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How long can you give up your market share?
The Revival Group's Simon Walker says the the effects on business caused by disasters, such as flooding, is not just immediate sales, but far more than this, long-term market share
The summer of 2007 was devasting for many businesses across the UK. As we all know, in June cities in Yorkshire and areas of Northern Ireland were struck by flash flooding. In a matter of weeks, the floods had spread to the Midlands, Gloucestershire and Worcestershire, Oxfordshire, Berkshire and South Wales.
All manner of firms were affected, from high street retailers to huge factories and manufacturing firms.
For many businesses, it was like foot and mouth all over again, with thousands relying on prompt reactions of insurance companies for survival.
The estimated 27,000 claims made by businesses in the first few days of the flooding last year ranged from tens of millions, for instances such as steel mills, large shopping centres or distribution warehouses to straightforward claims of a few thousand.
These claims theoretically covered property damage and loss of business – but did they?
For every firm that suffered a flooding, there was business interruption. If that interruption was prolonged there was no doubt a competitor waiting to step in and mop up the available customers. The business lost by such disruption wasn't simply those immediate sales – it was far more than this, it was long-term market share.
Damage to Market Share
While figures abound for the claims covered by the flood, few have attempted to quantify the 'cost of loss of market share' which flood-hit businesses no doubt suffered. To get a feel of how significant it might be we should take a look at the online world – where the link between service outage and market performance is strong.
While nothing to do with floods, ebay, the online auction house suffered a 22-hour outage a few years back. This inability to serve its customers cost it $5 million in lost revenue and a 26% drop in share value. Other similar examples were when Charles Schwab suffered a 26 hour outage resulting in losses believed to be $20m leading to $70m having to be invested in infrastructure whilst in the same year E*Trade were hit by a 5 hour outage which led to a market share drop of 22%.
Now while few businesses are an ebay, Charles Schwab or E*Trade these examples show that a business' market value is inextricably linked to its ability to serve its customers.
You need only flip the coin and consider the spend and time taken to build market share in the first place, to see how costly it is when business interruption opens the door to your competition.
In many markets the advertising costs associated with increasing market share by even 1% can run into millions of pounds. It's not just big brands however who are spending serious sums to build share. Figures from the Internet Advertising Bureau show that internet advertising spending jumped 38% last year to £2.8bn, with SMEs contributing significantly to this figure. The SMEs strong marketing spend was highlighted even further recently, by thebestof, a network of local marketing websites for SMEs, who conducted a survey amongst 3,000 small to medium sized enterprises across the UK with results showing that over 42% spent more on promoting their brands last year than in 2006. This activity being focused on building sales and thus defending or more likely growing market share.
What's more, market share is increasingly under threat from business disruption. For instance, a recent survey by the Chartered Management Institute found that about 1 in 3 businesses had business disruptions, and that UK businesses affected by extreme weather rose from 9% in 2006 to 28% in 2007.
Following the floods during last years summer, a report from the Association of British Insurers (ABI) released in November 2007 estimated that over 8,500 households and businesses would still not be repaired in time for Christmas. Amounting to over 6 months business disruption for many UK businesses, a time period that will have devastating affects and serious repercussions on their market share. The same report also highlighted the fact that a typical house or offices can take anything from 12 to 18 months to be fully repaired, underpinning again the long timescales that people are facing.
Damage to Reputation
Many companies sell on a 'service and reliability' proposition. So if a business is disrupted, for example by a flood, it's not just their infrastructure or market share that is damaged, their service and reliability proposition becomes damaged too.
A PriceWaterhouseCoopers survey quantified these intangibles. It claimed that over 75% of most companies' assets are not in its balance sheet, these being mainly brand value and customer goodwill. Citibank and Interbrand put the brand value of Coca-Cola in one survey at a staggering $83,845 million.
So what does this all mean?
Clearly after a flood or any kind of major disruption the challenge is to minimise the time your customers go without your product(s) or service(s) as the following example vividly shows.
We worked on a project in the north of England which suffered severe, widespread flooding. It was a national plant hire company and they had suffered a flood of approximately 4m depths through their yard and premises. For them any business interruption would be costly, particularly because of the competitive market they operated in.
Due to the size and quantity of the affected plant, we at The Revival Group located alternative premises within a few miles of the client's site and all units were transported to this site for storage, assessment and restoration.
The success of this work enabled ourselves, the Insurers and the Client to establish the benefits of restoration and to agree a program and scope of work to complete the restoration of all affected units in the quickest time possible.
The final full listing totalled over 50 major items. The restoration process involved the full disassembly of diesel engines, electrical systems as well as hydraulic systems.
We operated regular update meetings with the client to confirm priority items and timescales for completion to allow them to plan their operations to meet the needs of their own clients thus not losing business and ultimately market share.
The involvement of The Revival Group resulted in a saving of 40% over the current equipment value and at least 80% of the new replacement cost. It also enabled the client to continue trading, albeit on a reduced basis resulting in significant reductions in the business interruption costs. This was the key for them. In simple terms they couldn't afford to give up any of their market share, as this would have had horrific affects on their business, and because of us they didn't.
Being Prepared
Looking back again at the floods of last year many businesses were forced to outsource their manufacturing capabilities, relying on suppliers to fulfil contracts, and consequently losing profits.
The worry now for all businesses is that this event is not a one-off. The words 'climate change' have taken on a new connotation for business owners, even those who aren't located near a river. Many claims weren't as a result of river flooding – businesses near rivers were more used to it. But many firms just couldn't cope with the amount of rainfall; premises with features such as flat roofs, or guttering that couldn't cope.
The insurance industry thinks the number of unexpected events will increase. Premiums will go up, infact over the last year many UK insurers have already hiked home premiums, and others look set to follow.
Businesses are told constantly to expect the unexpected, so with this in mind what steps can we take to ensure that loss of market share is avoided if say a flood or fire were to take place on a business premises. My advice would be the following:
Insure well
Maintain guttering
Be careful where machinery and stock is stored
Know your plant equipment
Don't store I.T. equipment in basements
Keep outstanding invoices safe and to hand
Know your production process
Detail IT hardware network configuration and know where to replace it
Research alternative contingency properties or agencies offering short-term lets
And finally, have a contingency plan in place, know who to contact if ever affected by a fire or flood. As just knowing the right people can save your company thousands
Simon Walker, Technical Manager, The Revival Group
The Revival Group was formed in March of this year after The Revival Company, the fire and flood restoration specialist, acquired 80% of Arepa UK, technical disaster recovery experts.
Arepa is one of the world's leading companies in technical disaster recovery, offering insurance companies and loss adjustors solutions for their clients throughout Europe. Its services include the assessment and restoration of damaged technical equipment. The Revival Company, which is a market-leader and operates the fastest growing disaster restoration company in the UK is well equipped to work with Arepa which has the most sophisticated technical facilities in Europe, if not the world.
Through The Revival Company's acquisition of Arepa UK, which formed The Revival Group, they are able to provide clients with a powerful, integrated solution for both fire and flood restoration.
