Confidence in US Economy Declines Among Private Company CEOs Overall, But International Companies Prove More Optimistic

PricewaterhouseCoopers' Private Company Trendsetter Barometer tracks the business issues and standard industry practices of leading, privately held US businesses. It incorporates the views of 255 chief executive officers (CEOs/CFOs): 145 from companies in the product sector and 110 in the service sector, averaging $252.4 million in enterprise revenue/sales, and including large, $300M-plus private companies.

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Dec 09, 2010, 08:55 ET

NEW YORK, Dec. 9, 2010 /PRNewswire/ -- As uncertainty about market conditions prevails, only 39% of the nation's leading private company executives surveyed for PwC US's Private Company Trendsetter Barometer voiced optimism about US economic growth over the next 12 months -- down from the previous quarter's 45% and four points below a year ago. However, 45% of companies with international operations were optimistic about US economic growth, markedly more so than their domestic-only peers (35%). As for international marketers' optimism about the world economy, that rose to 43% (up six points from the second quarter).

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"In both the Trendsetter results and among our clients, we're seeing CEOs increasingly view international markets as holding the best growth opportunities," says Ken Esch, a partner with PwC's Private Company Services practice. "But they're navigating a complex environment -- reviewing a variety of tactics for global expansion, as well as strategies for dealing with ongoing economic uncertainty."

International marketers' confidence was further evident in their revenue forecasts. While US domestic-only private businesses forecasted a 7.7% growth rate over the next 12 months, international marketers forecasted a 12.2% growth rate. Despite ongoing concern about the economy, Trendsetter CEOs overall forecasted 9.7% growth in their companies' revenue over the next 12 months, up from 9.1% the previous quarter. Three-fourths of Trendsetter CEOs anticipated positive revenue growth for their businesses over the next 12 months, with 38% expecting double-digit growth and 37% anticipating single-digit growth. Only 6% forecasted negative revenues, with 15% expecting zero growth.

International Marketers Outpace Domestic-Only Businesses

In line with their projected growth rates, private companies that market internationally were ahead of their domestic-only counterparts in 12-month prospective spending. Forty-three percent of private companies marketing abroad said they were planning major capital investments, compared with just 24% of domestic-only companies. Only 4% of domestic-only private companies intended to expand to new markets outside the United States, while 28% of international marketers said they were planning further expansion abroad. A considerably greater percentage of international marketers also planned to increase operational spending, as compared with their domestic-only peers (76% vs. 53%).

Private companies selling in China, India, and Brazil, which collectively represented 32% of the international Trendsetter businesses surveyed this past quarter, were especially confident in their projected growth rate and spending plans. These companies projected a 13.6% growth rate, and half said they were planning major capital investments. Forty-one percent of private businesses marketing in China, India, and Brazil were also planning to expand to new markets abroad, and 83% planned to increase operational spending over the next 12 months.

Notably, this past quarter more private companies (33%) said their growth plans would involve new strategic alliances, up 14 points from the second quarter. "As US companies continue to seek growth abroad, we're seeing our clients leverage strategic alliances," says Esch. "While this can be a very effective way to gain access to key global markets, as well as increase speed to market, it's just one among a variety of entry points. Companies should weigh the range of options available to them, including joint ventures and acquisitions, deciding which ones will best allow them to tap into developed networks, supply chains, and local talent."

The breakout of spending by international marketers versus domestic-only companies is shown below:

	International Marketers		Domestic-Only Peers		Marketing In China/ India/Brazil
Plans over the Next 12 Months:	3Q10	2Q10	3Q10	2Q10	3Q10	2Q10
Major Capital Investments	43%	31%	24%	26%	50%	50%
Expansion to New Markets Abroad	28%	27%	4%	2%	41%	44%

Increased Operational Spending (Net)	76%	68%	53%	50%	83%	89%
New Products/Services	32%	36%	22%	15%	40%	47%
Information Technology	25%	28%	26%	25%	31%	36%
Sales Promotion	25%	19%	24%	12%	21%	17%
R&D	20%	17%	8%	8%	33%	25%
Business Acquisitions	21%	24%	6%	10%	15%	39%

Gross Margins Positive

Gross margins remained positive in the third quarter, with 29% of Trendsetter companies reporting higher margins and 23% reporting lower margins, for a net of plus 6%, similar to the previous quarter's 8%. Costs increased for a net 4% of Trendsetter private companies, whereas they decreased by 1% last quarter. Prices decreased for a net 1% of respondents.

"To maintain profitability in the current environment, companies will need to stay focused on managing costs, even as they move to execute growth plans," notes Esch. "Striking this balance can be a challenge even in the best of times."

More Companies Plan to Hire New Employees

Sixty percent of private companies said they planned to hire new employees over the next 12 months, up six points from last quarter. Only 4% said they expected to reduce their workforce. Across the companies surveyed, an overall workforce increase of 2% is planned, up from 1.8% in the second quarter. Net workforce growth was higher among small companies -- 4.5% versus 1.7% among large private companies -- though 64% of large firms said they were planning to hire, as compared with 57% of small businesses.

"The Trendsetter data supports what we've see among our clients," says Esch, "Private companies are beginning to add to their workforce, especially sales and marketing personnel and in the area of product development. This points to private companies' renewed confidence and growth agenda."

Less Concern About Access to Capital, More Concern About Regulatory/Legislative Pressures

Overall, concern about accessing capital over the next 12 months decreased. Only 20% of private companies surveyed said that lack of capital was a concern. However, small private firms voiced greater concern (23%) than large private businesses (15%). Ten percent of companies reported bank loans, up four points from the second quarter and up three points from a year ago. Larger companies also reported increased credit availability -- 19%, as compared with 11% for smaller businesses.

Private-company CEOs were less concerned about lack of demand this past quarter (72%) than they had been in the second quarter, though it remained their top-cited barrier to growth for the next 12 months. Apprehension over increased taxation also dropped (to 45%). However, concern about legislative/regulatory pressures rose (to 54%).

"While larger companies are starting to increase their capital expenditure and draw on their revolvers to fund their spending, it remains to be seen whether those companies are going to put that capital to use over the long term," says Esch. "At present, many of them are hedging their bets, waiting to see if economic, legislative, and regulatory uncertainty will abate in the coming months."

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(1) 2009 Forbes America's Largest Private Companies List

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