Economy

The US Economy Is Leaving Midsize Companies Behind – Harvard Business Review

Published

4 years ago

February 17, 2021

Despite low interest rates and a generally stable economic environment, 2010–2019 saw the slowest growth among midsize companies and a continual deterioration of their financial performance. That may have to do with the last decade’s winner-takes-all economy. Bankruptcy filings shows that the pandemic made this trend even worse. It’s never been more important for midsize businesses to understand that a booming stock market is not an accurate reflection of the reality for most American corporations.

When the Covid-19 pandemic hit, a record number of companies, many of which had survived for more than 50 or even 100 years, had no other option but to file for bankruptcy. Recent trends don’t bode well for midsize companies that are the bedrock of any nation’s economy.

We used a database approach to show the current plight of midsize companies and examined the recent period of 2000 to 2019, culminating in the pandemic year 2020. We defined midsize companies as those in the middle 40% of all companies listed on the U.S. stock exchanges by market value and identified them on an annual basis based on their market value at the end of previous fiscal year. (The top 30% and the bottom 30% are classified as big and small, respectively.)

Data suggests that a perfect storm has been brewing for midsize companies over the past 50 years. In every successive decade since 1970–79, the annual growth rates of assets, sales, and profits have been declining for midsize companies, which are increasingly struggling to earn profits.

To show the slowing growth trend, we calculated year-on-year percent-growth rates of three financial indicators — sales, assets, and profits — for each midsize company. Sales is the top-line number in income statements and indicates the market size for the company’s products and services. Sales growth indicates whether the company’s business is growing or diminishing. Asset growth shows whether the company is increasing or decreasing its total resource deployment. Profits is the bottom-line number in income statements and shows whether the company is generating a net surplus in its operations. That surplus is used to finance further growth and pay dividends to shareholders.

We calculated the annual percent-growth rate in those three financial indicators for each midsize company and year. We then calculated their medians for the decades 1970–1979, 1980–1989, 1990–1999, 2000–2009, and 2010–2019. For 2000–2009, we removed the fiscal years 2008 and 2009 because of the great recession. We calculated median values because, unlike averages, medians are not affected by any company’s extreme performance. The results are shown in the following figure.

The figure shows that the growth rate in each of the three measures has declined over the past 50 years and was lowest during the decade 2010–2019, despite that period’s having been labeled as a decade of economic recovery. This last decade showed rising population, decreasing interest rates, growth in the hourly wage rate and household income, improving education attainment, and growing GDP. You would expect those factors to have enabled rapid growth for corporations, yet such growth seems to have bypassed midsize companies.

It’s difficult to pinpoint the exact reason why midsize companies haven’t benefited from the past decade’s economic progress, but we offer a few hypotheses. One plausible reason is that businesses that could scale their virtual operations without the need for physical assets benefitted most from the technological progress and economic conditions. As a result, digital disruptors like Amazon, Airbnb, and Uber ate into the growth and margins of midsize companies’ business. Amazon needed large infrastructure, but it could integrate across physical and virtual platforms seamlessly, disrupting many businesses simultaneously. In contrast, midsize companies, particularly those like hotel chains and retail stores that operate with physical assets and infrastructure, lacked not only the dynamism of small companies but also the R&D investment and scaling capabilities of large companies. Furthermore, the last decade was a winner takes-all-economy, with large companies like Amazon and Apple getting even bigger. We previously showed that the economic benefits that came about since the financial crisis of 2008 largely accrued to large companies.

In 2019, we described the changes in market values of midsize companies. The new statistics we present in this article highlight midsize businesses’ struggles in the past decade. During the 2010–2019 period, 39.8% of midsize companies reported a loss, 33% reported year-on-year decreases in sales, and 47% reported declines in annual profit. After removing the influence of outliers, the average earnings-to-price ratio was negative 3.86%. The average return on assets was also negative at 2.36%. The median change in return on equity, a measure of profitability on shareholder value, was negative 4.04%. These results indicate that midsize companies increasingly struggled in the last decade despite the stable and growth-conducive economic conditions.

What happened from 2010–2019 didn’t portend well when the pandemic hit in 2020. We don’t yet have financial reports for the fiscal year 2020 because it typically takes three months to prepare and audit the financial statements before they’re reported. However, we do have another indicator of financial distress: the number of bankruptcies filed by midsize companies. For this information, we rely on the UCLA-LoPucki Bankruptcy Research Database, which tracks bankruptcies filed by companies with assets exceeding $100 million in 1980 dollars (about $310 million in today’s dollars). The database also includes economically important midsize companies. The following figure shows a trend in the number of midsize companies that filed for bankruptcy from 2010–2020.

The highest number of annual bankruptcy filings between 2010 and 2019 was 32 in 2016, and the median and averages during the decade were 11 and 13.2, respectively, per year. That number jumped to 43 in 2020, which is a 226% increase from the annual average and a 291% increase over the median. These numbers are based on data up to November 2020 — if December 2020 data had been included, the picture would look even more stark.

These companies include well-known retail stores like J. C. Penney, Pier 1 Imports, Tailored Brands (brands like Men’s Wearhouse and Jos. A. Bank), and Ascena Retail (brands like Ann Taylor and LOFT). The other large industry groups filing for bankruptcy included oil and gas companies, such as Gulfport Energy; lodging and entertainment companies, such as Marcus Corporation; and travel corporations, such as Hertz. Bankruptcy filings would have been even higher but for the U.S. government’s $2.2 trillion dollar stimulus plan, which included $500 billion earmarked for public corporations.

Each company is pursuing a different path to recovery. Consider the outcomes of a few companies that have been around for more than 50 years. The 120-year-old retail pioneer J. C. Penney was sold to Simon Property Group and Brookfield Asset Management. Similarly, century-old engine maker Briggs & Stratton entered into an agreement with a private equity firm to assume all of the company’s assets. The car-rental giant Hertz is selling 180,000 of its roughly 500,000-car fleet while borrowing an additional $1.65 billion in new financing, to be added to its existing debt of $19 billion. In addition, it’s changing its business model by offering an all-inclusive maintenance, liability, and premium roadside assistance package for a fixed monthly subscription fee. The 80-year-old McDermott International Ltd., which provides engineering and construction for the energy industry, emerged from bankruptcy by selling its assets and eliminating about $4.6 billion of debt.

In sum, despite its low interest rates and stable economic environment, the most recent decade witnessed the slowest growth among midsize companies and a continual deterioration of their financial performance. As shown by bankruptcy filings, pandemic shock made this trend even worse, shaking to their core companies that had survived harder economic hits during the last century. Leaders of midsize businesses must understand that the booming stock market is not an accurate reflection of the on-the-ground reality for most American corporations.

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Business

A timeline of events in the bread price-fixing scandal

Published

7 hours ago

September 19, 2024

Anne Joseph

Almost seven years since news broke of an alleged conspiracy to fix the price of packaged bread across Canada, the saga isn’t over: the Competition Bureau continues to investigate the companies that may have been involved, and two class-action lawsuits continue to work their way through the courts.

Here’s a timeline of key events in the bread price-fixing case.

Oct. 31, 2017: The Competition Bureau says it’s investigating allegations of bread price-fixing and that it was granted search warrants in the case. Several grocers confirm they are co-operating in the probe.

Dec. 19, 2017: Loblaw and George Weston say they participated in an “industry-wide price-fixing arrangement” to raise the price of packaged bread. The companies say they have been co-operating in the Competition Bureau’s investigation since March 2015, when they self-reported to the bureau upon discovering anti-competitive behaviour, and are receiving immunity from prosecution. They announce they are offering $25 gift cards to customers amid the ongoing investigation into alleged bread price-fixing.

Jan. 31, 2018: In court documents, the Competition Bureau says at least $1.50 was added to the price of a loaf of bread between about 2001 and 2016.

Dec. 20, 2019: A class-action lawsuit in a Quebec court against multiple grocers and food companies is certified against a number of companies allegedly involved in bread price-fixing, including Loblaw, George Weston, Metro, Sobeys, Walmart Canada, Canada Bread and Giant Tiger (which have all denied involvement, except for Loblaw and George Weston, which later settled with the plaintiffs).

Dec. 31, 2021: A class-action lawsuit in an Ontario court covering all Canadian residents except those in Quebec who bought packaged bread from a company named in the suit is certified against roughly the same group of companies.

June 21, 2023: Bakery giant Canada Bread Co. is fined $50 million after pleading guilty to four counts of price-fixing under the Competition Act as part of the Competition Bureau’s ongoing investigation.

Oct. 25 2023: Canada Bread files a statement of defence in the Ontario class action denying participating in the alleged conspiracy and saying any anti-competitive behaviour it participated in was at the direction and to the benefit of its then-majority owner Maple Leaf Foods, which is not a defendant in the case (neither is its current owner Grupo Bimbo). Maple Leaf calls Canada Bread’s accusations “baseless.”

Dec. 20, 2023: Metro files new documents in the Ontario class action accusing Loblaw and its parent company George Weston of conspiring to implicate it in the alleged scheme, denying involvement. Sobeys has made a similar claim. The two companies deny the allegations.

July 25, 2024: Loblaw and George Weston say they agreed to pay a combined $500 million to settle both the Ontario and Quebec class-action lawsuits. Loblaw’s share of the settlement includes a $96-million credit for the gift cards it gave out years earlier.

Sept. 12, 2024: Canada Bread files new documents in Ontario court as part of the class action, claiming Maple Leaf used it as a “shield” to avoid liability in the alleged scheme. Maple Leaf was a majority shareholder of Canada Bread until 2014, and the company claims it’s liable for any price-fixing activity. Maple Leaf refutes the claims.

This report by The Canadian Press was first published Sept. 19, 2024.

Companies in this story: (TSX:L, TSX:MFI, TSX:MRU, TSX:EMP.A, TSX:WN)

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Economy

S&P/TSX composite up more than 250 points, U.S. stock markets also higher

Published

7 hours ago

September 19, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 250 points in late-morning trading, led by strength in the base metal and technology sectors, while U.S. stock markets also charged higher.

The S&P/TSX composite index was up 254.62 points at 23,847.22.

In New York, the Dow Jones industrial average was up 432.77 points at 41,935.87. The S&P 500 index was up 96.38 points at 5,714.64, while the Nasdaq composite was up 486.12 points at 18,059.42.

The Canadian dollar traded for 73.68 cents US compared with 73.58 cents US on Thursday.

The November crude oil contract was up 89 cents at US$70.77 per barrel and the October natural gas contract was down a penny at US2.27 per mmBTU.

The December gold contract was up US$9.40 at US$2,608.00 an ounce and the December copper contract was up four cents at US$4.33 a pound.

This report by The Canadian Press was first published Sept. 19, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

Construction wraps on indoor supervised site for people who inhale drugs in Vancouver

Published

21 hours ago

September 18, 2024

Anne Joseph

VANCOUVER – Supervised injection sites are saving the lives of drug users everyday, but the same support is not being offered to people who inhale illicit drugs, the head of the BC Centre for Excellence in HIV/AIDS says.

Dr. Julio Montaner said the construction of Vancouver’s first indoor supervised site for people who inhale drugs comes as the percentage of people who die from smoking drugs continues to climb.

The location in the Downtown Eastside at the Hope to Health Research and Innovation Centre was unveiled Wednesday after construction was complete, and Montaner said people could start using the specialized rooms in a matter of weeks after final approvals from the city and federal government.

“If we don’t create mechanisms for these individuals to be able to use safely and engage with the medical system, and generate points of entry into the medical system, we will never be able to solve the problem,” he said.

“Now, I’m not here to tell you that we will fix it tomorrow, but denying it or ignoring it, or throw it under the bus, or under the carpet is no way to fix it, so we need to take proactive action.”

Nearly two-thirds of overdose deaths in British Columbia in 2023 came after smoking illicit drugs, yet only 40 per cent of supervised consumption sites in the province offer a safe place to smoke, often outdoors, in a tent.

The centre has been running a supervised injection site for years which sees more than a thousand people monthly and last month resuscitated five people who were overdosing.

The new facilities offer indoor, individual, negative-pressure rooms that allow fresh air to circulate and can clear out smoke in 30 to 60 seconds while users are monitored by trained nurses.

Advocates calling for more supervised inhalation sites have previously said the rules for setting up sites are overly complicated at a time when the province is facing an overdose crisis.

More than 15,000 people have died of overdoses since the public health emergency was declared in B.C. in April 2016.

Kate Salters, a senior researcher at the centre, said they worked with mechanical and chemical engineers to make sure the site is up to code and abidies by the highest standard of occupational health and safety.

“This is just another tool in our tool box to make sure that we’re offering life-saving services to those who are using drugs,” she said.

Montaner acknowledged the process to get the site up and running took “an inordinate amount of time,” but said the centre worked hard to follow all regulations.

“We feel that doing this right, with appropriate scientific background, in a medically supervised environment, etc, etc, allows us to derive the data that ultimately will be sufficiently convincing for not just our leaders, but also the leaders across the country and across the world, to embrace the strategies that we are trying to develop.” he said.

Montaner said building the facility was possible thanks to a single $4-million donation from a longtime supporter.

Construction finished with less than a week before the launch of the next provincial election campaign and within a year of the next federal election.

Montaner said he is concerned about “some of the things that have been said publicly by some of the political leaders in the province and in the country.”

“We want to bring awareness to the people that this is a serious undertaking. This is a very massive investment, and we need to protect it for the benefit of people who are unfortunately drug dependent.” he said.

This report by The Canadian Press was first published Sept. 18, 2024.

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