Empirical Analysis of Corporate Growth  169 In addition to mapping median growth, Exhibit 9.7 also reveals that from the mid-1970s to 2017, at least one-quarter of all companies shrank in real terms almost every year. Thus, although most companies project healthy growth over the next years in their public communications or even analyst guidance, the reality is that many mature firms will shrink. This underlines the need to exercise caution before projecting strong growth for a valuation, especially for large companies in mature sectors. Exhibit 9.8 shows the distribution of three-year real revenue growth for two periods, 1997–2007 (before the 2008 financial crisis) and 2007–2017. Not surprisingly, the distribution became wider and shifted to the left in the latter period. From 2007 to 2017, almost two-thirds of companies in the sample grew at an annual real rate of less than 5 percent. Only 21 percent grew faster than 10 percent. (This includes the effect of acquisitions, so fewer companies grew faster than 10 percent just through organic growth.) Growth across Industries As Exhibit 9.1 illustrated, growth rates vary widely across and within in- dustries. In addition—unlike ROIC, where the industry ranking tends to be stable—the industry growth ranking varies significantly over time, as shown in Exhibit 9.9 for the decades 1997–2007 and 2007–2017. Some of the varia- tion is explained by structural factors, such as the saturation of markets (the declining growth in hotels and restaurants and in chemicals) or the effect of technological innovation in creating entirely new markets (the strong growth in biotechnology and information services). In other cases, growth is more cy- clical. Growth in the oil and gas sector varied from more than 10 percent in the first decade to just 1 percent over the past ten years, as oil prices plummeted after 2014. Similarly, the construction industry is subject to cycles, with growth Exhibit 9.8  Distribution of Growth Rates Revenue growth rate, inflation-adjusted Number of companies as % of total sample Revenue CAGR,1 % 5 10 15 20 25 30 35–40 30–35 25–30 20–25 1997–2007 2007–2017 15–20 5–10 10–15 0–5 –5–0 –10 – –5 <–10 >40 0 1 Compound annual growth rate. Source: Compustat; Corporate Performance Analytics by McKinsey. 170  Growth at much lower levels since the 2008 credit crisis. Telecommunications service providers enjoyed a burst of growth in the 2000s, when mobile phones became ubiquitous. But revenue growth rates over the past decade ended significantly lower due to strong price pressure. Despite this high degree of variation, some sectors have consistently been among the fastest growing, not only during the 30 years covered in this sample, but also for earlier periods. These include life sciences and technology, such as information services and software, technology hardware, pharmaceuticals, biotechnology, and health care, where demand has remained strong for three decades. Others, such as automobile parts, chemicals, and branded consumer goods, have consistently registered lower growth rates, as their markets had already reached maturity well before the 1990s. Exhibit 9.9  Volatile Growth by Industry 10-year revenue growth rate,1 industry median adjusted for inflation, % Automobiles and parts Branded consumer goods Materials and components Household durables Luxury goods and apparel Distribution and trading Utilities and power producers Machinery and equipment Technology hardware Pharmaceuticals Metals and mining 1997–2007 Industry Chemicals Commercial and professional services Transportation and logistics Industrial conglomerates Health-care equipment and supplies Telecommunication services Construction Hotels, restaurants, and leisure Retailing Aerospace and defense Media Information services and software Oil, gas, and consumable fuels Biotechnology 3.5 3.5 4.0 4.1 4.3 4.3 5.0 5.6 5.7 6.1 6.2 3.5 6.2 6.3 6.5 6.7 7.2 7.5 7.7 8.3 8.7 8.8 10.0 10.6 15.1 1.2 3.3 0.8 –0.4 2.0 3.6 –0.6 0.1 2.8 10.5 0.3 1.8 1.7 2.1 2.4 5.7 4.2 2.7 1.7 2.1 3.4 2.2 5.8 1.4 11.0 2007–2017 Airlines 1.4 6.3 1 Compound annual growth rate. Source: Compustat; Corporate Performance Analytics by McKinsey. Empirical Analysis of Corporate Growth  171 Sustaining Growth Understanding a company’s potential for growing revenues in the future is critical to valuation and strategy assessment. Yet developing reasonable pro- jections is a challenge, especially given the upward bias in growth expectations demonstrated by equity research analysts and the media. Research shows that analyst forecasts of one-year-out aggregate earnings growth for the S&P 500 are systematically overoptimistic, exceeding actual earnings growth by five percentage points or more.9 To put long-term corporate growth rates in their proper perspective, we analyzed historical rates of growth decay since 1963. Companies were seg- mented into five portfolios, depending on their growth rate in the year the portfolio was formed. Exhibit 9.10 plots how each portfolio’s median com- pany grows over time. As the exhibit shows, growth decays very quickly; high growth is not sustainable for the typical company. Within three years, the dif- ference across portfolios narrows considerably, and by year 5, the highest- growth portfolio outperforms the lowest-growth portfolio by less than five percentage points. Within ten years, this difference drops to less than two per- centage points. 9 See, for example, M. Goedhart, B. Raj, and A. Saxena, “Equity Analysts: Still Too Bullish,” McKinsey on Finance, no. 35 (Spring 2010): 14–17. Exhibit 9.10  Revenue Growth Decay Analysis Median growth of portfolios, by quintile,1 % –5 0 5 10 15 20 25 30 35 0 1 3 5 7 9 2 4 6 8 10 11 12 13 14 15 Number of years following portfolio formation 1 At year 0, companies are grouped into one of five portfolios, based on revenue growth. Source: Compustat; Corporate Performance Analytics by McKinsey.