SMElls like trouble
Let’s turn our attention away from listed companies for a day.
Small and Medium Enterprises (SMEs) are the lifeblood of the South African economy and there is much to be concerned about. SMEs contribute 39% of South Africa’s GDP but they are hanging on by a thread.
Small boats in rough seas
If listed companies are struggling to hold it together, can you imagine the strain that SMEs are taking? They don’t have the option of doing huge rights issues or quickly raising debt from banks. These are entrepreneurs trying to juggle the demands of the business with the needs of their families, all whilst having to compete against corporate juggernauts with dedicated teams of specialists.
On top of this, many of them have to deal with the SARS call centre, which is a pain arguably worse than death.
SMEs can compete in a business-friendly climate, offering superior service and niche products to a loyal customer base. I wouldn’t rush to describe South Africa as a business-friendly climate though, which makes a crisis like lockdown even more vicious for these vulnerable SMEs.
An SME.Africa and Sasfin survey found that around 60% of SMEs may even close before the crisis is over. It’s worth noting that the survey was done in the early days of this nightmare. Considering SMEs provide between 50% and 60% of the total jobs in South Africa, that’s an utterly terrifying statistic.
Even if you don’t work for an SME or own one, your future as a South African is tied to the future of these SMEs.
Context to lockdown is important.
In places like the UK and the US, government saved lives but did so while putting strong defences in place for the economy. Stimulus packages ensured that people were basically paid to stay home. It has certainly put those sovereign balance sheets under some pressure, but the world’s leading economies have the money to ride this storm.
Meanwhile, at the tip of Africa, government’s financial nest egg came into this mess with a broken shell and no more yolk. The TERS assistance from UIF has been woefully inadequate and shockingly unreliable. Ridiculous trading restrictions from the DTI and autocratic policies have all but killed entire industries.
Stimulus payments? Dream on. Have a strong dose of load shedding instead.
Any sensible government would’ve recognised the vulnerable position of our SMEs and done everything possible to help them. If only we had a sensible government.
SMEs that supply corporates: cash flows are being squeezed
In boardrooms of JSE-listed companies across the country, the decision has been made to cut spending. Everywhere. Everything – cut it as much as you can!
Oh yes, squeeze working capital while you’re at it. Take as long as possible to pay our suppliers.
This creates an impossible reality for SMEs, many of whom have built their businesses around a core group of large clients.
SMEs that supply consumers: let’s not even go there
Many of these SMEs are in the tourism, hospitality or restaurant industries. That’s an unmitigated disaster that is too painful to discuss.
Others are in specialist retail, competing for the few remaining Rands that consumers have to spare at the moment. Some had e-Commerce platforms operating before lockdown, which may have done ok over this period. Others relied entirely on walk-in customers, which sadly may have been the end for them.
There’s only one potential outcome: widespread job losses
SMEs can only cut expenses in so many places. When responding to a crisis like this, perhaps the most painful decision of them all becomes unavoidable: cutting jobs.
In a McKinsey survey of SMEs in South Africa, 70% confirmed they were reducing expenditure and the most common area identified for savings was in employee costs. This is of course despite the various government initiatives put in place to avoid this outcome, which clearly haven’t worked.
So, what are SMEs supposed to do?
McKinsey highlights a few strategies for SMEs to consider. One needs to remember that McKinsey defines an SME as having turnover between R15m and R500m per year, so we aren’t quite talking mom and pop shops here. These are chunky businesses.
Unfortunately, like all good management consultants, McKinsey’s suggestions are high on intellectual value and low on practical value. “Investing in capacity building, especially at leadership level” sounds lovely in a presentation, but what does that actually mean?
I’m a practical ghost. I believe you need to do two major things:
- Embrace technology in every sphere of your business, whether to enable remote working and save on lease costs, improve internal processes and free up capacity for business development or create an enhanced user experience for your customers
- Measure everything – be ruthless on expenses you don’t need and optimize the ones you do, but make sure that you have a proper view of everything going on in your business
How does this affect me as an investor?
From an investment perspective, I’m cautious of consumer-facing businesses in general at the moment. With significant job losses comes an inevitable downturn in consumer spending.
Durable goods suffer the most, especially the likes of new car sales. Semi-durable or luxury goods also struggle, as reflected in Massmart’s share price pain over the past couple of months (I bought into Massmart far too early but I continue to hold for the recovery).
I’m also conscious that banks will bear the brunt of this mess both in their SME lending divisions as well as their retail banking divisions, as people without jobs cannot service their debts. I’ve given my views on Capitec before and the state of SMEs in this country only confirms my fears.
Where the hell is government in all this?
It’s easier to believe in ghosts that it is to believe in government assistance.