Corporate America is on a mission to cut costs this year, with companies across various sectors announcing layoffs and other measures to slash expenses. Even profitable companies like Mattel, PayPal, Cisco, Nike, Estée Lauder, and Levi Strauss have implemented job cuts in recent weeks. The pressure to reduce costs comes as consumers tighten their wallets and investors demand that companies adjust to changing consumer demand and counter rising expenses.
In the past, businesses could pass on higher costs to customers who were willing to spend on luxury items. However, businesses’ pricing power has diminished, prompting executives to find alternative ways to manage their budgets and increase profits. Gregory Daco, chief economist for EY, explains that cost fatigue is a significant factor for both consumers and business leaders. The cost of goods, inputs, equipment, labor, and even interest rates has significantly increased since the pandemic.
While many companies are focused on cutting costs, some exceptions exist. Walmart, for example, plans to build or convert over 150 stores in the next five years and invest more than $9 billion in modernizing its current stores. Additionally, some companies, such as banks, have already made substantial cuts. Wells Fargo and Goldman Sachs eliminated over 20,000 jobs in 2023 and are now awaiting interest rate cuts by the Federal Reserve to free up cash for mergers and acquisitions.
Despite the exceptions, the cost-cutting wave has resulted in tens of thousands of job cuts and billions of dollars in savings. In January alone, US companies announced 82,307 job cuts, more than double the number in December. However, this figure is still down 20% from the previous year. The impact of these cost reductions is already evident in financial reports. While earnings have risen nearly 10% for S&P 500 companies in the fourth quarter, revenue growth has been more modest at 3.4%.
The cost-cutting measures have affected various industries, including the tech industry, where companies like Amazon, Alphabet, Microsoft, and Cisco have announced layoffs. The trend has extended beyond tech, with companies like UPS, Warner Bros. Discovery, Disney, Paramount Global, and Comcast’s NBCUniversal also implementing workforce reductions. Even airlines like JetBlue Airways and United Airlines have made cuts, including reducing first-class meals on shorter flights.
Automakers like General Motors and Ford Motor have reduced spending on electric vehicles and implemented voluntary buyouts or layoffs. Even Chipotle, which reported increased foot traffic and sales, is testing robots to increase productivity and reduce costs.
Industry experts attribute these cost-cutting measures to companies reassessing their operations after a challenging four-year period due to the pandemic and its aftermath. There has been a mismatch in supply and demand for goods, services, and workers. Customers went on shopping sprees fueled by government stimulus, while airlines experienced a sudden drop and then a surge in demand. Companies initially furloughed workers but struggled to fill jobs later on.
David Silverman, a retail analyst at Fitch Ratings, suggests that companies are feeling the weight of moderating or declining sales growth. Cost cuts at companies like UPS, Hasbro, and Levi Strauss followed sales declines in the most recent fiscal quarter. Fitch expects a continued pullback in discretionary spending but does not anticipate a recession.
Companies are also cutting costs to fund investments in newer technologies such as e-commerce infrastructure, resilient supply chains, and artificial intelligence. The normalization of layoffs has made it easier for companies to implement cost-cutting measures without facing significant backlash.
Despite the cost-cutting measures, the labor market remains strong, which may explain why Wall Street has rewarded companies that have found ways to save and returned profits to shareholders. For example, Meta’s stock price almost tripled in 2023 after implementing job cuts and announcing its first-ever dividend. UPS also raised its quarterly dividend after job cuts.
Overall, Corporate America’s cost-cutting wave is driven by the need to adapt to changing consumer demand, counter rising expenses, and increase profitability. While some exceptions exist, the trend has resulted in significant job cuts and billions of dollars in savings. As companies search for an equilibrium and reassess their operations, the focus on cost reduction is likely to continue throughout the year.