Confidence crash?

Business confidence in Britain has fallen to its lowest point in six years, according to a recent report. How is the UK channel bearing up under the threat of another recession?

You know that roller-coaster ride in Blackpool? We're right at theix years, according to a recent report. How is the UK channel bearing up under the threat of another recession? top of that at the moment. If someone comes along with a helium balloon - which is one per cent off interest rates - then we'll float. If they don't, we'll go down like a bloody rocket.'

So says Barry Neil, managing director of Reliance Computer Services, his sentiments reflecting widespread concern in the channel about the state of the UK economy. With recessionary pressures at play, most agree the outlook for the industry is hanging in the balance.

Dun & Bradstreet, the business information company, believes business confidence in the UK has crashed. Of the 1,500 managing and finance directors it polled last month, around half expect a decrease in sales, new orders and profits in the last three months of this year. For the first time in 10 years, more companies are predicting a decrease than an increase in exports, with 55 per cent expecting a drop. And employment prospects look equally unhealthy - 52.5 per cent expect to boost their staff headcount, compared to 59.5 per cent last quarter.

The Confederation of British Industry (CBI) and chartered accountants Pannell Kerr Forster have hit out with their own set of statistics. A report out this month warns that small and medium-sized manufacturers are being hit by a drop in orders, output and jobs. In terms of business optimism, 59 per cent of SMEs are more pessimistic about the future than they were four months ago, with just six per cent more optimistic.

John Alexander, partner at Pannell Kerr Forster, blames the continuing strength of the pound, high interest rates and lack of confidence at home and abroad. 'It looks as if it might all end in tears,' he says.

It is small businesses at the sharp end that are the first to get squeezed, and most resellers and smaller distributors fall into this category. Players are nervous and are tightening their belts accordingly. 'People aren't ordering as much - they are taking a longer term viewpoint. It's gone very, very quiet,' says Reliance's Neil.

He attributes the current situation to the government's monetary policy.

'It's costing us to have our overdraft. We're at the mercy of the government and the Bank of England and there's damn all we can do about it. We need the government to support small businesses and lower the interest rates,' adds Neil.

The Federation of Small Businesses is also calling for a drop in interest rates. It says that 60 per cent of its members are 'borrowers' with long-term loans and, because of this, are affected by the current economic climate more than other sectors. Because bank managers see smaller players as a bigger risk, most pay between three and five per cent above the base rate on their loans. By bringing the base rate down, their bank rates will come down proportionately.

It is also lobbying the Monetary Policy Committee to get more business players on board, since the body is run largely by economists who 'don't have the day-to-day knowledge of running a small firm'.

For some, any action will come too late. KPMG Corporate Recovery has recorded 300 receiverships in the third period of this year, up 14 per cent from the second quarter. Although the number of receivership appointments for the year so far is down on the same period last year, Mike Wheeler, head of corporate recovery at KPMG says: 'There are now clear signs that the number of companies going into receivership is on the increase.'

Credit manager at Ideal Hardware, Eddie Pacey, who is at the frontline of channel financing, agrees that insolvencies have been on the up in general in recent months and believes that the IT sector, in particular, is suffering. 'From the number of notifications I have received about insolvencies, the number of insolvencies in IT in the past six months seems to have increased. The people that are struggling are on the reseller side. They bear the brunt of it because the lull is from the user side.'

He identifies 'price reduction from the vendors down', as a contributing factor which has eroded margins and argues too many resellers have been 'cutting each other's throats on price' in a bid to remain competitive.

Many resellers are feeling the pinch from every angle. 'There's a lot of sales pressure in the channel,' says Neil, 'but that's not going to go anywhere because our customers aren't buying.' He says this month has seen a sharp downturn in sales. 'People are calling me to say "buy, buy, buy", but our customers are saying they can't afford to.'

Others argue it is the distributors that are stuck between a rock and a hard place and consequently they will be the first to buckle under economic pressure. Andrew Robins, business development manager at financial sector VAR PNC, comments: 'We are concerned for the distributors. They are the first to get squeezed and they have non-existent margins as it is.'

Ideal's Pacey argues that this 'depends on the nature of the distributor'.

He says: 'We hold the reins to a certain extent in the distributor/reseller relationship.' He adds: 'Certain distributors - those that are already in a downward spiral - will be hit harder than anyone thinks, but those performing adequately will hold firm.

'We're doing okay. Unfortunately, others are not because they're not as strong as us in distribution, or as stable. We've got the right systems and logistics,' Pacey adds.

In the City, the mood in the market is reflected, and IT stocks have 'been on a significant downward slide', according to last month's review by Granville Equity Research. In the first few days of October, the FTSE IT Index fell below 1000 for the first time and 'the City's attitude to IT stocks has shifted'. All sizes of IT stocks have been affected and, the report says, 'the City is expecting downgrades to analyst forecasts'.

But despite this gloomy backdrop, many in the channel are cautiously optimistic about the state of play, hitting out at 'media hype' which they say is whipping the industry up into a frenzy. 'I would say that if there is a recession around the corner we've talked ourselves into it more than anything,' says PNC's Robins.

Barry Dodhia, marketing manager at Hemini Plc, agrees: 'It's a lot of hype. The media is preventing people from being positive. Things go up and down - you have to look at it from the positive side.'

Neil, too, argues: 'People talk the economy down. This reinforces the feeling that we're in an economic downturn. A bit of confidence would go a long, long way.'

Dun & Bradstreet's computer market intelligence centre manager Brian Burke says that while the industry is heading for an economic downturn, there's a question mark hanging over what type of downturn we're going to have. He says he is 'not convinced of the severity' of the market's position in comparison to the last recession. One of the factors that he believes will reduce the impact of economic instability is that this time round the industry is ready for it and is steeling itself against decline.

'In the early to mid 1980s - the boom years - everyone was full of confidence and going at 100 miles an hour. When the recession came, they got caught with their pants down. Now I believe people know it's coming - which means they are not as overextended as they were then, or as bullish.'

He also points out that British business has for some time been fighting against a number of negative economic forces, like the strong pound and high interest rates, but has managed to keep its head above water. 'Considering the pound has been so strong - which should have been to the detriment of exporters - people are still exporting successfully,' he says.

Burke adds some will argue that a recession has already started 'and probably did a year ago'. The global economy has been shaken up by the financial turmoil in the Far East and while its knock-on effect on Europe 'remains to be seen', Burke says he hopes the UK, which has been battling against significant odds so far, will remain stable. 'People have lost money because of the Far East, but that was anticipated.' What's encouraging, he says, is that 'they haven't gone out of business'.

The IT industry has a headstart on other sectors since it has changed significantly over the past few years. It has already, in effect, been through a downturn, according to Burke. As technology has become increasingly commoditised and prices slashed, IT players have been forced to redefine their business processes and offerings to offset this and boost the bottom line.

'A number of businesses have become strengthened as a matter of course.

They have had to embrace change and so have to some degree insulated themselves against the effects of economic downturn,' Burke says.

In the channel, price cuts have meant wafer-thin margins and an increased focus on ways to add value - and this shift could cushion any blow. 'Distributors and dealers have restructured over the past few years, moving towards areas they think will shelter them and maximise margins. They are now stabilised against a recession,' says Burke.

Most resellers, which a few years ago made a living shifting boxes, have 'added two or three more strings to their bow'. They have moved into high-margin specialised fields, such as computer telephony integration (CTI) - namely 'providing solutions rather than kit' says Burke.

Hemini's Dodhia says this is exactly the course of action his company took. Three or four years ago, Hemini dealt primarily in hardware. Now, Dodhia says the primary side is services. 'We build systems and configure them. The focus has changed so much.' As a result, he disregards any suggestion that recession is imminent - at least for those with a value-add bent.

'It's a load of rubbish. We've been very busy. I've got orders for December and January.' But he would welcome a further drop in interest rates.

PNC, which is also services-focused, believes it, too, could ride the storm. Robins says the company saw a drop in kit sales 'about four weeks ago', but maintains that confidence appears to be creeping back up, with customers beginning to place orders again. 'People out there have still got money to spend,' he says, adding that other market forces are working in the favour of some channel players. 'People need to be compliant for the year 2000, so they have little choice but to keep spending.'

Financial director Warren Butcher at reseller InCity agrees: 'There is little doubt in my mind that there will be a recession,' he says. 'There are, however, reasons why IT will be immune to its effects. The financial sector is having to cope with both economic and monetary union (EMU) and year 2000 issues, which have created a false economy in terms of demand for skills. This demand will continue well into the year 2000, so that any downturn will not happen for at least 18 months. The recession will probably be coming to an end by then, so the economy will start to become more bullish.'

Pacey argues that the value-add issue is not even tied up with the question of economic downturn. 'The box shifters are not going to survive at any time whether there's a recession or not. Price erosion is such that you simply can't do that profitably.' He points to 'a certain consolidation' in the reseller sector in recent months, indicating a reaction to financial pressures, and says that more mergers are afoot. Pacey says he is pleased to see this, since resellers previously trampling over each other's stamping grounds and undercutting each other's quotes are realising they need to pull together to survive.

Distributors, meanwhile, have been 'streamlining operations' and 'improving infrastructure'. Those with more muscle, like Computer 2000 and Ingram Micro, are moving onto the global stage, expanding operations and spreading risk.

'Global distributors, having spread themselves out, will have different impacts in different markets and that will balance out,' argues Burke.

He warns, however, against those players in the channel trying to spread themselves too thinly in their dash to diversify. 'It's a balancing act.

You can end up overextending yourself.'

Because the channel has been building up its defences over the past few years to stave off market pressure, the consensus is that it is heading for a dip rather than a slump - at least for those that have jumped on the restructuring bandwagon. The channel is eschewing what it sees as media pressure and bucking the national trend in its bid to remain optimistic, if nervous. It wants to see interest rates down and market confidence up.

Ideal's Pacey believes there will be a 'mini-recession, but not a full-blown one, in IT over the next 12 months. It's happening right now to a certain extent'. But 'it's not a steep decline, it's a lull. A bit of a quiet patch'. Neil agrees: 'I think we're in an economic flat bit - I don't think we're crashing down.'

Dun & Bradstreet's Burke concludes: 'Most people believe the next six months to a year are going to be difficult. I'm hopeful that this time round it will be a much shallower curve - whether you can call it a recession, I don't know yet.'

CONSUMER CONFIDENCE

Levels of consumer confidence across the UK are closely matching the mood in the business sector. Consumer confidence 'has plunged' nationally, according to a report published at the end of last month by consultancy firm Business Strategies.

As a result, IT retailers - from PC World to the Tottenham Court Road independents - will find themselves feeling the effects as the nation tightens its purse strings.

Melanie Lansbury, senior economist at Business Strategies, says confidence in the economy suffered its biggest quarter-to-quarter fall since 1992 in the third quarter this year, with optimism about employment prospects over the next 12 months hitting a four-year low.

Lansbury blames media scare stories for playing a part in damaging confidence levels. She points out that consumers, except for those in London, say they are not really worried about their household finances and that this contradicts the other findings of the survey. If people are worried about job losses and the economy, it should follow that they are also concerned about household finances.

The manufacturing regions including the North East, Yorkshire and the Humber, the West Midlands, and the South East including London are seeing confidence at its lowest. The report points out that this is where the effects of the global economic crisis are being felt most strongly.

(See feature, page 39)

REGIONAL ROUND-UP/BUSINESS CONFIDENCE BY REGION (FOURTH QUARTER, 1998)

London and South East Business confidence has fallen sharply since the third quarter, but remains at the highest level in the country. The number of companies expecting to increase sales has dropped by eight per cent - from the third quarter to the fourth quarter - to 62 per cent; 57 per cent expect increased profits - also a fall of eight per cent and 58.5 per cent expect to take on more staff - a drop of 6.5 per cent. A decline in exports is predicted by 52 per cent of businesses.

THE EAST

The number of firms anticipating increased sales has dropped from 66.5 per cent to 57.5 per cent, while the number expecting profits to rise has fallen from 60 per cent to 57 per cent. Just over half predict an increase in employee headcount. 46 per cent expect to increase exports.

The South West Business confidence here is at its lowest in the country. Just over half of companies are predicting that they will increase sales - down 14 per cent on the last quarter. The number of firms expecting increased sales has fallen 15 per cent to 45 per cent. Just over half anticipate a higher number of new orders.

East Midlands Less businesses are expecting new orders - down 11 per cent to 46 per cent, but sales confidence has remained stable with 55 per cent expecting increases. The number of firms predicting a rise in exports is down 2.5 per cent to 46.5 per cent.

WEST MIDLANDS

Just 41 per cent expect to push up prices - the lowest figure in the country. The number of firms expecting increased orders has fallen five per cent to 45 per cent - down from 64 per cent at the start of the year.

NORTH EAST

A steep fall in confidence - with those expecting increased sales down from 65 per cent to 51.5 per cent and a drop in the number of firms predicting a profit rise - down to 50 per cent from 61 per cent.

North West One of the areas where confidence is at its lowest - with sales confidence falling 18 per cent to 50 per cent. Just 46 per cent of businesses anticipate increased profits, compared to 67 per cent last quarter. Less than 40 per cent now expect exports to rise.

Wales: Sales confidence is down 10 per cent to 51.5 per cent, while confidence in profits has dropped 14 per cent to 47 per cent. Just 38 per cent expect to increase prices, and only 45 per cent say they will take on more staff - both figures are the lowest in the country.

Scotland: Business confidence is higher than the national average with 54 per cent anticipating a profits rise, compared to a 51.5 per cent national average, and 56.5 per cent expecting increased new orders, compared to 50.5 per cent nationally.

Source: Dun & Bradstreet.