Rural Scotland Business Panel Survey February 2023

Executive summary

This report presents findings from the fourth Rural Scotland Business Panel survey carried out in October and November 2022.

Overview and key findings

Against the backdrop of a cost crisis, record inflation and the beginnings of a recession, rural businesses’ confidence in the economy fell to its lowest level since the survey began.

While most rural businesses felt confident in their future viability, there was also a sense of uncertainty about the future and a lack of ability to plan ahead. Most businesses were planning no more than six months ahead, with a quarter unable to plan beyond the next month.

Increased costs were being widely felt and were having a range of impacts, including on profit margins and ability to grow and make plans. Electricity and gas, raw materials and transportation of goods were the biggest areas of cost increase and were having the biggest impact.

Ability to respond to the cost crisis varied and was linked to performance. Those that had performed well were more able to invest in their business, while those that had struggled appeared to be scaling back and using their cash reserves – actions that suggest a shorter term response to the crisis.

The impacts of the cost crisis on businesses and their staff were also clear. Rural businesses reported feelings of worry and stress, working longer hours, reductions in pay, and difficulties balancing work and home life. Employers also reported impacts on their staff, such as working at or beyond capacity, low morale and requests for additional support.

Optimism and performance

• Confidence in the economic outlook for Scotland was at the lowest level recorded in the survey: 35% of businesses were confident and 63% were not.
• Reflecting on the past six months, economic optimism continued the downward trend seen in the previous waves: 63% said their confidence had decreased, while 32% said it had stayed the same and 5% said it had increased.
• Views on business performance over the last six months were mixed: 33% said they had performed well, 26% said they had struggled and 41% said their performance had been fairly steady.
• Over the past six months, sales or turnover performance was mixed, while employment had remained relatively stable. Exports were more likely to have decreased than increased, but had remained stable for a majority of businesses.
• Over a quarter (27%) of businesses felt unable to plan more than a month ahead. Just under a quarter (23%) felt able to plan no more than three months ahead, 20% six months ahead, and 15% 12 months ahead. One in ten (10%) felt able to plan beyond the next 12 months.

Future viability

• The majority (82%) of businesses were confident they would be viable over the next six months, while 16% were not. Confidence was down on the previous wave.
• Among those that were confident in their future viability, 47% expected to be operating at about the same level in six months’ time, while 15% expected to be operating below and 12% over and above their current levels.
• Among those that had struggled in the past six months, 25% expected to still be operating in six months’ time, but at a loss, 11% expected to have downsized and 10% expected to have ceased operating completely.

Markets

• Three quarters (76%) of businesses were importers, sourcing goods from either the rest of the UK (73%) or outside the UK (33%).
• Around half (53%) were exporters, selling to the rest of the UK (51%) or outside the UK (24%).

Cost crisis

• Almost all businesses (99%) had experienced cost increases in the past 12 months, with 82% experiencing substantial cost increases.
• The biggest areas of cost increase were: electricity and gas (80% saw an increase, 53% a substantial increase), raw materials (78% and 54%), transportation of goods (71% and 43%), and equipment purchase or repair (71% and 33%).
• The costs having the biggest impact were those that had increased the most: electricity and gas (51%), raw materials (48%) and transportation of goods (35%).
• The main impact of cost increases was reduced profit margins (70%). This was followed by delayed or postponed growth plans (44%), loss or reduction in customer demand (40%) and being unable to set prices for the coming year (39%).
• Three quarters (74%) of businesses had delayed or postponed plans because of cost increases. A range of plans were impacted including: investing in technology (35%), increasing staff wages or benefits (33%), energy efficiency improvements (33%), development of new products or services (28%) and new capital projects (28%).
• In response to the cost crisis, around three quarters (73%) of businesses were absorbing costs and two thirds were increasing prices (67%). Just over half were making energy efficiency improvements (52%). Other actions included using cash reserves (45%), sourcing alternative supplies (43%) and investing in the business (41%).

Financial concerns and access to finance

• The majority of businesses (85%) had financial concerns, with the top concerns being unpredictable costs (74%) and low profit margins or losses (61%). Other concerns were: low or no cash reserves (35%), increased interest rates on loans and debts (28%), restricted access to finance (22%), repayment of COVID-19 recovery loans (16%), and repayment of other debt (14%).
• Around two in five (44%) businesses were currently using or planning to use some form of finance. Around a third were already using or planning to use loans from banks or financial institutions (31%), or credit or overdrafts (30%). Over a quarter were already using or planning to use public sector grants or loans (28%).

Wellbeing and support

• The majority (79%) of business owners/senior managers had experienced personal impacts as a result of the cost crisis.
• Generally feeling worried or stressed was the most common impact (57%), followed by working longer hours (49%) and struggling to balance work and home life (44%).
• Over a third (37%) reported impacts on their own health – with 31% saying their mental health had suffered and 25% their physical health.
• Around six in ten (59%) employers had seen impacts of the cost crisis on their staff. Almost a third (31%) said staff were working at or beyond capacity, while around a quarter reported low morale (26%), requests for more flexibility in working patterns or locations (25%) and requests for longer or more hours (22%).
• A majority (84%) of employers were taking, or planning to take, actions to support staff in response to the cost crisis. Two-thirds (67%) were engaging with staff to understand their needs, while around half were encouraging flexible working (51%) or increasing wages (50%).

Ownership and recruitment

• Among employers, over four-fifths (84%) described themselves as family-owned, while 11% were employee-owned. More than one-in-ten (13%) businesses were women-led.
• A quarter (24%) of businesses had recruited staff at some point in the past six months. Among those that had, 21% had recruited from further afield in the UK, while 6% had recruited from international markets. Just under one in five (18%) had helped with childcare requirements and 14% had either provided or helped source accommodation.
• Most (72%) businesses that had hired staff in the past six months said that word of mouth or personal recommendations was the most effective method of recruitment. Around half (47%) said that social media adverts were most effective, followed by paid-for recruitment services (25%) or advertising jobs on their own website (23%).

Sector summaries

Findings for two of the largest sectors covered in the survey (tourism, and food and drink) are summarised below^[1].

Sector summary: Tourism

Tourism businesses were more likely than average to report increased confidence in the economy - though most (67%) were still not confident about the outlook for the next 12 months.

Reflecting on the last six months, tourism businesses were more likely to have performed well, which may reflect the timing of the survey coming after the summer holiday season.

In spite of this positive performance, tourism businesses were less confident than average in their future viability.

They were more likely to have seen increased costs in a range of areas including electricity and gas, other utilities, equipment, rates and insurance, and staff wages.

As a result, they were more likely to have experienced a range of impacts from cost increases including delayed growth plans, loss of customer demand, being unable to set prices for the year ahead, pressure of staff costs, and being less competitive. Their plans for energy efficiency improvements, capital projects, new products or services, and upgrading premises had also been disrupted.

In response to the cost crisis, tourism businesses were more likely to be increasing their prices, absorbing costs, making energy efficiency improvements, sourcing alternative supplies, adapting products or services and scaling back through reduced opening hours, winter closing or redundancies.

Tourism businesses reported higher than average impacts on their wellbeing, including reducing their pay and benefits and impacts on mental and physical health. They also noted low morale in staff, along with increased sickness absence and requests for longer hours or additional work.

Sector summary: Food and drink

Food and drink businesses had lower levels of confidence in the economy and in their future viability than average.

Increased cost of raw materials was a particular concern for food and drink businesses, as were the costs of equipment, transportation of goods, other utilities and servicing debt. They were more likely to have delayed or postponed growth plans and been unable to use the goods or materials they used to. They had also delayed or postponed their plans for new capital projects and energy efficiency improvements as a result of the cost crisis.

In response to the cost crisis, food and drink businesses were more likely than average to be absorbing costs, making energy efficiency improvements, investing in the business, collaborating and sharing premises.

They were more likely than other sectors be using external finance, credit or overdrafts. They were also more likely to be concerned about unpredictable costs, interest rates on loans and debt and repayment of debt.