Has time finally run out for “Zombie Businesses” in 2023?

Zombie companies have been kept afloat by cheap money and favourable governance over the past decade and a half. The economic crises from the ‘Great Recession’ that followed the 2008 financial crash, to the impact of Brexit and onto the pandemic, didn’t force as many companies out of business as a normally would have been expected.

The endless flow of ‘cheap money’ after the financial crash and the pause to elements of insolvency legislation amid the pandemic allowed zombie businesses to keep going where otherwise they would have failed. In addition, prolonged and historically low-interest rates have inadvertently prevented the productivity restructuring the UK economy so desperately needs.

For every zombie business that didn’t fail under the weight of its poor financial performance, capacity wasn’t freed up. New or innovative companies haven’t been allowed the space to develop newer, more efficient ways of operating. This has stymied the additional growth more efficient companies might have achieved.

Zombie companies cause all manner of damage. The extra congestion caused by their prolonged survival hampers new entrants and crowds out young businesses. These innovators will be the ones to drive the next generation of productivity, but those that do gain a foothold find it much harder to upscale due to market saturation.

Plimsoll classifies a zombie business as one that is over 10 years old, with a high interest-to-turnover ratio in each of its last five years. This allows us to look beyond the impact of the pandemic. The following is a breakdown of the prevalence of zombie businesses in each of the UK’s key sectors:

Nobody wants to see businesses fail and people lose their jobs. However, keeping these zombie businesses afloat with ‘cheap money’ is akin to keeping Blockbuster afloat at the expense of Netflix. It is a delaying of the inevitable and standing in the way of more productive businesses and new and better jobs.

In January 2023, the economic reality is changing markedly as interest rates rise sharply and the last of the pandemic survival support pillars are being removed. Time appears to be up for many zombie businesses. Recent research by Allianz suggests insolvencies surged by 51% in 2022 and predicts them to rise even faster in 2023, growing a further 19%. While this will bring with it unwelcome headlines about job losses, many of these zombie companies need to die. If Britain is to address its post-Brexit position of being the only G7 nation not to get back to pre-pandemic growth levels, some economic bloodletting is needed, no matter how politically inconvenient that might be.

At Plimsoll, we believe that monitoring who among your key competitors are zombie companies and who are the innovative “unicorns” is essential The former will fail and free up capacity or the occasional hot M&A prospect. The latter will change the future of your market.

Plimsoll makes it easy to continually monitor both types of companies in your market and help you steer your own business away from trouble.

To see our up-to-date analysis and commentary on your company, your market and your key competitors, please visit www.plimsoll.co.uk