Hunkering-down wrong approach to recession - study

By Ben Chapman-Smith

Shamubeel Eaqub, principal economist for NZIER. Photo / Marty Melville
Shamubeel Eaqub, principal economist for NZIER. Photo / Marty Melville

New Zealand businesses which chose to wait out the downturn by cutting costs have performed worse than those which kept investing, according to a new study.

Four years' worth of MYOB Business Monitor results have been analysed by the New Zealand Institute of Economic Research (NZIER), showing most kiwi businesses underestimated how long the economic downturn would last.

The data confirmed the global downturn of the past four years had not been a typical one, said NZIER principal economist Shamubeel Eaqub.

"The recession lasted nearly twice as long as other recessions in the last 50 years, and the recovery since has been quite shallow.

"This has meant that businesses who have taken the approach of tightening their belts during tough times and trying to wait out the downturn have actually not performed as well as businesses who have focused on their core strengths and invested their way through the recession."

Eaqub said firms focused on 'business building' had seen revenue growth over the previous 12 months improve from negative 9 per cent in early 2010 to 17 per cent in June 2012.

In contrast, more conservative businesses reported a slowdown in sales from negative 6 per cent in early 2010 to only 8 per cent in June this year.

The MYOB and NZIER study found that back in April 2010, 78 per cent of businesses thought the economy would have returned to full steam by the end of 2011. Yet, in June this year, 48 per cent said they believed economic recovery was still more than 18 months away.

Businesses that had invested in areas like improving their IT systems, hiring talented staff and retaining customers have had better results, the study showed.

Of those that had focused on business development, 12 per cent said they were increasing their full-time staff numbers, compared to only 4 per cent of other businesses.

Nearly a quarter of investing businesses were also looking to increase their employees' wages.

Half of businesses following an investment approach said they were spending more on customer retention, compared to just 29 per cent of other businesses.

And businesses that had tried to grow their way out of recession since 2010 had typically continued to invest in information technology, with 23 per cent increasing their spend on IT systems. Only 11 per cent of other businesses had invested in IT during the downturn.

MYOB general manager Julian Smith said businesses which invested during the downturn would probably emerge from it with a stronger market position.

"If you are in an industry where many of your competitors are losing market share or failing to make new investments, and your focus is on growing your business through better systems and staff, that is a real competitive advantage."

While it may have been a brave move at the time, businesses that had continued investing were now reaping the rewards of their strategy, Smith said.

"It can be very hard for businesses to plan ahead at the best of times, but the longer than expected economic downturn has made planning even more difficult.

"Especially for small businesses which may not have a lot of capital, the first instinct is often to be cautious and hold off investment until the economy recovers, but what these results show is that now isn't the time for a business as usual approach."

Most kiwi businesses had been consistently overly optimistic about their revenue growth throughout the downturn, the study showed.

A net 25 per cent of businesses were expecting revenue growth in the year ahead at the start of 2011. This was despite the fact that a net negative 4 per cent had actually seen growth in the previous year.

Likewise, in June 2012, a net 24 per cent of businesses were forecasting revenue growth but only a net 1 per cent had actually experienced growth in the 12 months prior.

The MYOB Business Monitor is a nationwide survey, conducted by Colmar Brunton, of about 1000 kiwi small and medium business owners.

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