Like economies, organizations, and individuals around the world, the U.S. middle market has not been immune to the adverse impacts of the Covid-19 pandemic. These companies, defined as those with annual revenues between $10 million and $1 billion, make up a critical yet often overlooked segment of our national economy. While the middle market represents barely 3% of all U.S. businesses, it’s responsible for roughly one-third of private sector GDP and employment. If it were its own country, it would be the fifth-largest economy in the world!
Based on recent survey data collected by the National Center for the Middle Market (NCMM) at The Ohio State University Fisher College of Business, nearly 40% of middle-market executives think the pandemic will be “catastrophic” to their businesses over the next six months. Moreover, the impact is much larger in some industries than others. For example, the story of Cameron Mitchell Restaurants is typical of the hospitality industry. Based in Columbus, Ohio, pre-pandemic, it had 36 restaurants in 12 states, $300 million in annual revenue, and 3,000 employees. In the spring of 2020, it essentially shuttered operations and has been clawing to get back to capacity as it struggles under various health department restrictions and customer hesitation to return to in-person dining.
According to the NCMM Middle Market Indicator (MMI) for Q4, collected in December 2020 by surveying 1,000 middle-market executives, middle-market companies reported an average revenue decline of -1.2% over the prior 12 months while also reporting a drop in employment of -2.2%. Poor results, to be sure. Compared to the small business and large business segments, however, the middle market has done a significantly better job of containing its losses throughout the ongoing crisis, particularly for a sector that has long been growing at healthy rates. For comparison, based on S&P 500 revenue data, large publicly traded companies lost -5.5% in revenues during 2020. Similarly, using ADP monthly reporting, small businesses with 50 employees or fewer saw employment drop by -5.1%, and large corporations experienced a -8.2% decrease in the size of the workforce. These results aren’t necessarily surprising — since the NCMM began tracking middle-market performance in 2012, the middle market has consistently outpaced its larger and smaller peers.
The Middle Market’s Role and Prospects
Large firms have deep pockets and are constantly in the public eye. But middle-market firms deserve more attention from us. Simply put, the middle market has been the real growth engine of the economy since the financial crisis of 2007–2009 and can continue going forward if supported properly. During the so-called Great Recession, NCMM data shows that, while large businesses shed 3.7 million jobs, the middle market added over 2 million new positions. According to NCMM quarterly MMI data, average revenue growth from 2012–2019 has been 6.5% for midsize companies, and employment growth has averaged 4.3%. Once again, these historical averages outpace large business at 3.5% revenue growth and 2.3% employment growth, respectively. Middle-market performance also outpaces small firms with regard to employment growth.
In addition, middle-market companies are typically very resilient, as demonstrated by their average age of 31 years in business and the enduring brands they’ve created. These include well-known consumer names like White Castle, Patagonia, Orangetheory Fitness, and Highlights for Children, along with countless others acting as important links in the supply chains of other companies. For example, a 2013 report by the Brookings Institution mapping the automotive supply chain in Tennessee uncovered approximately 650 companies, only three of which were large OEMs. The balance consisted of predominately middle-market tier one and two suppliers, illustrating just how crucial the middle market is to the vitality of the industry.
Besides the opinions of middle-market managers, the reported actions of middle-market firms reveal their lack of confidence and their concerns regarding the future impact of the pandemic. MMI forecasts for 2021 show the following: 43% of middle-market leaders would hold cash instead of investing it immediately in their businesses (up from 30% a year earlier). In the next six months, 35% expect to significantly delay planned investments, 32% expect raw materials and supply shortages, and 31% anticipate general disruption of work due to a remote workforce. In fact, on average, only 52% of middle-market employees are back to the office or shop floor. One in four companies expect additional or continued layoffs, and while overall employment growth is projected as positive, this is driven by only a third of companies.
Maintaining Customer Connectivity Is Most Pressing
What underlying challenges are behind this forecast? Of all the issues shared with the NCMM as ongoing challenges, one of the most consistent from the start of the pandemic through today has been maintaining customer engagement and connectivity. Early on, when the figurative floor dropped out in March 2020, uncertainty, cash flow, and employee safety were the primary concerns, and rightly so. As the NCMM continued to monitor sentiment throughout the summer and businesses began to reopen, the lingering uncertainty and concern for employee safety and productivity persisted, but the threat of diminishing customer relationships and engagement began to mount. As a result, the adverse impact to revenues is apparent in nearly a quarter of executives stating that the 2020 topline was in significant jeopardy.
Understandably, customer connectivity has become an issue across the board. With the shutdown of live events, tradeshows, conferences, and even simple face-to-face meetings, the middle market needs to thoughtfully invest in new ways to reach its clients. Take the example of PDC Machines, located outside of Philadelphia, Pennsylvania. PDC is a second-generation, family-owned business that designs and manufactures complex gas diaphragm compressors for a variety of industries and customers around the world. In a typical year, the company’s senior leaders would spend days at a time traveling around the world to visit customer sites and collaborate on solutions, all while building deeper relationships with key accounts. With global travel still grounded, PDC decided to hire a professional videographer and producer to create a series of short demo webinars, which included drone flyovers of their factories and on-demand technical demonstrations. Without the ability to visit their customers, the business used technology to bring those customers to them. The results have been impressive — 2020 revenue increased 37% over the prior year, with 2021 projected to increase another 62% as demand for clean energy increases worldwide.
Industry differences aside, we can identify several other common characteristics for businesses that have performed well in this challenging environment. They tend to have strengths in the following areas: access to capital, marketing and communications capability, a long-term growth strategy, and an appetite for investing in future growth. These capabilities have allowed for expansion despite the pandemic — in many cases, greater than 10% growth in both year-over-year revenues and employment. Having a great relationship with a bank or other capital provider has many benefits, too. In addition to funding growth, financial institutions often bring to the table years of experience supporting other middle-market companies and can serve as a strategic advisor regarding planning and investments. Similarly, outsourcing to a strong marketing and communications partner can help accelerate results when the capability might not exist in-house (and can take some time to build effectively).
The middle market isn’t unique in facing the many challenges brought on by the pandemic, but many of these businesses have the resiliency to emerge from it successfully. Companies that take steps to reimagine how they connect with their customers will have an edge.
