Herefordshire Area Council Meeting Notes

Business Sector Updates

Banking

Resilience of SME businesses in the two counties is usually fairly robust in a national downturn and, whilst there will be casualties, these are not being seen in great number at the present time. Borrowing requests in the SME community is still weak but there are signs of demand to replace aging capex and for medium term strategic projects. Banks continue to support SME clients who are investing in sustainability projects with discounted terms.

Credit policies have remained broadly unchanged with a focus on understanding the impacts of: strained supply lines. Logistics, freight and distribution challenges and cost, staffing and skills shortages and energy costs.

 

Defence & Security

 The Ukraine conflict dominates the UKs MOD focus, and industry engagement has been considerable since the invasion began. Approximately £2Bn has been committed by MOD to buying equipment related to the conflict, and the UK is playing a significant role in the recently formed international organisation to manage military capability supplies to Ukraine.

More widely, the MOD will be feeling considerable financial pressure.  Government resources are stretched with the NHS, Education and Transport sectors all requiring increased funding. Defence will likely be under pressure to justify their budgets with potentially 2% of GDP being allocated to defence. When change occurs there are always winners and losers, opportunities and threats, so defence businesses in our counties need to adapt. It would appear that the areas attracting investment as the high-tech defence capabilities – technologies that remove personnel from battle and enable remote fighting.

 

Distribution

In terms of what we are seeing in the market at the moment, continuing price rises are a huge problem.  This applies to both raw material prices and energy costs; obviously the latter is having a bigger impact and is much more of a concern.  Although we do not manufacture ourselves, we purchase goods from suppliers that do, and nickel alloy production is an extremely energy intensive process. Suppliers I have spoken to seem to be in limbo with regards to clarity on what further help the government will provide after March 2023. Although there was an announcement by the government earlier this month, it doesn’t seem to be clear which businesses this will apply to. We are expecting much more difficult trading conditions this year as a result.

With regards to Brexit, we are now seeing more stability in the process of importing goods into the UK, which is a relief.  Hopefully this will continue.

 

Education

  1. The NMITE focus is currently on recruiting students to courses that will be available from September. Energy costs are continuing to increase especially in relation to the new building (Centre for Advanced Timber technology), which is not cheap to run.  A new site has been acquired at Irongate, part of which will be used for student accommodation.
  2. Concerns are similar to those that will be raised by others in different sectors. Staff retention is challenging and energy price increases will hit hard. The ONS have reclassified further education colleges as being in the public sector, which although not having a major impact individually, will as a whole sector stop commercial borrowing. There are positives; the development of the low carbon campus at Holme Lacey, which will retro fit and grants for energy efficiency, and the training of existing industry employees (mostly plumbers and electricians) reach accreditation and train our own students.  The college is also one of the first places nationally to get carbon training accreditation.

 

Engineering

It is a ‘hazy crystal ball’ regarding predictions for 2023 with previously mentioned cost increases in all areas. We are hoping for stability this year. Material prices do seem to be dropping although construction and manufacturing services are facing uncertainty, although this is consistent across the whole of Europe. We are still working towards 20-week lead times so there are positives.  There are currently no issues relating to recruitment although large recruitment drives are not currently being undertaken. Pay awards are being factored in to financial planning (9.5% will be the biggest awards). Health and wellbeing policies have been embedded and the workforce are motivated.

We are hoping that 2023 will be a big year for our business as it marks our 40th We hope to see more stability this year as prices for materials appear to be stabilising. Steel prices have fallen but they remain way above what they were two years ago.  We are trying to increase the size of the business without large recruitment exercises by upskilling existing staff and by using automation and digitalisation, and we have taken over another company and are hopefully looking at turnover doubling. There now appears to be a two-speed economy as some businesses are very busy post Covid while others are struggling considerably.  Issues with energy costs are having an impact although energy support is welcome.  Business confidence is an important issue and there are worries it won’t last past the midpoint of 2023.  Inflation levels appear baked in “4 is the new 2” but the company would be content with a level of 4%.  Customers are appearing to accept higher prices.  January 2023 may in fact be our best month ever

 

Sports & Leisure

 After two years of record turnover during the Covid period we ended 2022 8% ahead in the UK and 15% ahead in the USA. There is a big question mark about prospects for the retailers we supply for 2023.  Most have experienced sifter demand and are being very cautious about placing forward orders.  Fortunately we are in a sector that generally remains fairly stable during downturns as the horse comes before anything else.  Having just attended a trade show in Dallas, our US customers seem much more confident than those in the UK. The good news for us is that shipping costs have come down to below the cost pre-Covid which goes some way to compensate for the current sterling/dollar exchange rate.

One thing that we are becoming aware of in our industry is the social licence from the general public for people to be able to ride horses. The perception from some people who have no knowledge of equestrianism is that riding and competing horses is cruel.  People who are involved with horses know that they enjoy being ridden and the majority of horse owners lavish care on their charges.  Hopefully it will not be a serious issue. On general things are good. We need the Russian/Ukrainian war to end before confidence will improve.

 

Food & Drink

Most producers and venues reported good increased trade through December and across the festive period compared to last year – but this was almost certainly needed as margins remain heavily under pressure due to energy costs and other supplier costs. For example one major brewery have increased prices by 15% and others will no doubt follow.

Staff shortages continue to remain an issue across the hospitality sector.  With the minimum wage increase in April to £10.42, again this will put pressure on margins.  There is now a steady flow of pub closures and small brewery closures due to this unrelenting cost pressure.  With many small businesses citing the reason for closures as ‘just had enough of constant pressure’. The cost of living crisis will continue to effect the overall sector as customers ‘tighten their belts’ cutting out non-essential spend i.e. nights out etc.  So the outlook for 2023 is ‘extremely choppy waters ahead’.  One major positive is that no duty increases are scheduled until August 2023 which gives some respite.  We remain positive as a business but foresee 2023 being another challenging year.

Food inflation may have peaked at 16.9%, which is well above the general inflation rate. Drought across Europe last year has had a big impact on agricultural growth which led to price increases in bas commodities such as sugar, flour and potatoes.  Food factories are closing as they simply cannot compete in the current market.  Food inflation should ease in 2023 but this will take time.

 

Legal Services

One of the biggest challenges we continue to face as a sector is staffing.  I have updated the Council previously about the challenges being faced by the legal sector when it comes to recruitment and retention and, unfortunately those issues continue.  The good news, however, is that the legal sector has been forced to think of ever more creative ways in which to recruit and retain talent and to continue to invest in its people which can only be a good thing. The other good news is that the issues being seen in the legal sector are being seen across almost all sectors we deal with on behalf of our clients – so at least we are not alone! The employment market is currently a very hard market – both for us and the majority of our clients. Other staffing or employment matters include the pressure being felt by everyone as a result of the cost of living crisis. All businesses are coming under increasing pressure from employees as a result of the cost of living crisis and the rate of inflation in particular. It is particularly relevant at this time of year when many businesses are setting their budgets for the year and issues such as pay reviews are firmly on the agenda. Almost every business I speak to raise the issues of increased costs for the business and the pressure from staff to increase salaries as well as the conflict between those two issues and a possible downturn in business.

On the subject of a possible downturn in business however, that is actually an opportunity for good news.  The legal sector is definitely seeing some signs of a slow-down in some areas but nothing particularly concerning. Family instructions have slowed slightly. However, the general consensus is that people stick together in a crisis, if only because they do not want to make matters worse by adding a divorce in to the mix. That trend was seen at the start of the last economic downturn in 2008 and experience tells us that family work will increase again soon. Likewise, Real Estate has slowed down slightly.  That said, a slow-down of some kind was expected following the unprecedented conditions generated by the Stamp Duty Holiday and, when compared to ‘normal times’, the market is still quite strong and confidence remains, which again, is good news. Overall, I think people are feeling more confident than perhaps they expected to in the first quarter.

 

Logistics & Transport

Network volumes are down 15% year on year (back to 2020 levels) and there is a lot of cost cutting going on.  Warehousing capacity is creeping back up within the sector.  Equipment availability has not eased.  There were strikes at container ports last autumn, which had a knock-on effect for the industry although these seem to be easing as are fuel process.  Further afield the ultra-low emissions zone in London expands to all London Boroughs this year, which will have a big impact on service provision. Direct Vision Standards will also have an impact after introduction, with a £550 fine for a lorry/van entering London if it does not have at least a three-star rating.  It has been expensive ensuring vehicles are upgraded to meet this standard.

Pay levels will increase and we currently have a settled workforce but due to pay restraints, there are concerns staff could be lost.

 

Manufacturing

2022 ended very well for us.  2023 is, as we all appreciate a bit of an unknown quantity, January has started well from an order intake perspective. However, as the Director at S&P Global Market Intelligence said, “The UK manufacturing downturn took a further turn for the worse at the end of the year. Output contracted at one of the quickest rates during the past 14 years, as new order inflows weakened, and supply chain issues continued to bite. The decline in new business was worryingly steep, as weak domestic demand was accompanied by a further marked drop in new orders from overseas. This is not just in the UK but across the EU, China and the US”.

Although raw material prices have settled the increase in the utilities, in particular electricity, will hit margins this year and some businesses that are already running fixed contracts on tight margins might see themselves in difficulty as the year progresses. We are typically seeing suppliers increasing their prices by 5% at the beginning of 2023.

 

Science & Medical

There has been a focus on recruitment and retention during this period.  Recruitment has generally been positive outside very specialised science.  There are currently mixed market conditions in the sector with a number of more significant supply chain issues; shortages, delayed delivery and significant price increases.  Utility pricing remains a challenge, while hedged for the short term and the next period pricing is showing very significant increases.  This combined with other cost pressures will impact margins.  There has been a national increase in general protest activity against most life science sector businesses and universities.