Transforming in Turbulence:
Adapting to Uncertainty in Today's Macroeconomic Environment
Long-held business assumptions about the operating environment have been turned on their head. COVID-19 was an unforeseen global calamity, forcing a rapid transformation in ways of working and ushering in supply chain and inflationary shocks across the world, to say nothing of the fatalities and societal impacts. Then, just as the world was emerging from the pandemic, the unthinkable happened with the war in Ukraine, sending inflation rates to the highest seen for decades and seeing a steady increase in interest rates from their entrenched rock-bottom levels. Adding to this is a darkening of the general economic outlook and the likelihood of lower or negative economic growth across most of the Western world.
1.
Macroeconomic Outlook
2.
New Economic Reality
3.
Workforce Challenges
Across Sectors
Unprecedented Squeeze
on Corporate Profitability
France saw a 50% increase in insolvencies in 2022,* and England and Wales saw the highest number in Q2 2022 since 2009
The Four Key Dimension to Manage Today’s Disruptive Forces
Today’s highly unusual and uncertain environment requires a completely different way of operating, planning and budgeting for global businesses with complex supply chains. A crisis, semi-restructuring mindset based on a rigorous and highly analytical approach is required.
There are four key elements to how companies should respond: instil tighter business controls and disciplines, refocus and challenge sales and marketing activities, challenge and streamline all cost categories across the business, and aggressively manage the supply chain.
Given the current environment is unchartered territory for many executive teams globally, a radically new way of managing and controlling the business is required to navigate through these times. Companies that do not change and adapt can face dramatically reduced operational and financial performance within months, leading to dramatically weaker liquidity and cash flow.
As a result, many companies will require help getting into shape to survive. We’ve seen some global businesses require wholesale assistance across almost every aspect of their business.
Moving on From Survival Mode
Consumer-facing companies need to take control and act quickly. Survival mode is where many businesses are at, and this means their priority must be to get on top of and manage the situation. With the right approach, management teams that lack the depth of experience for the moment will be able to reinvent their business and make it more resilient to sustain it through these torrid times and make it fit for growth as the economy gradually returns to a more certain and predictable footing.
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New Economic Reality
Across Global Supply Chains
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Featured Topics
Passing on all cost increases to customers is in many cases not a viable option for companies because of market competition, so for companies stomaching the rises means taking a direct hit to the bottom line.
Financial stress and insolvencies are on the up across the UK and Europe as companies struggle with cash flow and covenant breaches. France saw a 50% increase in insolvencies in 2022,* and England and Wales saw the highest number in Q2 2022 since 2009, with more than 10% of businesses in August anticipating a moderate-to-severe risk of insolvency.* Many more companies are in the category of being established and profitable for years, but suddenly facing financial strife.
Additionally a significant issue for many businesses is that their management teams have little experience in operating outside of the more predictable, stable business environment, with its market growth and low inflation, limited restraints in labour supply, stable supply chain costs, and almost non-existent interest rates they have enjoyed for years. Current pressures mean that a business’s financial situation can deteriorate very rapidly — it’s sink or swim, a moment of truth for many leaders. We have seen multiple situations, where multi-billion-dollar global organisations went from being profitable to loss-making in a matter of months partly because of substantial market changes and cost increases and partly because their management had little experience steering through these highly challenging times.
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January 30, 2023
Tackling the Squeeze on Corporate Profitability
AN FTI CONSULTING REPORT
Michael.Weyrich@fticonsulting.com
Michael Weyrich
Senior Managing Director
Our Experts
Turnaround and Restructuring
Our senior professionals help drive successful turnarounds ensuring enhanced value at every stage.
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Discover why the world's top organisations turn to FTI Consulting for independent, enterprise-wide transformation expertise.
Michael.Weyrich@fticonsulting.com
Michael Weyrich
Senior Managing Director
Author
6.
Managing Today’s Disruptive Forces
5.
Corporate Profitability Squeeze
4.
Inflationary Forces Around the World
The International Monetary Fund (IMF) might have slightly upgraded its outlook for the global economy during Davos*, but businesses today are fighting through arguably the most complex set of corporate challenges in living memory, and they are expecting one of the most significant global downturns since the global financial crisis in 2007. Some of the most severely affected companies are in consumer facing sectors, and many need a dramatically different approach to running their business and operations to address this situation.
The economic forecast is worsening around the world and despite signs of resilience and the fight against inflation, GDP growth remains lower than expected.
Substantially More Challenging Macroeconomic Environment
1. Macroeconomic Outlook
2. New Economic Reality
No one-size-fits-all
3. Industry Growth Forecasts
Long-held business assumptions about the operating environment have been turned on their head. COVID-19 was an unforeseen global calamity, forcing a rapid transformation in ways of working and ushering in supply chain and inflationary shocks across the world, to say nothing of the fatalities and societal impacts. Then, just as the Western world was emerging from the pandemic, the unthinkable happened as Russia invaded Ukraine, sending inflation rates to the highest seen for decades and seeing a steady increase in interest rates from their entrenched rock-bottom levels. Adding to this is a darkening of the general economic outlook and the likelihood of lower or negative economic growth across most of the Western world.
Growth forecasts remain mixed across industries
EMEA
North America
EMEA
2023 Revenue Growth Forecasts
Topline revenue is haemorrhaging as people are holding back on discretionary spending because of the significantly inflated prices they are paying for essentials, such as energy and food, and for mortgage bills that have hiked up in response to interest rates that have progressively risen from historic lows to tackle inflation.
Revenues are also being further eroded by the stack of unsold inventory many consumer facing companies have built up after the easing of stock shortages during the pandemic, especially stock relying on complex global supply chains.
At the same time input cost pressures across the board remain intense. Freight rates have dropped from their pandemic peak, but costs are still high. Many categories of raw materials are in short supply because of the pandemic and the war in Ukraine driving up costs to unprecedented levels. Costs have come down to some extent but are still historically high.*
Freight Rates, Discretionary Spending and Revenue Erosion
North America tells a similar story for natural gas and resources, chemicals and oil and gas, with revenue set to trend significantly down. It is also notable that while revenue growth in retail is set to remain almost level in EMEA, businesses in North America are expected to have a more difficult 12 months.
However, there are a number of sectors which have improved growth forecasts, including e.g. Aerospace & Defence, Automotive and Environmental Services. Alongside an unchanged positive outlook for Lodging & Leisure, Media & Entertainment and Transportation.
North America
2023 Revenue Growth Forecasts
The accumulation of forces presents a difficult picture for businesses across Europe. Input costs have risen at an extraordinarily high rate, meaning huge external cost pressures for leaders to manage. Coupled with wage inflation and a competitive talent market creating pressure internally, for many businesses, it truly feels like they’re caught between a rock and a hard place.
An Accumulation of Inflationary Forces is Putting Unprecedented Pressure on Businesses Around the World
4. Inflationary Forces Around the World
Growth of Consumer Price, Producer Price,
and Wage Inflation
Germany
Note: Wage inflation and PPI % Increase does not extend to 2023 for all geographies due to a lack of available data at the time of publication (April 2023).
Source: OECD Data, National Bureau of Statistics, Financial Times, Trading Economics, CNBC
United States
United Kingdom
Netherlands
Spain
France
Italy
China
DE
IT
NL
ES
FR
CN
Us
GB
Statistics from September 2022 revealed 133,400 full-time staff vacancies in the UK’s National Health Service (NHS).* Coupled with staff walk outs and strikes, it paints a bleak picture for the healthcare workforce. These challenges are reflected in the US, with the Bureau of Labor Statistics estimating that they will need more than 203,000 new nurses every year until 2026 to fill the current shortage.*
Healthcare
Research in the UK has revealed that staff shortages are costing the industry £21 billion in lost revenue, with many restaurants and bars having to cut trading hours in order to cope.* A similar picture can be seen in France, with an estimated 250,000 vacancies as of December 2022, mostly in manual posts including cleaning and wait staff.*
Hospitality
In 2022, 1.2 million jobs in tourism were affected by staff shortages, with Italy being one of the worst affected countries. According to the World Tourism & Travel Council, one in six tourism jobs were vacant in 2022, the result of a shortfall of 250,000 workers.*
Tourism
Research by Oxford Economics revealed that 2.3 million jobs have been lost in the aviation industry following the outbreak of COVID-19.* Reality set in at Heathrow Airport during the summer of 2022, when a daily passenger cap of 100,000 was enforced to cope with a lack of staff.* Schiphol airport in the Netherlands announced similar restrictions in February 2023 in an attempt to reduce passenger numbers by 5% and minimise disruption.* Following a flurry of redundancies by airlines during the pandemic, recovery of staff numbers is set to be slow, with Boeing recently forecasting that more than 2.1 million personnel will be needed over the next 20 years (including 612,000 new pilots, 626,000 new maintenance technicians, and 886,000 new cabin crew members).*
Aviation
A lack of lorry drivers is adding further to companies’ supply chain problems, according to The International Road Transport Union— by 2026 50% of Europe’s freight movements could be affected by a lack of drivers.*
Travel and Transportation
Alongside difficulties procuring and affording raw materials, the construction industry is facing huge challenges recruiting skilled workers. This is particularly acute in Germany, with a recent IFO Survey revealing that 39.3% of construction companies in Germany reported a shortage of skilled workers, with many having to cancel projects.*
Construction
Significant Labour Shortages are Being Felt Across Sectors
3. Workforce Challenges Across Sectors
Substantial wage increases to help staff manage inflation and the cost of living — and attract, recruit and retain them because of labour shortages and changing post-pandemic working patterns — are a further operational and financial constraint. Whilst we are beginning to see wage growth level off in a number of countries (or have even seen a decrease in the United States), workforce costs remain exceptionally high for many businesses.
In addition, low unemployment and a high number of job vacancies are impacting most major economies, highlighting significant labour shortages. These workforce challenges are impacting businesses across the globe and across different sectors in similar ways, including:
5. Corporate Profitability Squeeze
6. Managing Today’s Disruptive Forces
Instil Tighter Business Controls & Disciplines
Tighter business control is about taking a razor-sharp focus on financial and operating processes. Core items include more robust and granular forecasting and budgeting, and far more frequent monitoring of profit and loss and balance sheet movements, as well as of costs and working capital. Companies need to be thinking from a much more short-term perspective — reviewing and forecasting on a weekly or monthly basis, rather than quarterly or half yearly — to ensure they are fully on top of their financial situation and can spot major changes and problems as they arise.
1. Planning Fundamentals
Challenge Sales & Marketing Activities
Sales and marketing functions must double down on the topline and margins. This means scrutinising items such as product range and profitability, pricing and margin leakage, return on marketing investment, and sales force effectiveness. Equally vital is thinking hard about how to forecast sales volumes in such an unpredictable environment and what volumes to manufacture given inventory levels and softer and changed consumer demand.
2. Top Line/Margins
Restructuring Mindset
Deeply Critique and Streamline of Cost Base
Critical central cost management measures will include seeing how the organisation’s structure could be simplified, where headcount could be reduced, productivity enhanced, and management processes and the overall operating model improved. Again, companies will likely need to take a shorter term and more tactical view on these as opposed to a longer-term and more strategic view of three to five years into the future.
3. SG&A COsts
Aggressively Manage
Supply Chain
Managing the supply chain must include reviewing existing supplier agreements to optimise and manage costs. One solution is to re-tender contracts, involve new suppliers and negotiate better terms and conditions. Some contracts may need to be terminated entirely. Other important elements to put under the microscope are landed costs, the insource/outsource mix, expenditure rates and the overall efficiency of the supply chain.
4. COGS/CAPEX SPEND
EMEA
Our professionals are true leaders in their fields, working with leading Global corporates, private equity funds and portfolio company management teams to respond to complex and urgent situations and shape and deliver ambitious value creation plans. We combine in-depth industry and functional knowledge and experience with a hands-on, action-focused approach.
Adam.Bradley@fticonsulting.com
Adam Bradley
Senior Managing Director
Raphael.Miolane@fticonsulting.com
Raphaël Miolane
Senior Managing Director
Thierry.Miremont@fticonsulting.com
Thierry Miremont
Senior Managing Director
France
Enrique.Baranda@fticonsulting.com
Enrique Baranda
Managing Director
Eduardo.Diaz@fticonsulting.com
Eduardo Diaz
Managing Director
Spain
Heiko.Rauscher@fticonsulting.com
Senior Managing Director
Heiko Rauscher
Stephan.Lechel@fticonsulting.com
Stephan Lechel
Senior Managing Director
Germany
Gerrit.vanMunster@fticonsulting.com
Senior Managing Director
Gerrit van Munster
Martijn.Hulshof@fticonsulting.com
Managing Director
Martijn Hulshof
Netherlands
Francesco.Leone@fticonsulting.com
Senior Managing Director
Francesco Leone
Claudia.Lotti@fticonsulting.com
Senior Managing Director
Claudia Lotti
Italy
Christo.Roux@fticonsulting.com
Senior Managing Director
Christo Roux
Rami.Semaan@fticonsulting.com
Managing Director
Rami Semaan
Middle East
South Africa
Forecasting and budgeting processes
Closer monitoring of P&L and balance sheet changes and movements
Detailed cost monitoring
Prevent siloed decisions
More actively challenge/manage working capital
Demand forecasting ahead of the curve & granular
SKU portfolio profitability and complexity
Pricing & margin leakage
Marketing spend return on investment
Sales force effectiveness
Organisation structure, complexity & headcount
Productivity Improvement/recapture
Management & control
Operating model
Open up/ revisit contracts
Tear up selected contracts
Landed costs, in-house/outsource
Operational inefficiency
Speed of cost down
Premium costs & habits
Footprint & fixed costs
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Tackling the Squeeze on Corporate Profitability
Transforming in Turbulence:
AN FTI CONSULTING REPORT
8.5%
Europe’s inflation rate
in February 2023*
10.4%
United Kingdom’s inflation rate
in February 2023*
77.3%
of CFOs indicate that inflation poses a high or medium risk to achieving their objectives in the next 18 months*
New Economic Reality
Across Global Supply Chains
2. New Economic Reality
Decades-high inflation levels have dropped from their peaks, but inflation rates are still very steep by historical standards: 8.5%* in the Eurozone and 10.4% in the UK in February 2023* — and although wholesale energy prices have eased because of a warmer winter than usual in Europe, they are unlikely to revert to pre-pandemic levels anytime soon. China’s abrupt ditching of its zero-COVID policy and rapid reopening could also lead to further inflationary pressure on energy and raw materials. Inflation is set to have a harrowing impact on businesses for some time to come.
This is also apparent in new research by FTI Consulting, which revealed that inflation is the number one risk in 2023 and beyond for global CFOs, with 77.3% indicating that inflation poses a high or medium risk to achieving their objectives in the next 18 months.*
The situation is especially acute for consumer-facing companies, from car manufacturers, to durable consumer goods, consumer electronics, and high street retailers, to mention a few of the sectors heavily impacted. As businesses weather the impacts of macroeconomic challenges and the weakening pricing power that affects corporate profitability, corporate revenue forecasts are bleak.
2.9%
Global growth is projected to fall from 3.4 in 2022 to 2.9 in 2023*
1.2%
Advanced economies are set to see the sharpest decline in GDP, from 2.7 in 2022 to 1.2 in 2023*
https://www.cnbc.com/video/2023/01/20/global-outlook-is-better-but-dont-get-too-optimistic-imf-chief-warns-at-davos.html
World Economic Forum, Jan 2023
World Economic Forum, Jan 2023
https://www.ft.com/content/bfc32042-6193-48f6-aa5a-481c8e6e2790
https://www.fticonsulting.com/insights/reports/global-cfo-survey-2023
https://tradingeconomics.com/commodity/steel
https://www.medicaleconomics.com/view/how-to-address-the-shortage-of-health-care-workers
https://www.schengenvisainfo.com/news/wttc-250000-vacancies-in-italys-travel-tourism-sector-to-remain-vacant/
https://www.restaurantonline.co.uk/Article/2022/06/23/record-staff-shortages-causing-hospitality-to-lose-21bn-in-trade
https://www.oxfordeconomics.com/resource/financial-time-aerospace-industry-grounded-by-lost-jobs-and-lack-of-staff/#:~:text=20%20Jul%202022-,Financial%20
https://apnews.com/article/travel-london-07426049fa6c985d5b2f8f27c89dd3c5
https://nltimes.nl/2023/02/21/schiphol-confirms-restrictions-returning-limit-departing-passengers
https://www.iru.org/news-resources/newsroom/europe-driver-shortage-triple-2026-if-no-action-new-iru-report
https://www.nytimes.com/2022/12/23/business/france-jobs.html#:~:text=The%20shortage%20is%20tightest...
https://www.ifo.de/en/press-release/2022-08-02/shortage-skilled-workers-germany-reaches-all-time-high
https://www.health.org.uk/news-and-comment/news/nhs-vacancy-rates-point-to-deepening-workforce-crisis#:~:text=Further%20detail%20about%20the%20
NHS,the%20quarter%20to%20September%202022
https://www.euractiv.com/section/economy-jobs/news/insolvency-figures-soar-by-50-in-france/
https://www.ft.com/content/bfc32042-6193-48f6-aa5a-481c8e6e2790
https://www.reuters.com/world/uk/uk-inflation-rate-rises-104-february-ons-2023-03-22/
https://www.fticonsulting.com/insights/reports/global-cfo-survey-2023
https://www.euractiv.com/section/economy-jobs/news/insolvency-figures-soar-by-50-in-france/
“The combination of lower economic growth and soft consumer demand, coupled with a tight labour market driving up compensation, as well as substantial cost increases in areas such as energy, raw materials, freight, and various overheads makes up a complex cocktail of challenges for consumer facing businesses…”
Michael Weyrich
Senior Managing Director
“The speed of cost increases in key cost categories has been substantially faster than most businesses are used to, putting significant pressure on companies to proactively monitor and manage their cost base…”
Francesco Leone
Senior Managing Director
“Companies can move from well performing and profitable to loss-making and troubled in a matter of months without the right approach, controls and systems in place…”
Heiko Rauscher
Senior Managing Director
Financial and
Operational Processes
Financial and
Operational Processes
Sales, General and Admin Cost
Cost of Goods Sold / Capex
Revenue and Gross Margin
https://nltimes.nl/2023/02/21/schiphol-confirms-restrictions-returning-limit-departing-passengers
https://apnews.com/article/travel-london-07426049fa6c985d5b2f8f27c89dd3c5
https://www.oxfordeconomics.com/resource/financial-time-aerospace-industry-grounded-by-lost-jobs-and-lack-of-staff...
Note: Wage inflation and PPI % Increase does not extend to 2023 for all geographies due to a lack of available data at the time of publication (April 2023).
Source: OECD Data, National Bureau of Statistics, Financial Times, Trading Economics, CNBC
Growth of Consumer Price, Producer Price, and Wage Inflation
China
United Kingdom
United States
France
Netherlands
Spain
Italy
Germany
CN
GB
Us
FR
NL
ES
IT
DE
Turnaround and Restructuring
Our senior professionals help drive successful turnarounds ensuring enhanced value at every stage.
Business Transformation
Discover why the world's top organisations turn to FTI Consulting for independent, enterprise-wide transformation expertise.
France saw a 50% increase in insolvencies in 2022,* and England and Wales saw the highest number in Q2 2022 since 2009
Passing on all cost increases to customers is in many cases not a viable option for companies because of market competition, so for companies stomaching therises means taking a direct hit to the bottom line.
Financial stress and insolvencies are on the up across the UK and Europe as companies struggle with cash flow and covenant breaches. France saw a 50% increase in insolvencies in 2022,* and England and Wales saw the highest number in Q2 2022 since 2009, with more than10% of businesses in August anticipating a moderate-to-severe risk of insolvency.* Many more companies are in the category of being established and profitable for years, but suddenly facing financial strife.
Additionally a significant issue for many businesses is that their management teams have little experience in operating outside of the more predictable, stable business environment, with its market growth and low inflation, limited restraints in labour supply, stable supply chain costs, and almost non-existent interest rates they have enjoyed for years. Current pressures mean that a business’s financial situation can deteriorate very rapidly — it’s sink or swim,a moment of truth for many leaders. We have seen multiple situations, where multi-billion-dollar global organisations went from being profitable to loss-making in a matter of months partly because of substantial market changes and cost increases, and partly because their management had little experience steering through these highly challenging times.
https://www.fticonsulting.com/insights/reports/global-cfo-survey-2023
https://boeing.mediaroom.com/2021-09-14-Boeing-forecasts-9-trillion-aerospace-market-opportunities-in-commercial,-defense-and-services-over-next-decade
https://www.ons.gov.uk/businessindustryandtrade/ changestobusiness/bankruptcyinsolvency/articles /risingbusinessinsolvenciesandhighenergyprices/2022-10-07
Source: OECD Economic Outlook, Interim Report March 2023
Energy Costs Have Come Down Substantially, but are Still Elevated
Coal
Gas
Oil
Source: OECD Economic Outlook, Interim Report March 2023
Labour Markets Remain Tight
Nominal Wage Growth
Job Vacancies per Unemployed
Job Vacancies per Unemployed
Nominal Wage Growth (% y-o-y)
https://www.fticonsulting.com/insights/reports/global-cfo-survey-2023
https://boeing.mediaroom.com/2021-09-14-Boeing-forecasts-9-trillion-aerospace-market-opportunities-in-commercial,-defense-and-services-over-next-decade
Rami.Semaan@fticonsulting.com
Managing Director
Rami Semaan
Middle East
https://www.reuters.com/world/uk/uk-inflation-rate-rises-104-february-ons-2023-03-22/
Source: OECD Economic Outlook, Interim Report March 2023
Labour Markets Remain Tight
Nominal Wage Growth (% y-o-y)
Job Vacancies per Unemployed
Nominal Wage Growth
Job Vacancies per Unemployed
https://boeing.mediaroom.com/2021-09-14-Boeing-forecasts-9-trillion-aerospace-market-opportunities-in-commercial,-defense-and-services-over-next-decade
https://www.iru.org/news-resources/newsroom/europe-driver-shortage-triple-2026-if-no-action-new-iru-report
Source: OECD Economic Outlook, Interim Report March 2023