Every company must start developing their own “Bounce Back Strategy” now. One way to decide what steps are right for your business is to look at what the best and biggest are doing and see if any of their strategies apply to your business.
In second instalment of our two-part series, we examine the unique challenges of five of the UK’s top ten businesses as they develop their bounce back strategies in the wake of the COVID-19 crisis.
The UK’s oil & gas giant has battled through a perfect storm of crises over the past decade including the Deepwater Horizon disaster, collapse in oil prices, explosion in fracking, decarbonisation and now a global pandemic.
BP has already started to divest some historic assets in Alaska and recently sold its Alaskan operations to Hilcorp for just under US$6 billion. It also sold its petrochemical business to Ineos for over $5 billion, a divergent strategy from other major competitors who continue to reap rewards from the petrochemicals market.
The company, along with most major oil businesses, are preparing their bounce back strategies based on shedding high priced production. In June, BP announced write-downs of up to $17.5 billion on assets as it closed loss-making facilities. It did however recently announce new fields in Egypt.
Plimsoll’s latest assessment of BP Plc shows a company with the highest sales per employee of the UK’s top ten companies at £416,000. Its profit margins remain very much at the mercy of WTI and Brent crude prices but at 3.1% it is still profitable in a market with increasing numbers of exposed operators. With lenders increasingly shying away from the market, further consolidation is likely.
Rio Tinto Group Mining
The mining giant has ridden the crest of strong iron ore prices and resilient demand from China recently. However, the continued depressed demand for aluminium has seen the company reviewing its smelting operations and there are still concerns about demand in the US and Europe.
Already the company has announced the shuttering of its New Zealand based smelting facilities. At the same time, its focus increasingly on iron ore mining continues unabated with the acceleration of projects including the huge Simadou mine in Guinea.
Plimsoll’s latest analysis of Rio Tinto shows a high profit company with 34% profit margins and sales per employee figures of almost £90,000. Their bounce back strategy is underway with a focus on the most profitable parts of their business. They also appear able to diversify into the booming gold market with development of their Winu mine in Western Australia.
As with most banks, the 2008 financial crisis did little long term to damage the profit margins and bonuses at HSBC. COVID-19 is a completely different scenario.
The bank had already been planning on shedding 35,000 jobs, $4.5 billion in costs and $100 billion in risk-weighted assets. They are reportedly now considering deeper cuts including more job losses or the possible sale of some businesses as they look to get the bank ready to bounce back in the “new normal”.
Plimsoll’s latest assessment of HSBC shows a company with over 300,000 staff. No wonder COVID-19 has accelerated the need to shed roles as it battles to improve a lowly £36,000 sales per employee. With the changing nature of banking and consumer demand, these moves are necessary to bounce back properly.
The main challenge for Barclays is the potential for an avalanche of delinquent loans as the full consequence of COVID-19 become apparent. Any bounce back strategy needs to embrace the coverage for what could be monumental losses.
Having set aside almost £3.7 billion for bad loans, the company has already taken steps to ensure their bounce back strategy isn’t hampered by legacy debts as payment holidays end. While it has temporarily halted the staff and branch cuts during the crisis a resumption of cost savings should be restart before the end of 2020.
Plimsoll’s latest analysis of Barclays shows the lowest profit-making bank of the three that appear in the top 10. Obviously, the extent of the impact of delinquent lending has yet to be felt but as with all companies in the financial services sector branch closures and cost reductions are imperative if they are to bounce back strongly.
Lloyds Banking Group
The third bank on the top 10 has been the best performer over recent years. However, it also faces the same tsunami of defaults as soaring unemployment batters the market. Lloyds announced they have set aside £3.8 billion provision for bad loans. In the first half of 2020 they have posted a £600 million loss as the forecasts for damage caused by the virus is become apparent.
Full year accounts for the group mark them out as a high performer with profit margins of 16% - way above others in the sector. However, handing out more than a million payment holidays to mortgage holder has hit the bottom line. The new board have already taken the decision to stop dividends for this year, and job losses on hold until October will have to be discussed.
Plimsoll’s latest analysis of Lloyds shows the most domestic facing bank is closest tied to the fortunes of the UK property market. While its full year accounts show it is far more profitable than its two competitors and with higher sales per employee, a deep recession could disproportionately affect Lloyds. To bounce back strongly, they may consider diversification away from domestic loans or cut their costs accordingly.
It is not just the UK’s largest companies that need to prepare their strategy to ensure their business bounces back as strongly as possible. While your own business may not be large enough to be shelving hundreds of product lines or selling off units for billions of dollars, the principles remain the same. Maximise your financial strength, eliminate the unprofitable and be efficient. In the coming trading period, companies need to be lean enough to survive and agile enough to take advantage of opportunities.
Visit www.plimsoll.co.uk to find out more about how Plimsoll can help you benchmark your own performance in a key market, spot companies heading for danger, pick M&A opportunities and monitor the latest trends.