Companies make 2024 the year of cost reduction

Retailer Macy's said it will close five of its namesake stores and cut more than 2,300 jobs. JetBlue Airways and Spirit Airlines have offered to buy out staff, while United Airlines has reduced first-class meals on some of its shortest flights.

As consumers watch their wallets, companies have felt pressure from investors to do the same. Executives have sought to show shareholders that they are adjusting to consumer demand returning to typical patterns or even declining, as well as aggressively confronting rising expenses.

Airlines, automakers, media companies and packaging giant UPS are working to accommodate new labor contracts that have given raises to tens of thousands of workers and driven up costs.

In years past, companies could get away with passing on high costs to customers who were willing to splurge on everything from new appliances to beach vacations. Companies' pricing power has diminished, so executives are looking for other ways to manage the budget — or make more profits, said Gregory Daco, chief economist at EY.

“You're in an environment where cost fatigue is a big part of the equation for consumers and business leaders,” Daco said. “The cost of most everything is much higher than before the pandemic, whether that be goods, inputs, equipment, labor, and even interest rates.”

There are some exceptions to the recent wave of cost-cutting: For example, Walmart said last month that it would build or convert more than 150 stores over the next five years, along with investing more than $9 billion to modernize many of its existing stores. Stores.

Some companies, such as banks, have already made significant cuts. Five of the largest banks, including Wells Fargo and Goldman Sachs, have cut more than 20,000 jobs in 2023. Now, they are waiting for interest rate cuts by the Federal Reserve that would free up cash for pent-up mergers and acquisitions.

But the cost cuts unveiled even in just the first few weeks of the year are worth tens of thousands of jobs and billions of dollars. In January, US companies announced 82,307 job cuts, more than double the number in December, while still down 20% from a year ago, according to Challenger and Gray and Christmas.

The tightening of previous months has already begun to show in financial reports.

So far this earnings season, results indicate that companies have focused on increasing profits without the tailwinds of big price increases and sales growth.

As of mid-February, more than three-quarters of S&P 500 companies reported fourth-quarter results, with profits significantly outpacing revenues. Earnings for the quarter, measured by a group of S&P 500 companies, are on track to rise about 10%. However, revenues rose by a more modest 3.4%.

While companies' pursuit of higher profits is nothing new, they have made boosting their bottom line a priority this year.

The downsizing was reflected across the tech industry, with companies following in the footsteps of 2023's meta cutbacks, which many analysts credited with helping the social media giant recover from a difficult 2022. CEO Mark Zuckerberg has called 2023 a “year of efficiency” for the parent company. Facebook and Instagram, as they reduced the size of their workforces and pledged to continue their leaner approach.

In recent weeks, Amazon, Alphabet, Microsoft, and Cisco, among others, have announced staff cuts.

Layoffs in technology have not been contained. UPS will cut 12,000 jobs, saving the company $1 billion, CEO Carol Toomey said late last month, citing declining demand. Many of the largest retail, media and entertainment companies have also announced workforce reductions, among other reductions.

Warner Bros. Discovery is reducing content spending and headcount as part of the… 4 billion dollars In total cost savings from the Discovery and WarnerMedia merger. Disney initially promised to cut costs worth $5.5 billion in 2023, supported by layoffs of 7,000 employees. Since then, the company has increased its savings promises to $7.5 billion, and executives noted in its February 7 quarterly earnings report that may exceed This goal.

Last week, Paramount Global announced hundreds of layoffs in an effort to “operate like a leaner company and spend less,” according to CEO Bob Bakish. Comcast's NBCUniversal, the parent company of CNBC, did just that Jobs have also been eliminated recently.

JetBlue Airways, which has not made an annual profit since before the pandemic, is deferring about $2.5 billion in capital expenditures on new Airbus planes until the end of the decade, canceling unprofitable routes and redeploying planes as well as worker buyouts.

Delta Air Lines, a profitable carrier, said in November that it would cut some desk jobs, calling it a “minor adjustment.”

Some cuts even make their way to the front of the cabin. United Airlines, which also reported profits in 2023, said at the beginning of this year that it would offer first-class meals only on flights longer than 900 miles, up from 800 miles previously. “On flights between 301 and 900 miles, United First customers can expect an offering of a premium snack basket,” according to an internal post.

Many of the nation's largest automakers, such as General Motors and Ford Motor Co., have cut billions of dollars in spending by reducing or delaying investments in fully electric vehicles. U.S.-based companies and others, such as Netherlands-based Stellantis, have recently reduced headcount and payroll through voluntary buyouts or layoffs.

Even Chipotle, which reported an increase in traffic and sales at its restaurants in the last reported quarter, is seeking higher productivity by testing an avocado-scooping robot called Autocado, which reduces the time it takes to make guacamole. He's also testing another robot that can prepare burritos and salads. The robots, if expanded to other stores, could help cut costs by reducing food waste or reducing the number of workers needed for these tasks.

Industry experts have attributed some of the recent cuts to companies catching their breath — and taking a closer look at how they operate — after an unusual four-year period due to the pandemic and its fallout.

The past few years have been characterized by mismatches in supply and demand when it comes to goods, services and even workers, EY's Daco said.

Customers went on shopping sprees, fueled by government incentives and lower experience-related spending. Airlines saw demand disappear and then rise dramatically. Companies furloughed workers at the start of the pandemic and then struggled to fill jobs.

He said he expects companies this year to “look for balance.”

“You see rebalancing happening in labor markets, in capital markets,” he said. “This rebalancing process will continue and gradually lead to a more sustainable environment characterized by lower inflation, lower interest rates, and perhaps slightly slower growth.”

For example, the auto industry faced a supply problem for most of the Covid pandemic, but now it faces a potential demand problem. New vehicle inventories are soaring — surpassing 2.5 million units and a 71-day supply through the end of 2023, up 57% year over year, according to Cox Automotive — forcing automakers to offer more discounts in an effort to move cars and trucks off the dealer lot. .

Automakers are also facing slower-than-expected adoption of electric vehicles.

David Silverman, a retail analyst at Fitch Ratings, said companies are “feeling a little bit heavy as sales growth moderates and perhaps declines.”

Cost cuts at UPS, Hasbro and Levi's came on the heels of lower sales in the most recent fiscal quarter. Macy's, which reports earnings later this month, said it expects same-store sales to decline, and there is early evidence that might pay off: Consumers pulled back on spending in January, with retail sales falling 0.8%, more than economists had expected. According to the latest federal data.

Most major retailers, including Walmart, Target and Home Depot, will report earnings in the coming weeks.

Credit rating agency Fitch said it does not expect the US economy to head toward a recession, but it expects a continued decline in discretionary spending.

“Part of the companies' decision to reduce their expense structure is in line with their views that 2024 may not be a great year from a higher growth standpoint,” Silverman said.

In addition, companies had to find money to finance investments in newer technology such as infrastructure that supports e-commerce, a resilient supply chain or investments in artificial intelligence, he added.

Companies may have another reason to cut costs now, too. While they see other companies downsizing their workforces or budgets, there is safety in numbers.

Or as Silverman pointed out, “layoffs lead to layoffs.”

“When companies started advertising it, it became normal,” he said. “There's less stigma.”

Even with successive layoffs, the labor market remains strong, which may help explain why Wall Street has largely rewarded companies that have found areas to save and returned profits to shareholders.

For example, Meta shares nearly tripled in price in 2023 in that “efficiency year,” making the stock the second-best gainer in the S&P 500, behind only Nvidia. After laying off more than 20,000 workers in 2023, Meta on February 2 announced its first-ever dividend and said it had expanded the scope of its share buyback authorization by 2023. 50 billion dollars.

UPS, which is just coming off job cuts, said it would raise its quarterly dividend by a penny.

Overall, dividends paid by companies in the S&P 500 rose 5.05% last year, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, and he estimated they would likely rise about 5.3% this year.

— CNBC's Michael Wayland, Alex Sherman, Robert Hom, Amelia Lucas and Jonathan Vanian contributed to this story.

Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.