The financial crisis has dominated newspaper headlines and newsreels over the last few months. Governments across the world have stepped in to prop up ailing banks and financial institutions. Hedge funds were prohibited from short-selling shares in financial institutions. Last week, the Bank of England slashed interest rates to 3%, their lowest level in over 50 years. Everything that can be done has been done.
Whilst its complete capitulation has been averted, the sector is still bleeding jobs - another 60,000 positions are predicted to go in the City during the coming year. Part of the problem is that the City has been growing in strength over the last four decades, abnormally so. Its expansion has been two quick and too frenetic - the financial services industry now accounts for over 10% of the GDP for the United Kingdom, whilst London is now the largest financial centre in the world. The City has become the front line of the UK's economy and consequently it is also at the forefront of the job-losses and cut-backs in graduate recruitment that have already reared their ugly head.
Following the chaos surrounding the financial sector this September and October, its strength has been deliberately and decisively lessened by the measures taken by the British government to take large positions in leading banks. After the laissez-faire attitude of the Blair administration towards the financial sector , it seems inevitable that stricter regulation will have to be enforced by this government or the next. But whilst the financial sector may have been stabilised for now at least, the longer-term effects on the wider economy will likely be more severe. What happens in the financial world is just the tip of the iceberg, how developments in the sector filter through into the real economy will be crucial to all those looking to find work within the UK's various industries. 18 months after the credit crunch began, Britain's economy is expected to be amongst the worst hit by a recession in 2009 that is set to affect the entirety of the developed world. GDP is expected to fall to -1% or even below. So far, the fiscal policies introduced to revive the financial sector have not been passed on to ordinary businesses.
So what is the real sector? In essence it constitutes everything which is not finance, industries which provide services to the man on the street: the retail sector, the manufacturing sector, the media sector, to name but a few.
Whether you are looking to work in finance, law, consulting, for a large corporate or a start-up, you will need to know what is going in the real economy, how the different sectors fit together and what the outlook is for different industries over the coming months. Economic movements affect industries in different ways - as the global economy enters a recession many sectors will struggle to survive, others will be more resilient, a handful will thrive.
In this issue we have highlighted some of the most important sectors and the key issues facing them. We explore how those working within the sector, or as an external consultant, might look to tackle the challenges ahead.
Tesco, Marks & Spencer, Starbucks
Food prices have risen substantially over the last year, though have abated somewhat recently, and firms with lower priced produce such as Aldi and Lidl have profited. Retailers are hit by increased costs of transportation due to fuel costs, as well as increasing production costs in the developing world which have cut into their profit margins; online retailing has grown considerably as companies like Amazon are able to undercut existing stores with their cost-effective business models.
As the UK moves into recession in 2009 consumer confidence will take a further hit. Consumers have less money to spend - M&S recently reported a 34% drop in sales on last year - and analysts are predicting the worst Xmas for spending in years. Cheaper retailers e.g. Asda, Primark and McDonalds will continue to increase their share of the market with more stores in the UK. Other, higher end firms like Waitrose may be forced to downsize.
Strategies going forward
Reinvention: Tesco's phenomenal success has been largely the result of being able to appeal to all sectors and being able to grow or downsize a specific area of their business depending on market conditions. Their 'every little helps' marketing campaign, has positioned them as seller of good-value, no frills products at the right time.
Downsizing: Companies like US coffee shop firm Starbucks have over-extended during the boom period of the economy. Starbuck's achieved rapid growth in the 90s as a coffee house targeted primarily at the middle class, white collar workers in business districts and wealthy suburbs. They have expanded this model to lower income cities in the US like Detroit and are now closing stores where there isn't the required demand for their products.
Fewer professional positions available at companies, graduate management and strategy positions at large corporates. On the other hand, successful firms like Aldi, and McDonalds will look to grow and attract more graduate talent into management and strategy positions. Firms who are reinventing themselves or restructuring will call on outside help in the form of strategy and marketing consultants, allowing firms in these areas to take on more staff.
Travel and Leisure
British Airways, Thomson, Ryanair
The travel industry has changed considerably over the last decade. In the UK rising income levels and the strength of the Pound have meant that foreign travel is no longer the preserve of the middle classes. Airlines and travel companies have cut the cost of foreign holidays and flights to appeal to a larger proportion of the population. The airline industry has rapidly expanded with new budget airlines like Ryanair and Easyjet undercutting established firms.
The rise in energy costs has stretched the industry to breaking point. Travel agents and airlines have found themselves stuck between a rock and a hard place as they have been hit by record fuel prices and the risk of reduced demand from consumers with less disposable income. Several less established firms such as XL and Sterling have been forced to close. BA recently announced a 90% drop in profits.
Oil prices have receded and will probably remain low over the next two years as the recession hits consumption of petrol. Whilst this should be good news for the majority airlines, however, several firms who have hedged their bets in the expectation of rising prices are now being hit as they recede. Purchasers of flights and foreign holidays will also be badly hit as the UK enters a recession - disposable income will decrease, causing less people to holiday abroad. Following further interest rate cuts, the Pound will likely continue to fall over the coming months, also making overseas travel more prohibitive. Business slowdown in the UK will mean less executive travel where higher margins are made by airlines.
Strategies going forward
Downsizing, several firms are reducing the number of flight routes and size of air fleets and cutting staff.
Price cuts: Firms will also be under pressure to cut prices, as Ryanair have done, reducing ticket charges by 20%.
Mergers/ Acquisition This type of activity between different companies will become more commonplace as the industry's recent expansion will need to be reversed as demand slows - Travel company First Choice was swallowed by TUI; German airline giant Lufthansa recently acquired British firm BMI.
Management and strategy positions with airlines and travel providers will become less commonplace. There may be an increase in the number of sector-specific analyst and consultant positions within banks, fund managers and consultantcies on the back of increase M&A activity.
Rolls-Royce, BAE Systems, Toyota
Manufacturing remains a significant part of the British economy, and accounts for approximately one-sixth of national output. The automotive industry makes up a significant part of this sector, with foreign car makers like Toyota choosing to base themselves in the UK, though it has been diminishing over the last decade with countries like Brazil and India offering more cost-effective locations for manufacturers. The freeze in consumer credit has had a devastating effect on the sale of new cars with many market leaders in the UK and abroad posting huge falls in profits. Major factories, such as Mini, Toyota and Jaguar-Land Rover have temporarily closed down as sales across the industry were down 23% for October.
Aircraft technology production makes up another large percentage of the sector, BAE Systems, and the continental European firm EADS, the owner of Airbus. Rolls-Royce holds a major share of the global aerospace engines market. This too has been affected by the problems faced by airlines with many firms cutting fleets following expansion by low-cost airliners like Easyjet and Ryanair.
The market for cars and machinery is unlikely to pick up whilst the economy remains such a prominent fear for consumers. Recent cuts in interest rates might make more car credit more readily available to individuals, however. There should be a proportional rise in the number of small, economical cars sold, with people wary of a likely return to high fuel prices before too long. Airline and production should be more resilient - a large proportion of Rolls Royce's mandate is geared towards defence, and with two large international wars being fought there will be ongoing demand for this kind of technology.
Strategies going forward
Downsizing: Many firms will follow the trend towards temporary factory closures and shorter working weeks on the back of poor sales results. Large-scale redundancies have always been common in the manufacturing sector as this is a quick method for cutting costs.
Mergers/Acquisitions: In the US, several of the leading car manufacturers including General Motors and Chrysler are thought to be discussing the possibility of mergers as the state of the car market has made the survival of numerous large firms untenable. A similar scenario could take place in the UK, though many British firms like Jaguar-Land Rover (owned by Indian car-maker, Tata) have already been bought out by foreign firms.
Graduate Management and Finance roles with firms like Rolls Royce and BAE systems should not be greatly affected given that these firms have large international markets and government mandates.
There may be a rise in consultancy and advisory work within consultancies and corporate finance as car manufacturers weigh up merger and/or buy-out possibilities.
News Corporation, ThomsonReuters
All areas of the media are hurting. The Financial Times recently described the industry as 'furthest down the mineshaft of an economic downturn'. The growth and increased affordability of Satellite television has created increased competition for viewers and for advertising revenue between firms - ITV's advertising revenue has fallen year on year since Channel 4 launched in 1982.
The internet revolution has dented the appeal of traditional print media with newspaper circulation at its lowest ever level, particularly amongst young people. Newspaper groups like Trinity Mirror have seen large decreases in advertising revenue as they face increasing competition from the internet..
We can expect smaller brands to suffer as advertising revenue is further hit by consumer slow-down during the recession. Larger firms will increase their stranglehold on the market - BskyB recently acquired a 17% stake in ITV. A cyclical decline in advertising revenue will further threaten the existence of many newspaper groups.
Strategies going forward
Mergers/ Acquisitions/ public funding: Smaller firms might look to merge or accept takeovers from the larger players. Thomson's acquisition of Reuters is an example of this. Terrestrial television firms Channel 4 and ITV may seek public funding under a part-nationalisation deal. The newspaper industry may adopt a similar approach - the Daily Mail & General Trust was recently rumoured to be considering a buy-out of the Independent, though this would be a last resort for most firms. A more likely scenario might mean firms sharing or outsourcing resources as has taken place in broadcasting with Channel 5 outsourcing its news production to BSkyB.
Diversification: Firms may also look to prioritise their online media operations as means of acquiring advertising revenue as The Times has done successfully with timesonline.co.uk. There are limits to the success this can have, however - online advertising provides only 10% of the income papers are used to from traditional advertising streams.
The media industry has always been extremely competitive for job seekers and it is likely to get more so. British firms the BBC, ITV and Channel 4 have all been forced to downsize - opting for lower-cost programming, cutting large numbers of jobs and relocating to more cost-effective locations within the UK. This trend is likely to continue as conditions get tougher over the next couple of years. Newspaper groups will also have to cut back on spending and may look to outsource reporting work rather than take on new staff.