Positive outlook among London’s SMEs

A look back at 2022

SMEs in the capital and South East were optimistically anticipating a year of relative stability as the pandemic receded in early 2022, but by the autumn found themselves impacted by the cost of living crisis, high inflation, economic uncertainty and rising energy costs.

These macro headwinds exacerbated the supply chain difficulties that began in 2020, leaving many companies in our region facing continued materials shortages and rapidly escalating prices.

At the same time the shift to hybrid working practices in the capital continued, with lots of companies either downsizing their London premises or moving out to regional locations. Interestingly, by the end of 2022 there was evidence of a growing desire to return to the workplace, particularly among younger people, seeking social and professional interaction.

There was relatively little M&A activity last year as companies focused on rebuilding their business plans. Similarly, lending activity was fairly muted due to high levels of liquidity in company ‘war chests’ built up during the pandemic.

A degree of optimism

Turning to 2023 and following informal conversations about the year ahead with clients across all sectors, I think it’s fair to say there is a degree of optimism in our region.

There is a general acknowledgement that the next 12 months are going to be difficult given the macro-economic headwinds. But because many businesses have spent time anticipating the challenges that lie ahead and methodically planning how to deal with them, a certain level of confidence has emerged.

While higher interest rates and the inflationary environment are a concern, the single biggest challenge seems to be recruitment and retention of staff. Not only is this driving wage inflation, many of our SMEs will not be functioning at full capacity, not through lack of demand, but simply because they don’t have enough people with the right skills.

That sentiment is felt across every sector in our region from hospitality and leisure to retail, from healthcare to professional services, and applies to roles across the board.

Embracing Environmental, Social and Governance (ESG)

The latest Government energy support package will see the Price Cap removed at the end of March for businesses in England, Scotland and Wales, replaced by a new discount mechanism based on wholesale prices. All businesses are likely to see a rise in costs although energy-heavy sectors will see higher discounts available. In the short term, cash and profits could be impacted and some businesses may look to increase prices or reduce costs and energy consumption to try and maintain margins.

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/renewable 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. For projects with long-term sustainability at the core, sustainable financing may be a suitable option to support any immediate shortfall in cashflow.  

Being more ESG-aware could have the additional benefit of supporting recruitment and retention objectives by making companies more attractive to talent.

Other key challenges

Companies reliant on consumer spending face falling consumer confidence this year, which will particularly challenge hospitality and leisure and retail companies, including food retailers who will increasingly feel the pinch as people cut back on their food shopping to meet rising energy bills. 

Another significant challenge for SMEs heavily involved in exporting or importing, is dealing with the red tape associated with the rise in sanctioned jurisdictions. Of course it’s hard for smaller businesses to navigate the constantly evolving situation, as they simply don’t have the resources to deal with an issue that looks set to continue in 2023.

I think global supply chain disruption will continue to present problems for our region’s SMEs, given the ongoing economic and Covid-19 related issues China is experiencing, we can still expect shipments to be delayed and costs to remain high during the year ahead.

One challenge specific to businesses in London is the expansion of the city’s ultra-low emissions zone in October to all roads inside the M25. For SMEs with older, non-compliant transport fleets this could push operating costs up or force them to buy greener vehicles.

Opportunities open up

The unfavourable supply chain situation does open up opportunities for small, specialist manufacturers in our region, as companies begin to source supplies locally for greater supply chain security. For example, uPVC double glazing manufacturers are already benefiting from this on-shoring trend as overseas sources become increasingly unviable.

The weaker pound also makes exports from the capital more competitive and benefits the hospitality and leisure industry by making London and other tourist hotspots in the region more affordable and attractive to overseas tourists.

In terms of M&A activity, I would expect to see caution during the first half of 2023 as businesses pay down debts and stabilise their finances. However, in the latter half of the year businesses may begin to identify and capitalise on M&A opportunities that may not have been affordable in previous years, driving consolidation.

Data is the big deal

Technology use went through a step-change during the pandemic and moving forward companies should look at their data. Finding ways to make use of it could help many businesses to better understand their customer behaviour and find efficiencies. The key issue is that while there is now so much data available, there’s a shortage of people with the skills to help companies to exploit it in a way which is also compliant with the relevant regulatory/legal rules and that is something firms need to address to remain competitive.

Conclusion

Despite the macro situation, this year could be a hopeful one for businesses that are sufficiently prepared to face the challenges ahead and capitalise on growth opportunities where they can.

For our part, the London and South East Region team is here to help clients through these difficult times, and we look forward to helping them capitalize on emerging opportunities.

Read related insights