Mobilizing Greater Philadelphia’s Middle Market

In the fall of 2016, McKinsey & Company was asked to collect and evaluate middle market data in the Philadelphia Region. Middle market is defined here as companies earning between $10M – $1B in annual revenue.

According to the Chamber of Commerce of Greater Philadelphia report (sponsors of the study), this segment accounts for 27% of the total employment in the region, despite accounting for only ~1% of companies.

The study suggests that for various reasons, the region is poised for healthy growth in the coming years. “The Greater Philadelphia Region is located in the center of the Washington-to-New York corridor, which represents over $2.6 trillion in disposable income…provid[ing] easy access to potential customers and consumers for middle market companies…In addition,…executives identified familiarity with the area and strength of higher education institutions as major factors in choosing to locate to the region.”

Over half of lower middle market firms surveyed expect revenue growth exceeding 10% over the next year. Despite the optimistic projections, there are some headwinds that executives will need to overcome.

Here are the six major themes that highlight the challenges middle market executives and their organizations will face moving forward.

1. STEM and Front-End Talent – Hiring qualified workers, especially in the engineering/research or operations is cited as a top challenge for executives. For smaller companies, engineering/tech, manufacturing and construction skills are also in high demand.
2. Sustaining Growth in Closely Held Companies – Two-thirds of privately held middle market companies are family-owned, and face a different set of issues than they did as a rapidly growing start-up. Chief among them is determining how and when to develop talent at the leadership level. “Any reluctance to expand control of their companies can lead to stunted growth, and in some cases, lead to an overall failure of the business.”
3. Access to Capital Needed for Growth – Despite the fact that 16% of lower middle market companies are concerned about access to capital, they do not seem to recognize what alternative sources are available, i.e. private equity. “Determining what private firm is a good fit is an opaque process, with no clear source for vetting.”
4. Business Climate – Despite recent tax incentives to offset the tax burden of operating in the region, companies find the regulatory process for attaining those tax incentives to be too cumbersome. “Business owners are frustrated by the non-electronic submission process, the delays and subsequent cost associated with compliance.” Despite the tax burden however, the overall cost of doing business in the region is competitive, offset by low real estate prices and high quality of life, particularly in the city. Also, considering proximity to the DC and New York markets.
5. Transportation Infrastructure – “The most common concern voiced was congestion in and around Philadelphia County, particularly…along I-76…. While the Philadelphia MSA has grown its millennial population faster than any other large cities, most of the middle market is located outside the city core…. This imbalance necessarily increases the traffic on I-76. However…. average delays on I-76 are less than half of the average of top congested roads for other MSAs.”
6. Industrial Hubs and Startup Pipeline – “Collocating and developing similar businesses in close proximity serves as an amplifying mechanism for attracting talent to the region.” Despite the regions assets and potential for developing health care and life sciences hubs, limited access to capital, and an inability to retain entrepreneurial successes, and insufficient marketing are seen as obstacles.

The Middle Market Study, Philadelphia outlines solutions and ways forward for each of these themes. If you own or operate a middle market business, this report provides information that should inform your strategies for the coming year.