private performers

The Mighty Mittelstand

Dieter Morszeck - CEO - RIMOWA GmbH
Dieter Morszeck, CEO of Rimowa.
  • Why it matters

    Why it matters

    Germany’s highly specialized, family-owned companies are thriving thanks to the quality of their products and strong domestic demand but they need to keep an eye on opportunities for growth overseas to maintain profits.

  • Facts


    • The German Mittelstand refers to a group of 3 million small- and medium-sized private businesses.
    • A report  based on balance sheet data of 300,000 of these companies shows the sector is thriving.
    • Since 2003, the private firms more than doubled their operations’ profit, with an increase of 128 percent. DAX companies increased 97 percent.
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Germany’s economic fortune is built on the Mittelstand: a collective noun for its millions of small- and medium-sized businesses.

The companies may be privately held, but they are often household names. Take the example of luxury luggage manufacturer Rimowa, which increased its profits by 70 percent annually in the past five years.

But the sector is hard to assess as, unlike the 547 listed companies on the DAX, the 3 million private German companies and partnerships don’t publish their balance sheets.

But now Handelsblatt has received a copy of a report produced by the German Savings Bank Association (DSGV) based on 300,000 corporate customers. German savings banks, or Sparkasse, are the main lenders to the medium-sized private business sector, and, without breaching customer confidentiality, they have managed to compile data that provides insight into 34 different relevant indicators from the balance sheets of private companies.

In the long run the Mittelstand’s top performers will only be successful if they focus not only on the German consumers, but also further afield on emerging economies.

The bank figures vividly illustrate the metrics of the many secretive family, partnerships, small and large medium-sized business and show that they actually often perform better than listed companies.

In the last fiscal year, the mid-sized companies managed, on average, profit margins of 7.3 percent. By contrast, the 110 largest German companies on DAX, MDAX, TecDAX and SDAX exchanges only managed a margin of 6.3 percent, based on Handelsblatt calculations. In the long term, the private companies performed better. Since 2003, the surveyed 300,000 firms more than doubled their profit from operations, with an increase of 128 percent. During the same period, the major DAX companies recorded an increase of 97 percent.

DSGV accounting expert Sebastian Kral said that “like 2014, 2015 was a very successful year.” All relevant indicators of Mittelstand companies had improved. With an average equity ratio of 25 percent, the sector never looked so good.  Back in 2000 it was only between 3 and 4 percent.

These small and medium-sized companies are thriving because they rely mainly on Germany’s robust economy. The International Monetary Fund states that “strong domestic demand compensates for weak demand from abroad.” By contrast, publicly traded companies suffer from crises in important markets such as Russia, parts of southern Europe and South America, and from the end of the boom in China.

Looking back at longer term trends, since 2003, when the world fell into a recession after the bursting of the technology bubble and the terrorist attacks on the World Trade Center in the United States, many private companies have performed better than larger, publicly traded companies. This is true whether one looks just at earnings or the much more important rate of return, i.e. the ratio between gross sales and net revenue, and can also be seen in stronger earnings growth and higher profitability.

17 p04 Strong, Stable Private Companies in Germany-01

Such long-term data underscores what is seen in the healthy German economy. While the data can conceal outliers on both ends of the spectrum, it’s still remarkable that one in six private companies were highly profitable last year with profit margins of about 20 percent. Not one of the 30 largest listed companies on the DAX can boast such successful results.

The key to such profitability often lies with the fact that the companies face limited competition and can keep both prices and margins high. The headphone and microphone specialist Sennheiser in Wedemark, Lower Saxony, for example, is a market leader. It makes the world’s most expensive set of headphones. A pair of Orpheus headphones cost €50,000 ($56,573), The family business was founded in 1945 by Fritz Sennheiser and is still run by his grandsons Andreas and Daniel Sennheiser. Today it provides virtually all microphones for New York City’s Broadway performances. Pilots, singers and DJs, and organisers of huge events such as the Eurovision Song Contest have huge trust in the company, 

“Great products are only successful if they also have a soul,” Fritz Sennheiser’s son Jörg told Handelsblatt recently. In other words, even in a globalized market, high prices can still be maintained as long as users trust the products.

Businesses improved in virtually all industries – with the exception of automakers and agriculture – in the last year, boosted by domestic demand. And the IMF and markets generally have stopped seeing reliance on domestic growth as a weakness for companies.

Consumption has grown recently, thanks to strong wage growth over the past two years, lower and lower interest costs due to the expansionary monetary policy and especially cheap energy, including lower heating and fuel costs.

The expenditure effect, which the European Central Bank and its president, Mario Draghi, have long pinned their hopes on, seems to be taking place. The expenditure effect can also be seen in the many balance sheets of the 400 savings banks in Germany.

Mr. Kral said that the willingness to spend “mainly profited traditionally low-return sectors such as retail, construction and the restaurant industry.”

In 2015, for example, the construction sector increased its profitability from 4.6 to 5.8 percent, on the back of a property boom and more expensive new building prices given the low construction interest rates. The retail sector increased its profitability from 2 to 2.9 percent. And the chronically cash-strapped restaurant industry made the leap out of the red. After a negative 2014 with an average margin of minus 0.4 percent, in the past year the sector saw at least two cents profit left over from every euro spent.

The Mittelstand’s top performers will only be successful if they focus not only on the German consumers, but also further afield on emerging economies.

In the long run, however, the Mittelstand’s top performers will only be successful if they focus not only on the German consumers, but also further afield on emerging economies. The same principles apply to companies on the stock exchange. Analysis by the Munich Strategy Group of 3,200 Mittelstand companies found that profitable, high-margin small- and medium-sized companies make a significant portion of their sales abroad and concentrate on the typical growth markets. This is what machine builder Strama-MPS does through its subsidiaries in Brazil, China, India, South Korea and many other emerging markets. The Straubinger group of companies, with more than 1,000 employees worldwide, supplies industrial companies like Siemens and Thyssen-Krupp and the large carmakers BMW, Daimler and VW with systems, onboard technology and electronics.

But just as with larger, publicly traded companies, not all are successful. Of the Mittelstand, 22.6 percent generated a margin of less than one percent in the past year. The most striking weakness of such “low performers” was inadequate positioning outside the saturated European markets.

These companies tend to stay away from the public with their rather unpleasant balance sheet results. Only large studies with broad data results can show us the scale of the trouble. Almost every fourth German company earned not even one cent on the euro. And so it’s the many high-profit and high-margin companies that have made the German Mittelstand companies come out ahead of the DAX-listed corporations.


Ulf Sommer reports for Handelsblatt on companies and financial markets. To contact the author:

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