Blog
3 Businesses That Have Thrived during the Economic Downturn
13th May 2013
It is now six years since the global financial crisis triggered a prolonged downturn in economic activity. The UK economy, like other developed economies, has struggled to escape from a period of stagnant economic growth.
However, despite the weak economy, many UK firms have succeeded in significantly growing their revenues and profits.
Here are three examples of such businesses. Their strategies for success are different – but there are also some similarities.
Can you compare and contrast these three – and also identify some other businesses that have enjoyed similar success despite the tough economic environment?
You might also consider:
What factors have driven revenue growth at each of the three businesses?Has their growth strategy been based on organic or external development?To what extent has their growth been driven by international expansion?Do you think their recent success can be sustained?What factors might that continued success depend on?
Britain’s leading coffee shop chain continues to go from strength to strength.
In April 2013 Costa Coffee reported annual revenue growth of 24% and profit growth of 29% over the previous year. The UK's market-leading coffee shop brand has now reported 44 quarters of consecutive revenue growth - a stunning achievement growing at such a strong rate in a market where money is tight and selling on the high street is generally difficult.
Part of the reason for Costa's growth has been the rapid expansion of demand for coffee shops in the UK and the increasing supply as measured by numbers of outlets. However, Costa has also managed to increase its market share.
Costa Coffee is now estimated to have 11% market share of the total UK market with over 1,500 stores and many Costa Express machines. If you just look at branded coffee shops (e.g. Costa, Starbucks, Caffé Nero), the Costa’s market share is nearer 40%.
The branded coffee shop sector is experiencing very strong growth, predicted to grow at 6.7% in the next 3 years. Costa is not resting on its laurels, but has set itself the goal of doubling sales to £2bn by 2018.
A key part of Costa's continued growth is expansion into emerging markets, particularly China. Costa has already opened 253 stores in 28 cities in China and has set an objective of having 500 stores by 2016.
You may not have heard about ARM Holdings. However, it is very likely that you use their products – perhaps many of them!
ARM holdings is the company that designs the chips that power just about every smartphone and tablet on the market, plus a huge variety of other electronic devices that need microprocessor chips to function.
ARM has performed really well in recent years. In the last five years, ARM Holdings has increased its revenues from £299m in 2008 to £577m in 2012. ARM's operating margin (or net profit margin) has increased to 36.1% by 2012.
The key way ARM generates revenues (and high profits) is by licensing its chip designs to companies like Apple and Samsung, who then turn those designs into customized microchips for iPhones and Galaxy phones and the like. Another way ARM makes money is by charging smaller companies with more modest needs a per-chip royalty for microprocessors they produce.
A characteristic feature of ARM processors is their low electric power consumption, which makes them particularly suitable for use in portable devices.
ARM’s strategy is for its technology to continue to gain share in long-term growth markets such as mobile phones, consumer electronics and embedded digital devices. To date, ARM has licensed its technology over 900 times to more than 300 customers, who have shipped over 30 billion ARM-based chips.
The design work that ARM does requires a large amount of R&D investment and expertise. Every semiconductor company would need to spend between $50 million and $150 million every year to reproduce what ARM does. This represents an additional $20 billion of annual cost for the industry. By designing once and licensing many times, ARM spreads the R&D costs over the whole industry and thereby helps make digital electronics cheaper.
ARM has achieved substantial growth as a result of three major revenue growth drivers:
Growth in mobile applications:
As mobile devices, such as smartphones, become increasingly sophisticated they require more semiconductor chips within them. Many of these chips can contain ARM technology. As the number of chips per device increases, and as the value of each chip increases, so ARM's royalty per mobile device grows. Between 2006 and 2010 the royalty ARM received per mobile device increased by more than 60%.
Growth beyond mobile applications:
ARM technology is being increasingly used in applications such as digital TVs, hard disk drives, gaming console handsets, washing machines and many other consumer and industrial products that require smarter chips.
Growth into new technology outsourcing:
ARM is applying its business model to other technologies that the semiconductor industry is looking to outsource. ARM is already seeing success in licensing physical IP, and graphics technology. These technologies add incremental royalty per chip and so further increases ARM's value per device.
Britain’s retailers have found the economic downturn very challenging since 2007. However, one retail sector that seems to have thrived is “discount retailing”. And one of the growth stars of this sector has been the privately-owned Poundland.
The chain, which is led by chief executive Jim McCarthy, has been expanding at the rate of 60 new stores a year.
It was bought by venture capitalist Advent International for £50m in 2002 and they sold it on to another venture capitalist (Warburg Pincus) eight years later.
The first Poundland store was opened in 1990 and it made a £31.7m profit in 2011/12. It aims to reach 500 stores and £1 billion turnover next year. It created 2,000 jobs in 2012 with another 2,000 predicted this year, taking the total staff to 14,000.
Poundland is now Europe’s biggest single-price discount retailer as measured by number of stores operated. Poundland currently serves around four million shoppers.
Jim McCarthy has explained Poundland's strong growth in recent years as follows:
“Our fixed price makes it easy for families to budget as they can see how much they’ve spent, before they get to the checkouts.”
"If you buy five products, it can only be £5. I think that the certainty and the ability to budget have an appeal".
The retailer said it had also seen an increase in the number of more "affluent" customers looking to save money in difficult economic times.
Mr McCarthy also explains that Poundland's expansion had also given it greater power when negotiating deals with manufacturers. He says the firm had been able to reduce a number of its costs in areas such as distribution as the store portfolio has expanded.
Poundland is among the retailers that have benefited from the global economic downturn. Value retailers have thrived over the past few years as consumers, under pressure from prices rising faster than wages have sought to economise, cutting back on discretionary items and spending on more on food and essentials.