First Business survey: 46% of firms say 2011 fell below expectations

Their expectations are usually higher than most, but Dane County business managers did not report much change in their companies’ overall performance in 2011, and most said they did not meet their own expectations, and they have somewhat subdued expectations for 2012, according to the annual First Business Economic Survey of Dane County.

The findings were announced Dec. 7 by First Business Bank at the First Business Economic Forum, held at Monona Terrace. The ninth annual survey, which was sent to 3,584 businesses with five or more employees, was conducted in September and October by the University of Wisconsin’s A.C. Nielsen Center for Marketing Research. It garnered 337 responses – a response rate of 9.4%.

The survey found that 46.5% of survey respondents did not meet self-imposed expectations, while 36.3% met them, and only 17% exceeded them. The culprits cited for that disappointing result include domestic sales shortfalls, the nation’s prolonged housing slump, and staffing issues.

Despite losing the expectations game, significantly more businesses reported wage increases and fewer businesses reported staffing reductions in 2011. Meanwhile, more firms (50.3%) did report increased sales revenue in 2011, and more (37.5%) said they made in capital expenditures during the year.

Mark Meloy, president and CEO of First Business Bank, said the level of business performance reflects what he’s heard in one-on-one conversations with area business owners and managers. “The year 2011 wasn’t spectacular, and it didn’t have big increases, but companies have reached somewhat of an equilibrium in terms of sales,” Meloy said. “They aren’t really increasing as they might in an expanding economic climate, but expenses are generally staying in a position where they can manage a business.”

Among other key results, most employers (44.9%) saw an increase in pricing, while even more, 48.8% anticipate an increase in 2012. Another 43.2% saw no change in price in 2011, and 42.2% forecast no change in pricing in 2012.

The most positive industry sector was retail, as merchants reported significant increases in sales revenue, employment, wages, and capital expenditures over 2010.

Scott Converse of the University of Wisconsin-Madison School of Business called 2011 an interesting year for the survey. Most individual indicators were either positive, or at least level, compared to 2010, but the overall performance value was down. “Most economic indicators are still not at pre-recession levels,” Converse said, “and in my opinion, it’s the fatigue of not yet being out of the recession-hole that has led many firms to report less positive numbers for overall performance in 2011 and lower expectations for 2012.”

Performance metrics

The survey, which was addressed to the CEO, CFO, president, or business owner, asked executives to assess current performance, and predict the future performance, on eight key economic indicators: sales revenue, profitability, total operating costs as a percentage of revenue, capital expenditures, number of employees, overall wage change, changes in pricing, and operating capacity.

In terms of sales revenue and profitability, the survey found the following:

• 50.3% saw an increase in 2011 actual sales, up 7.9% from 2010; 53.9% expect an increase in 2012, down 4.2% from their 2011 projections.
• 37.6% saw a decrease in 2011 actual sales, down 8.6% from 2010; 23% expect a sales decrease in 2012, up only 0.3% from projected 2011 numbers.
• 12.1% experienced no change in sales, up slightly (0.7%) from 2010; in 2012, 23.2% expect no change in sales over 2011 projections.
• 37.7% reported an increase in profitability in 2011, down 2% from 2010; 46.7% forecast an increase in profits in 2012, down 4.8% from 2011 projections.
• 43.9% saw a decrease in profits in 2011, down slightly (-0.4%) from 2010; meanwhile, 25.1% anticipate a decrease in profitability in 2012, up just 1.6% from 2011 projections.
• 18.4% reported no change in profitability in 2011, up 2.4% from 2010; and 28.3% anticipate no change in profits in 2010, up 3.2% from their 2011 forecast.

While nearly 54% of respondents project an increase in sales, Meloy noted that this expectation “is the lowest of the nine years of data that we have collected. I think it’s probably expected to be tempered even some from last year.”

Several key performance metrics improved over 2010, including capital expenditures, where 37.5% saw an increase, up 7.4%; wages increased this year in 49% of the firms surveyed, while remaining steady in 39.4%; and 47.4% expect an increase in wages in 2012, while 43.1% see no change.

Noting the slow pace of the unfolding economic recovery, Meloy believes the information is inconclusive about the prospects for a fast turnaround. “I don’t know that there is enough data there to assure us that this is something that is sustainable in terms of a quicker recovery,” he stated.

Among performance metrics that declined, 58.8% reported an increase in operating costs as a percentage of revenue, up 5.9% over 2010. According to the survey, 48.2% anticipate an increase in this measure in 2012, but that’s only 1.1% ahead of the 2011 projected figure.

In terms of hiring, most of the surveyed employers, 61.6%, foresee no change in their number of employers in 2012, and most (52.8%) saw no change in 2011. Only 26.7% added employees in 2011, and even less, 23.4%, expect to increase the number of employees in 2012.

Converse cited the increased percentage of firms reporting capacity utilization at 90% or greater – 32.1% in 2011, up 4.3% over 2010. He noted that it’s a metric worth closely watching in 2012 because that 2011 figure is not sustainable in the long term.

Sector salutes

The retail sector, where 73.9% of survey respondents reported a decrease in sales in the recessionary year of 2009, continued to show improvement. In 2011, 35.9% reported a decrease in sales, compared to 44.3% in 2010, and 51.6% saw a sales increase in 2011, compared with 40.5% in 2010.

Retail actually fell short of expectations for 2011, when 75.4% expected an increase in sales and only 16.4% predicted a decrease. As a result, the retail forecast is a bit more modest for 2012, as 21.9% see a decrease in sales and 54.7% anticipate an increase.

There are a number of ways to read that, including that for retail post-2009, there was nowhere to go but up. While most retail associations forecast modest growth in 2011 holiday retail sales, and recent monthly consumer confidence indicators have been weak, Black Friday and Cyber Monday sales exceeded expectations.

“It’s an interesting indication because the consumer has led the economy prior to the current economic situation, and the consumer will have to lead us out toward better times,” Meloy said. “In Dane County, we’re blessed with a little bit better economic climate in terms of employment and the like, so that helps.”

In the manufacturing sector, the trends also are encouraging, as a smaller percentage, 34.2%, had a decrease in sales this year and 57.9% experienced an increase. In 2012, however, only 26.3% of manufacturers see a decrease in sales and 55.3% anticipate an increase.

Technology sales fared slightly worse in 2011, as a higher percentage, 40% compared to 38.6%, reported sales revenue declines, and 50% saw an increase, which compares to 51.9% in 2010. Technology executives envision a bright 2012, as only 10% see a revenue decrease and 80% expect a sales increase.

The drivers

Employers were asked to identify drivers that impact 2012 improvement, and the representative samples included a mixed bag of the following:

• “Sales are picking up slightly.”
• “It can’t get much worse.”
• “Better economic climate. More focus on control versus growth.”
• “Streamlined operations and staff.”
• “Closer control of inventory and overhead.”

They also identified drivers for a substandard performance in the new year, and those examples include the following comments:

• “Higher expenses, lower sales and margins due to competition.”
• “The economy isn’t getting any better.”
• “Higher operating costs.”
• “Lack of jobs in area equals less spending here.”
• “Not enough customers buying product or services.”

Meloy noted that people have to take into account the makeup of survey respondents. “We’re asking business owners, we’re asking C-suite managers, and chief executives and chief financial officers – the people who are typically in this survey,” Meloy stated. “They, by nature, tend to be more optimistic than others might be.”

Converse, who has also noted the usually upbeat nature of entrepreneurs, characterized their mood as cautious. “Even though the survey shows that firms expect no individual indicators to significantly decline, their overall expectation is down from the previous year,” he noted. “The road to recovery has been a long one for many Dane County firms. In many ways it appears that they are in a “wait-and-see” mode for 2012.

“I think this cautious business outlook will continue until firms see economic indicators finally get to pre-recession values.”

The survey sample size has an error range of 0.05%. The complete results are available at First Business Bank’s website.

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