Atlantic Canada’s TOP 101 companies show clear signs of recovering from the last recession, but economic challenges and uncertainty are weighing on the outlook for the region’s leading companies

David Chaundy, senior economist, Atlantic Provinces Economic Council

Atlantic Canada's TOP 101 firms are benefiting from the recovery from the 2008/09 recession. About 72% of TOP 101 firms reported growth in revenues during the last year based on their corporate year end, with median revenue growth of 4.1%. Retail and wholesale firms had the strongest performance, with median revenues up 8.5%, helped by a rebound in car sales in 2010. The industry in which TOP 101 firms were most likely to have suffered a decline in revenues in 2010 was professional and business services, as IT and engineering firms felt the effects of a drop in private and public sector investment in the Atlantic region. 

The economic recovery has been strong enough to lift the revenues of the majority of TOP 101 firms above their pre-recession levels. About 71% now have higher revenues than before the recession. Service-sector firms are most likely to be operating at a higher level of activity than before the recession, followed by retailers; manufacturers are most likely to still be below their pre-recession levels of revenue. 

However, despite this rebound, expectations for the year ahead are the weakest in five years (aside from the 2009 recession). Most TOP 101 firms expect further growth over the next 12 months, but expectations for gains in revenues and profitability have been trending downward over the last five years. This subdued level of business confidence seems to reflect a number of factors, including concerns about weak economic growth in the Atlantic region, rising cost pressures, labour shortages, and general economic uncertainty.

Business challenges
One in three TOP 101 firms reported that their biggest challenge was growing their revenues. This reflected a variety of factors such as clients cutting back on travel budgets and IT investment, a lack of financing for major project investment, and lower levels of defence spending. While slow growth in export markets was the main concern, for others it was the small slow-growing Atlantic market that posed the biggest restraint on their expansion plans.

Continuing economic uncertainty was cited by several firms as a restraint on spending by clients and customers. Uncertainty about the resolution of fiscal problems in Europe and the U.S. have weighed on investors in the first half of 2011, on top of challenges caused by the effects of higher energy prices and disruptions to supply chains resulting from the Japanese earthquake and tsunami.  

Finding and retaining qualified labour was the second most-cited challenge, reported by 16% of TOP 101 firms. The extent to which recruiting young workers is a particular challenge is discussed in the accompanying article on page 122.

Intensified competition was the third-most-cited challenge. Smaller firms were facing pressure from larger rivals with greater resources and lower unit costs; other firms cited competition from low-cost emerging markets. This competitive pressure was squeezing profit margins and dampening sales growth. Rising costs, most notably for fuel and other raw materials, were also an important concern. Higher energy prices were squeezing travel budgets and discretionary spending by consumers. 

The quest for new markets
TOP 101 firms in general are heavily dependent upon the market in Atlantic Canada, with nine out of 10 having some sales in the region. Atlantic Canada is the largest geographic market for revenues for three-quarters of TOP 101 firms and is typically focused on their home province. Almost two out of five firms have some international sales, but only 11% generate their largest sales in international markets. 

Growing Atlantic Canada’s exports is critical for the region’s prosperity. Recent research by APEC (“Atlantic Canada Needs to Boost Its Export Performance,” Report Card, July 2011) shows that the three Maritime provinces have the lowest levels of value-added exports relative to the size their economies in Canada. Newfoundland and Labrador would be in the same position were it not for its exports of offshore crude oil.

The U.S. is by far the most important export market for Atlantic Canadian firms. However, Atlantic Canada’s non-mineral exports to the U.S. have taken a big hit over the last decade, due to a combination of declining demand and a loss of competitiveness. A recent APEC report (“Atlantic Exporters Make Limited Gains Beyond the U.S. Market,” Report Card, August 2011) showed that while all four Atlantic provinces experienced an increase in non-mineral exports to non-U.S. markets between 2000 and 2010, only in Prince Edward Island was this sufficient to outweigh the loss of export revenues in the U.S. market. Furthermore, the growth in Atlantic Canada’s non-mineral exports to Europe, Asia, and other international markets is lagging the advances made by other exporters in other Canadian provinces.

Less than 20% of TOP 101 firms report sales to the EU, 15% have sales in the Caribbean and Latin America, and only 10% sell to Asia. While government officials report growing interest among Atlantic firms in exploring non-U.S. markets such as those in Europe and fast-growing emerging markets, it will take time to develop sales in these markets. Only 10% stated that markets outside North America were their highest priority for revenue growth over the next five years. The biggest shift reported in geographic priorities was from their home province to the rest of Atlantic Canada. 

A number of Atlantic Canadian firms are world leaders in their particular field. These firms are typically highly innovative, knowledge-intensive firms. Not only are they exporting to global markets but they also source inputs and technology from overseas. Several have established plants and offices in international markets or work with international partners. Atlantic Canada needs more of these globally orientated firms. APEC will be profiling some of these global firms and discussing how we can develop more world leaders at November’s Outlook Conference, aptly titled Let’s Get Out of Here: How We’re Taking on the World.