies named “accessing financing” as a major business challenge, but recently it’s dropped off the list of worries. That’s not altogether surprising, since many companies are sitting on cash and aren’t yet investing aggressively in the business; as a result, they have less immediate need to access financing.
But growth capital will likely be an ongoing need as growth accelerates. Given this possibility, proactive middle market retailers should review and consider their short- and long-term financing needs to ensure they are in line with growth plans. As the economic picture begins to clear, companies ready to react will have the advantage.
Jim Hogan is senior managing director at GE Capital, Corporate Retail Finance, a leading provider of senior secured loans to retailers in North America, supporting working capital, growth, acquisitions and turnarounds (gecapital.com/americas).