Barriers to Growth
Talent, recession, and inflation: the biggest obstacles.
When asked to choose the main barriers to achieving their growth targets, respondents identified a very clear top three: labor and talent shortages, recession, and inflation. Other headline issues such as raw material shortages and budget constraints lagged far behind. Geopolitics were of greater concern to companies with more than $50 billion in sales (50%) and those headquartered outside of the U.S. (52%).
Despite recent employment numbers slowing down somewhat, members are still reporting that the most pernicious shortages are in talent. In business services and financial services, it’s particularly difficult; some three-quarters of respondents from those industries reported talent shortages as one of the main barriers to growth. Said Rob Andrews, CEO of Health Transformation Alliance, “It’s a cultural paradigm shift where the power to define the relationship between work and non-work time, I think, has permanently shifted toward employees. I think this power will hold even in an economic downturn. This is a cultural change that’s personal.”
CEOs in particular were concerned about labor and talent shortages, with 90% of them ranking it as a top concern. And yet HR executives, who one might assume would agree with CEOs, tended to focus on inflation first, with 87% saying inflation was a major issue. Notably, the struggle for talent seems to be more extreme in the U.S.; 72% of respondents from U.S.-based companies said it was a barrier, but only 52% of those from companies located outside of the U.S. agreed.
At auto repair provider Caliber Collision, the struggle to hire continues. Although the company kept all locations open and still guaranteed some commissions during the pandemic despite volume falling by half, others did not. Said Mark Sanders, president and CEO: “A lot of our competitors took different approaches, and they closed a third of their locations. And what happened is a lot of those technicians left the industry.”
When we can’t get enough people, it can
directly stunt our reinvestment in future growth.”
– Heather Polinsky, Global President of Resilience, Arcadis
In tech—long a hiring center—layoffs from the likes of Meta (11,000) and Amazon (10,000) suggest this shortage is reversing, making it easier for other companies to hire—while simultaneously reducing demand for goods and services. “In a professional services organization, we need people—head count—to drive growth,” said Heather Polinsky, global president of resilience at engineering company Arcadis. “When we can’t get enough people, it can directly stunt our reinvestment in future growth.”
Partnership for Innovation
“We’re only as good as what we can generate next in terms of innovation for our consumers and the category,” said Michael Pellegrino, president and chief growth officer at Sargento Foods, a cheese and snacks provider. Sargento CEO Louie Gentine has challenged the team to generate at least 15% of their three-year trailing revenue from innovation. While they haven’t hit the target every year, they’ve come close—even through the pandemic.
When COVID hit, Sargento did not stop innovating, even as consumer eating patterns shifted dramatically to at-home consumption. It did, however, look to innovate in new ways, including partnerships—thanks to an opportunity with Mondelez International, the maker of Ritz Crackers and other snacks. Why not work together on ideas that leverage the best-known cheese and cracker brands in the industry? Both teams immediately saw huge untapped potential in the market. Their first new product, Sargento Balanced Breaks Cheese and Crackers, launched in early 2021 and was immediately successful, doubling Year One sales estimates. It’s now on track to more than double again in Year Two. In 2022, Sargento received its third Breakthrough Innovation Award in the last eight years from NielsenIQ BASES.
Looking ahead, Pellegrino said, “We are very open to other partnerships as long as they fit with our company culture and our philosophy around innovation and brand building. There’s a lot more in the works you’ll hear about soon.” With the partnerships approach now in place, Sargento has reached its 15% three-year trailing revenue from innovation goal in 2021 and 2022.
Said Pellegrino: “What I love about our CEO is he never says to stop innovating if we fail. He’ll say, ‘What did we learn? What are we going to do differently, and when can we get the next one up and running?’ I think that’s why we’ve been able to beat the industry average overall and continue to have a healthy pipeline for future growth.”
Inflation: An Unequal Burden.
Inflation, while a challenge for all, affects some industries more than others. In the consumer products sector, 88% of respondents said it was one of their top barriers to growth, compared with just 41% of business services executives. It’s also true that inflation places more pressure on lower-income individuals as non-discretionary items consume more of their spending capacity. “We continue to see strong consumer spending and demand for loans across the credit spectrum,” said Capital One CFO Andrew Young. “But recent economic data has shown a slowdown in demand for goods, while demand for services like travel—which tend to be driven by higher-income individuals with more discretionary spending power—is staying high,” he said. “We’re keeping a close eye on these dynamics as well as credit behavior by income and credit band to find opportunities for resilient growth.”
Frank Mannarino—President, US Retail & Canada, at toolmaker Stanley Black & Decker—said his company is focusing more on the professional tool user than the consumer because they see fewer signs of a slowdown in that segment.
It’s worth noting that inflation is beneficial or neutral for many companies. Said Marco Forato, SVP and chief strategy officer of insurance provider Unum, “Insurance companies benefit from high interest rates and higher inflation in multiple ways. We have a large amount of money that is invested in order to pay out the benefits we provide, so a high interest rate is good because it increases the investment return and ultimately strengthens our ability to deliver on the commitments we make to our customers.” For BrightView, which provides landscaping services, the growth strategy hasn’t really changed. BrightView President and CEO Andrew Masterman said, “In great times we don’t see our business boom, and in tough times we don’t see our business shrink back. The grass still grows. It doesn’t read the newspapers; it doesn’t look at what’s going on in the world.”
President and Chief Executive Officer, BrightView
“So in great times, we don’t see our business boom—and in tough times, we don’t see our business shrink back. The grass still grows. It doesn’t read the newspapers; it doesn’t look at what’s going on in the world.”
Doubling Down on M&A
PHOENIX Group, the largest European player in the pharmaceutical distribution, retail, and services sector, was founded in 1994 with the objective of consolidating the highly fragmented market. With interest rates soaring and competitors exiting, it might make sense to shift gears. But the company is carrying on with its focused M&A strategy. “We have a history of acquisitions. The process of acquiring and integrating companies is part of the genetics of our company,” said Roland Schütz, chief information officer of PHOENIX Group. On November 1, 2022, PHOENIX Group closed on the largest acquisition in company history: buying parts of McKesson Europe.
The core business of PHOENIX Group is a vital part of the health care industry and has recently been recognized as critical infrastructure, so this environment holds some appeal, said Marko Grünewald, director of corporate development and mergers and acquisitions. “We are very clearly focused,” he said, describing the company’s concentration on market entries and consolidation opportunities for the core business, as well as adjacent businesses such as IT solutions for pharmacies and value-added services. “We have a dedicated scorecard for each transaction to ensure a compelling strategic fit, attractive financial key performance indicators, and a strong business rationale.”