Rural Scotland Business Panel Survey October 2022

Executive summary

This report presents findings from the third Rural Scotland Business Panel survey carried out in June and July 2022.

Overview and key findings

Against a backdrop of rising inflation and a "cost of living crisis", confidence in the economy fell again this round. While most rural businesses were being impacted by rising costs, Coronavirus (COVID-19), EU Exit and the Russia-Ukraine conflict, business performance and operating levels remained broadly unchanged since the previous wave.

Most rural businesses were confident that they would be viable in the next six months. Rising costs, reduction in customer demand, and ability to access supplies were the biggest risks to future viability – but most felt equipped to deal with these challenges.

On workforce, the ability to attract new talent and staff working at capacity were the biggest risks facing businesses. Again, however, most felt equipped to deal with workforce-related risks.

Businesses had a mix of outlooks and aspirations for the future, with similar proportions wanting to grow as wanted to remain at the same level. The motivations behind these aspirations were multi-layered and included financial and corporate ambition, market conditions, restrictions on capacity and ability to grow, and lifestyle factors.

Optimism and performance

• Just over four in ten (42%) businesses were confident in the economic outlook for Scotland over the next 12 months, while 56% were not.
• Economic optimism was down on the previous wave: 57% said their confidence had decreased, while 35% said it had stayed the same and 8% said it had increased.
• Just under two thirds of businesses were now operating at either the same level (43%) or over and above the level (20%) they were before the COVID-19 pandemic. Around a third (36%) were operating below their pre-pandemic levels.
• The majority of businesses (94%) were being impacted by rising costs (to at least a small extent). Three quarters (74%) were being impacted by COVID-19, 63% by EU Exit, and 58% by the Russia-Ukraine conflict.
• 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.
• Around a third (35%) of businesses were operating behind where they wanted to be in relation to productivity, 29% in relation to adoption of technology, 20% skills development and 18% competitiveness.

Markets

• Three quarters (76%) of businesses were importers, sourcing goods from either the rest of the UK (74%) or outside the UK (33%).
• Around half (52%) were exporters, selling to the rest of the UK (49%) or outside the UK (23%).

Growth

• When thinking about their own business, the factors most commonly associated with "growth" were an increase in sales or turnover (79%) and a growing customer base (74%). Around half associated growth with new products or services (48%), followed by 46% saying creating new jobs and 42% saying expanding into new markets.
• Just over four in ten (43%) businesses were striving for growth, while around the same proportion (43%) were content with their current level of performance. Around one in ten (13%) wanted to downsize.
• The most common reasons for striving for growth were to make or increase profit (86%), to continually evolve (80%), to enhance resilience against economic uncertainty (78%) and to respond to changes in demand (77%).
• The main reasons for wanting to retain current levels of performance were that the business was operating as planned (71%) and feeling content with financial performance (62%).
• Among businesses that wanted to downsize, the top reason was that they were reaching retirement age (77%). This was followed by wanting to work less (63%), wanting to reduce or avoid stress (48%), increased costs (44%) and economic uncertainty (35%).

Viability

• The majority (88%) of businesses were confident that their business would be viable over the next six months, while 11% were not.
• The biggest perceived risk to viability was rising costs (83% said it was at least a medium risk) followed by reduction in customer demand (62%) and ability to access supplies (57%). Over four in ten felt workforce challenges (46%), low levels of stock (44%), increased competition (43%) and low or no cash reserves (41%) were risks.
• Most businesses (88%) felt equipped to respond to risks to their viability, while 11% did not.

Workforce

• Over half of employers felt their ability to attract new talent (55%) and staff working at capacity (54%) were risks to their business. Other risks included skills shortages (49%), ability to pay competitive wages (48%) and lack of permanent staff (45%).
• Most employers (84%) felt equipped to respond to workforce-related risks, while 15% did not.

Responding to change

• Businesses had mixed outlooks for the 12 months ahead: 41% were minimising change and hoping to continue as they were, 31% were open to change but not actively seeking to do so and 25% were actively seeking out new ways of doing things.
• Most businesses (82%) were taking at least one action in response to changes in their working environment. The top three actions were: using greener supply chains (45%), upskilling or reskilling staff (41%) and using more locally sourced supplies (40%).
• Among those that were upskilling or reskilling their workforce, the most common approaches being used were on the job training (90%), giving continual feedback and performance reviews (81%) and mentoring or coaching (72%).
• For those that were upskilling and reskilling, the most sought-after skills were use of new technologies (76%), specialist or technical skills (70%), digital skills (69%) or customer or client-facing skills (67%).

Variation by location and rurality

• Business in the Highlands and Islands were more confident in the economy than those in the South of Scotland and the rest of rural Scotland, and were more likely to have seen increases in their sales or turnover, employment and exports performance.
• Those in both the Highlands and Islands and the South of Scotland were more confident in their future viability than those in the rest of rural Scotland
• Remote rural businesses were more likely to say they had been impacted (to at least a small extent) by EU Exit and the Russia-Ukraine conflict.
• Remote rural businesses were more likely than average to be operating at the same levels as they were pre-COVID-19, and to want to downsize. Businesses in small towns and peripheral urban areas, on the other hand, were more likely to be striving for growth, while those in accessible rural areas were more likely to want to retain their current level of performance.
• For those in remote rural areas that were not striving for growth, they tended to be either content with their current performance (because the business was operating as planned) or they lacked capacity to grow (because they did not have enough staff or time to make changes).
• Remote rural businesses were more likely than average to be experiencing a range of workforce-related issues, and to not feel equipped to respond to them. Overall they were less confident than average in their viability over the next six months.

Sector summaries

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

Sector summary: Tourism

Tourism businesses were more likely to say they were being impacted by rising costs, EU Exit and Coronavirus (COVID-19).

They were more likely than other sectors to still be operating below pre-pandemic levels. However, they were also morelikely to say their confidence in the economy had increased over the past six months and were more likely to be striving for growth.

Tourism businesses were more likely to have seen decreases in sales or turnover. Compared to other sectors, tourism businesses also felt more at risk from rising costs and potential reduction in customer demand. They felt less equipped than average in their ability to respond to future risks to their viability.

On workforce, they were more likely to have seen decreases in their employment in the last six months, and to be behind where they wanted to be on skills development.

Tourism businesses felt more at risk from a range of workforce-related issues including staff working at capacity, a lack of temporary or seasonal staff, and ability to attract talent and pay competitive wages and less equipped than average to respond to these workforce-related risks. Among those that were reskilling and upskilling their workforce, tourism businesses were particularly looking to develop customer or client-facing skills.

In response to changes in the working environment, tourism businesses were more likely to be using more locally sourced supplies and greener supply chains.

Sector summary: Food and drink

Food and drink businesses were less confident than average in the economy and more likely to have been impacted by rising costs, the Russia-Ukraine conflict and EU Exit.

They had seen relatively stable performance over the last six months and were more likely than average to be operating at the same level as before COVID-19. However, they were more likely to be behind where they wanted to be on their skills development and competitiveness.

Food and drink businesses were more likely to want stability in future. For those that wanted to stability, or those that wanted to downsize, reasons included market conditions, lack of capacity, and looking ahead to legacy and succession planning.

Food and drink businesses felt more at risk from rising costs, workforce challenges, and their ability to access markets, supplies, and finance and a range of workforce-related risks. They were less likely than average to feel equipped to deal with these risks.

In response to changes in the working environment, food and drink businesses were more likely to be using more locally sourced supplies, collaborating and sharing resources. For those that were upskilling or reskilling their workforce, low carbon skills were particularly sought after.