Mittelstand companies demonstrate resilience as stubbornly high inflation, energy prices and strained supply chains weigh on the overall business outlook
Optimism is falling among German Mittelstand leaders, with nearly six in ten (59%) expecting a recession in 2023, and more are feeling pessimistic about the global (24%) and national (28%) economy compared to last year, according to J.P. Morgan’s third annual Germany Business Leaders Outlook survey released today.
“As uncertainties persist into the year ahead, it does not come as a surprise that business leaders have a more subdued outlook on the economy,” said Bernhard Brinker, Head of Commercial Banking, DACH Region, J.P. Morgan. “At the same time, however, we recognize that Mittelstand companies are resilient and have taken thoughtful precautions to navigate through this uncertain environment.”
In a survey of more than 250 senior executives of German Mittelstand companies, many leaders still expect their business to grow in revenue (69%) and profits (59%), though these figures are down 10% and 14% respectively from 2022. More than half (56%) expect capital expenditures to increase, down 10% from 2022, with nearly two out of three expecting capital needs (64%) to also increase.
“While companies are bracing themselves for a harsher business climate, we see that the German Mittelstand community is tackling the economic challenges proactively and continues to have conviction about the strength and success of their businesses,” said Stefan Povaly, Head of Germany, Senior Country Officer, J.P. Morgan.
Adapting and Solving for Persistent Business Challenges
Business challenges like supply chain issues were evident throughout 2022, with nearly six in ten (57%) leaders citing that supply chain pressures have gotten worse over the past 12 months. To account for this, those experiencing supply chain pressures are allocating more funds to cover increased costs related to moving products (45%), focusing on strategic stockpiling (40%) and are near-shoring by shifting manufacturing or distribution closer to their key markets (39%).
While those experiencing higher costs of doing business cite increased cost of energy (77%) as the biggest driver, nearly a quarter (23%) of Mittelstand leaders see energy prices as the number one external threat or risk to their business.
Notably, nearly seven in ten (69%) companies still face inflation challenges, and more than half (53%) have raised prices to account for inflation. Of those who have raised prices, the largest share (36%) is passing along 26%-50% of their increased costs on to their consumers. This trend is likely to stay, as a vast majority (83%) of those passing along costs plan to continue to do so.
Creatively Attracting and Retaining Top Talent
In the midst of continued economic headwinds, 39% of Mittelstand leaders are planning to add headcount and 38% plan to maintain their current headcount in the year ahead.
In light of the current labor environment, Mittelstand leaders planning to add or maintain headcount are taking a variety of measures to attract and retain talent through:
- Increasing wages and benefits (52%)
- Offering flexible work hours (51%)
- Offering upskilling and training opportunities (44%)
- Investing in automation technology (40%)
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Continued Search for Growth as Attitudes Toward Ownership Change
Mittelstand companies continue to look for ways to generate growth and secure the future of their business. When asked about their plans for the next 12 months, almost half of Mittelstand leaders said they are planning to grow their business by expanding into new geographical markets both internationally (43%) and domestically (41%), developing strategic partnerships or investments (42%) and expanding into new distribution channels (41%).
Unlike previous years, 55% of Mittelstand leaders are not planning to sell or transfer ownership of their company in the next 12 months, up 25% from 2022. Of those who have a transition plan in place, 36% plan to transfer to family through a sale, up 23% from 2022—and notably less (27%) plan to sell to a third party or management group if they’re transferring ownership, down 17% from 2022.
Nearly eight in ten (78%) of those considering a full or partial transfer expect it to take place within the next two years, up 32% from 2022.
Elevating What Success Looks Like Through Corporate Responsibility
In the year ahead, Mittelstand leaders are focusing on importance of corporate responsibility factors, citing social (56%) and environmental (49%) factors, and governance (48%) as most important to their business strategies—up 15%, 9% and 19% respectively from 2022.
Top outcomes of these corporate responsibility efforts are rooted in enhancing marketing and finding new customers (54%) and establishing the company’s position within the community (51%).