While many mid-market companies are seeing revenues rise, they’re also seeing profits decline as they face headwinds like higher labor costs.
Companies in the Golub Capital Altman Index saw revenues increase by 5.33 percent and EBITDA (earnings before interest, taxes, depreciation and amortization) decline by 2.48 percent in the first two months of Q4 2016. The Index is based on actual sales and earnings data for middle market companies. The index measures median revenue and earnings performance from the data of more than 150 private U.S. companies that operate in a variety of industries.
Lawrence E. Golub, CEO of Golub Capital, said these numbers indicate that while the economy is still growing there is continued pressure on margins at many of these companies. Golub attributes declines in EBITDA to increasing labor costs and to tougher competition from imports due to the strength of the U.S. dollar. It’s a continuation of the trends seen throughout 2016 when revenue growth for the mid-market was “relatively robust despite from profit margin compression,” according to Golub.
Golub Capital said they believe the results are representative of the general performance of mid-market companies, which are a major contributor to the private sector. While individual sectors are being impacted by a myriad of factors, rising labor costs continue to be an issue across the board.
Bloomberg reported in early 2016 that companies are facing some of the biggest labor cost increases in eight years. Russell Price, senior economist at Ameriprise Financial in Detroit said that “the outlook for profits is challenging,” while a chief economist at JPMorgan Chase said that rising wages were putting a “huge squeeze on earnings.”
Employers are facing rising wages on multiple fronts. On the lower end of the scale, new laws have increased minimum wages in 22 states since the start of 2017. And even for more advanced roles, the shortage of skilled talent in sectors like manufacturing and tech is forcing employers to raise wages in “the war for talent.”
Mid-market companies also have been using their size and flexibility to boost productivity and do more with fewer workers. Thomas Stewart, executive director of the National Center for the Middle Market, said that increasing productivity is a main driver of growth for many mid-market companies and that they are being more “cautious” with their investments.
Meanwhile, many mid-market companies are also growing profits by accepting higher labor costs and focusing more on reinventing the customer experience through innovation and technology. James Cassel, co-founder and chairman of Cassel Salpeter & Co., LLC, said that mid-market companies should look to large organizations like Starbucks, Apple and Google for ideas on how to build their business through seamless integration of both the employee and customer experience. “The most important thing is to find the approach that will fit your company’s unique needs. Try evaluating what other companies in and outside your industry have done, and find bits and pieces that are a fit for you,” said Cassel.