The Economic Shift: Companies Focus on Cost-Cutting Amidst Weakening Demand
In a significant shift from recent years, consumers have slowed the pace of spending and are becoming more price-sensitive, leading to a fading tailwind of profits from price hikes for corporate revenues. Facing weakening demand, easing inflation, and increased supply, several sectors are now looking for ways to find profit growth without relying on price increases.
One of the main strategies across industries has been cutting costs, whether through layoffs, buyouts, or simply becoming more efficient. Executives have spent the past several weeks presenting these cost-cutting plans to Wall Street.
For example, Nike recently lowered its annual sales growth forecast and announced plans to cut costs by $2 billion over the next three years. Similarly, Spirit Airlines, impacted by a slowdown in domestic bookings and increased costs, offered salaried workers buyouts. Toymaker Hasbro also announced layoffs of 1,100 employees due to lackluster toy sales.
“I think companies are better at controlling costs than maintaining pricing power,” said David Kelly, chief global strategist at J.P. Morgan Asset Management. “Goods companies don’t have the pricing power they did in the pandemic, and some in the hotel and travel industries don’t have the pricing power they did in the immediate post-Covid.”
According to FactSet, sales growth for companies in the S&P 500 is on track to average 2.7% this year, down from an average of 11% growth in 2022. Net margins are forecast to slightly fall year over year to 11.6% from 11.9%.
Despite a weaker sales forecast, FedEx maintained its adjusted earnings outlook for its fiscal year that ends May 31, after announcing cost-cutting measures last year.
While consumer spending has remained resilient, growth is slowing. According to the Mastercard SpendingPulse survey, holiday retail spending rose 3.1% from November 1 through December 24 of this year, compared to a 7.6% increase in the same period in 2022.
The drag in spending is not affecting all industries equally. Restaurant spending rose 7.8% during the holiday period, while spending on jewelry and electronics fell.
Airlines have seen robust demand for summer travel following pandemic halts, but fares are dropping compared to 2022 as capacity constraints ease. Auto manufacturers are also losing pricing power after record profits due to resilient demand and low vehicle supplies.
Consumers are pushing back on some prices, forcing companies to cut costs and focus on better strategy shifts.
While the future may pose challenges for companies to push price increases on consumers, analysts remain hopeful about earnings next year. FactSet data shows analysts expect a 6.6% increase in earnings of S&P 500 companies in the first quarter of 2024. Net margins are expected to expand to 11.8%.
Overall, companies are expected to focus on cost-cutting and evaluating their strategies to maintain profitability amidst weaker demand and price-sensitive consumers.