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MARKET OUTLOOK
Waiting for the
market to recover
Dealing with a recession requires that you have done your homework and
are prepared. “The most important thing is to have an elaborate plan for
different scenarios and a strong financial position so that you can take
a long-term approach and make use of the opportunities that present
themselves in a recession,” says Mellby Gård’s CEO Johan Andersson.
The pandemic was deeply tragic and challenging. At the same
time, it made many people realize how quickly a major change
can occur.
“What happened in March 2020 is unprecedented in modern times,
at least based on what I’ve experienced in my professional life,” says
Johan Andersson. “Few people were prepared for what was to come.
But Mellby Gård coped well with the pandemic, and there’s now a
completely different awareness that major changes can take place
quickly and have a big impact.”
“I think this will help us to deal with a possible recession,” he says.
“It doesn’t happen overnight in the same way. We’ve been preparing
for a long time and have dealt with recessions before, although
nobody knows exactly what this one will be like.”
“We’ve had discussions internally about it being likely to be more
protracted,” says Johan Andersson. “Previous declines have usually
been relatively quick, with rapid recovery. We now believe in a
scenario more akin to a slow puncture. We believe that interest rates
will stabilize at a level last experienced a couple of decades ago, and
this, combined with an increase in the cost of living, may affect some
industries significantly, while others do relatively okay.”
IMPORTANT TO HAVE A PLAN B AND PLAN C
Uncertainty regarding the scale and timing means that you should
not only have a plan B, but also a plan C in case of an unexpectedly
large drop in demand or an unusually prolonged recession.
Most rules or advice for dealing with a recession are company-
specific, according to Johan. However, a general piece of advice is to
have a well-developed plan in which you have considered different
scenarios and activities to deal with them. Being in a strong financial
position is also important. From an owner and a parent company
perspective, a strong balance sheet gives you the freedom to act and
support your holdings.
“Fortunately, our balance sheet remains strong, allowing us to
support our companies should they be severely affected,” says Johan
Andersson. “At the same time, we can be active if opportunities
present themselves. When the financing well begins to dry up, there’s
less competition to provide capital, allowing us to make interesting
strategic transactions.”
“Where others need to take drastic action and lay off staff, we
should have the confidence to feel we don’t have to act as forcefully,”
he says. “Of course, there may be times when we too are forced
to make redundancies, but we’ll make fewer cutbacks than our
competitors.”
A recent example is the wooden house industry, which is going
through a tough period, according to Johan. Many manufacturers
have already made cuts, and it cannot be ruled out that Älvsbyhus
will have to do the same. Our ambition is to last longer than the rest
of the industry by building houses on our own initiative on our own
land, build new display houses and make use of our strong balance
sheet. Because when the market changes direction – which it will – it
can be difficult to find skilled employees. If you retain staff instead,
you can respond to an upturn in an aggressive manner.
Johan also thinks that, during a recession, it is particularly
important that the companies in the group stay in close contact. It
should be and is a great advantage to be part of Mellby Gård, where
the companies can share experiences with each other, including with
businesses in different industries, which can provide new insights.
MORE DIFFICULT TO CONVINCE INVESTORS
During the pandemic, valuations of tech companies in particular
skyrocketed due to continued low interest rate policies and
central bank stimulus. With the subsequent increases in interest
rates, valuations have also fallen sharply. There was also a kind of
digital conversion that has driven e-commerce in many industries.
However, the companies purely focusing on e-commerce have had
a challenging 2022. Many started off 2022 with too much inventory
while extrapolating growth levels from levels seen in 2020 and 2021.
The post-pandemic reality has been different.
For those companies now seeking capital to continue their growth
journey, it is important to convince investors that they can become
positive in terms of cash flow in the near future. They need to present
a business plan that demonstrates they can adapt and reduce their
costs significantly. This in itself can be a useful experience for many.
“In general, I think that risk awareness has increased in recent times,
which is a good thing and increases the chances of being able to
tackle a recession effectively,” says Johan Andersson. “On the other
hand, there may be things that are underestimated. For example, real
estate companies have hundreds of billions in bond loans that are to
be refinanced in the coming years. The banks’ appetite to take them
over may not be very high.”
“We may also be underestimating the impact of aggregate cost
increases on household finances,” he says. “For many households,
they can increase costs by tens of thousands of Swedish kronor per
year. Obviously, this is likely to have consequences for most B2C
companies.”
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