I was browsing the Sunday Times Top Track 250 last weekend, seeing which mid-market consumer companies have been doing particularly well this year. There were lots of successes from retailers, FMCG businesses, travel firms and many more! I have to say that I was expecting substantially more tech-focused companies in the list, though: out of the 250 listed this year, between five and 10 exclusively concentrate on online or digital activities. Then I realised something – the Top Track 250 only includes companies that register operating profits. The implication of this measure is that many digital businesses (which may be doing well in terms of sales) are falling behind due to the difficulties of making consistent operating profits. So what are the factors blocking tech firms from converting sales to profits? And what are this year’s Top Track entrants doing right?
Firstly, it is important to note that the Top Track 250 is not the same as the Tech Track 100 that the Sunday Times also puts out. Indeed, it has quite different parameters. Tellingly, the Tech Track has no requirement for profitability, and the companies listed there are notably smaller. So when making a profit is taken into account for these bigger companies, why are there so few private mid-market tech businesses registering in the Top Track?
I believe the issue is down to several factors. Digital firms’ ability to monetise their business models is an age-old problem, for instance. Also, intensive programs of investment early on in a company’s lifespan (as tech firms must do to boost investment prospects) mean that operating profits can be swallowed up in favour of growing other metrics. Most importantly, though, the culture of profitability as a barometer of success does not exist for online-focused firms in the same way it does in other sectors. When newspapers run stories about Amazon’s status as a digital powerhouse despite profits being secondary to its operating model, and when venture capital or private equity investment prioritises potential over profit-making, the drive for early income is simply not there for smaller tech businesses.
The Top Track 250 includes certain digital companies that are getting it right, though. One such business is The Hut Group, which has coupled phenomenal sales growth (it had just £5m sales in 2005, and now boasts revenues of around £185m) with consistent earnings; in 2013 it registered £9.1m in operating profits. Furthermore, earlier this summer, the firm secured notable investment from private equity giant KKR, which shows what solid financial figures can do for a company’s reputation. Similarly, this week online bicycle retailer Chain Reaction Cycles reported annual operating profits of £4.8m (up from last year’s £1.1m), on revenues of £144.9m. These results show that it is possible for online businesses to succeed at the profit level as well as in terms of sales and operational growth.
Overall, around two thirds of the companies included in the Top Track 250 improved their operating profit margins over the last financial year. This shows that UK companies are continuing their recovery after the credit crunch, and that the business climate in the country is one of relative confidence. However, I think we should be seeing more profitable tech businesses being ranked alongside growing firms from other sectors. Let’s see if the next 12 months provides some breakthroughs!
Hopefully there will be more tech businesses in 2015’s Top Track 250. Which other sectors do you feel are underrepresented in the rankings? Let me know at moira@thembsgroup.co.uk, and have a brilliant weekend.