Resilient, well managed SMEs in the East of England are well-positioned for 2023

Looking back at 2022

For the Eastern Region last year was a reasonably strong one, with businesses demonstrating resilience to the cost-of-living crisis, high inflation, rising interest rates, ongoing supply chain challenges, staff churn and the economic uncertainty which emerged, particularly in the latter half of 2022.

The region’s buoyant tech, biotech and scientific research base continued to prosper, having experienced record levels of investment in the previous year, though market volatility in 2022 saw a reduction in IPO activity. Recruitment companies had a strong year, while private schools and professional firms also did well in affluent areas. 

Across the region the non-food retail sector was hit somewhat harder by macro-economic headwinds, as was hospitality and leisure, particularly at the top end. Logistics and food processing businesses suffered from Brexit-related supply chain issues, while not for profit organisations and facilities management businesses saw their margins eroded by inflation and rising energy bills.

However, many companies retained good liquidity from reserves built up during the pandemic and we saw opportunistic M&A pursued across all sectors by the businesses with stronger balance sheets.

Key challenges

The pandemic forced our region’s business leaders to make many tough decisions to survive, and I believe they are now more confident, resilient and decisive than ever before. A key challenge for businesses this year will be to ensure they have sufficient working capital, cashflow and liquidity to get them through the ongoing macro-economic headwinds they face and to exploit potential growth opportunities.  Forward thinking business leaders and owners have started to accept higher prices and interest rates as the new normal and have factored these into their planning. 

Supply chain issues look set to continue for some time, be that supply of semiconductor chips and electronic components from Asia, reduced foodstuffs from Ukraine, gas supplies from Russia, or simply on-off challenges around British ports. Difficulties in obtaining some raw materials and vital components are still creating shortages and driving up costs.  As a result, some manufacturers with sufficient storage capacity have stockpiled materials to de-risk the impact of future price increases and stock shortages. Please read our latest report, Chain Reaction, to find out more. 

Many businesses operating in manufacturing, transport and logistics, construction and recruitment tell me that they have been able to pass on at least some inflation-driven cost increases to their customers, but this is a less palatable option for direct consumer-facing businesses. 

The latest Government energy support package will see the Price Cap removed at the end of March for businesses England, Scotland and Wales, replaced by a new discount mechanism based on wholesale prices. In the short term, businesses in the East may see an impact on cash and profits and some may look to increase prices or reduce costs to try and maintain margins. Some businesses have managed to negotiate fixed-price contracts with energy suppliers for a limited period.  

Whilst investment in longer term solutions may hit corporates as an extra cost in the short term, it might also be imperative for businesses to look at how they can future-proof their running costs by developing a more sustainable approach to their energy consumption. With sustainability high on the agenda for many businesses, it is important that the cost of doing business does not overshadow this important transition. 

Staff recruitment and retention will continue to be another high priority in 2023. Reduced overseas employees as well as greater employee focus on salary growth, has led to a job market where employees have significant choice of would-be employers. Businesses need to work hard to attract and retain talent, through offering exciting roles which make optimal use of hybrid working to deliver meaningful work / life balance.  In addition, firms are starting to attract employees through demonstrable commitments to diversity and inclusion, as well as by having meaningful policies and practices in place to act ethically and with environmental sustainability front of mind.

Targeted investment could unlock growth

We continue to see private equity investment into high growth and IP-rich sectors, and recent reports of a c.€270bn European PE war chest suggest that there could be plenty more to come.  With valuations down in 2022, and fewer IPOs last year, there are certainly investment opportunities to be explored in our region, particularly in the tech, cleantech and life sciences sectors around Cambridge.

SMEs looking to grow organically or pursue mergers or acquisitions can benefit from a ‘first mover’ advantage where their competition remain more cautious.  Clearly businesses looking to grow must ensure they are well financed, with sufficient working capital, and generate sufficient cashflow to withstand any further unexpected economic headwinds. 

At the infrastructure scale, we’re hopeful that we will see government investment into roads and rail along the Oxford-Cambridge arc – another important tech and manufacturing “cluster” with significant growth potential.  And the government’s recently announced commitment to Sizewell C Nuclear Power Station in Suffolk should provide numerous opportunities for local construction and other suppliers and boost employment in our region.

I expect to see exciting opportunities for SMEs that support the pharmaceutical industry in Hertfordshire, as large-scale investments continue to drive the growth of this sector in the region.  And with Sunset Studios’ planned Waltham Cross development, complementing Sky Studios at Elstree and Warner Brothers at Leavesden, Hertfordshire’s creative media industry continues to thrive.

Environmental, Social and Governance (ESG) focus

There’s a growing public and business awareness of the imperative to protect the natural environment, preserve biodiversity, minimise greenhouse gas emissions, and minimise the use (and maximise the re-use) of precious natural resources, and I expect to see this awareness develop further in 2023.  This increasing emphasis on the broader environment should provide growth opportunities for specialist biodiversity research organisations, such as the National Institute of Agricultural Botany in Cambridge, Norwich Research Park, and Rothamsted Research Institute in Hertfordshire.

As well as the moral and ethical drivers to embed ESG practices into businesses, a further motivating factor for many of our clients is customer demand.  More and more large companies and local authorities now require that their suppliers be on a journey to transition to net-zero emissions, and be able to demonstrate this through strategies, policies and targets to, for example, reduce greenhouse gas emissions in a measurable way.  This, and the growing regulatory pressure from government, means SMEs in our region need to have appropriate ESG policies, practices and monitoring in place to help them meet these expectations.

Looking at the big picture, my Eastern Region team will do all we can to support our clients in what is going to be an undoubtedly tough year, but hopefully one that may also open up some opportunities for growth. Please get in touch with me or one of the team to find out how we can support your business.

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