A common response by companies to high inflation and rising interest rates is consumer price increases. But CFOs are leaning more towards cutting costs if high inflation persists.
Gartner recently asked 182 CFOs and senior finance leaders about their plans. About 54% said that price hikes remain their top method for now, according to the report. However, if high inflation remains in Q4 of 2022, just 25% said they expect to rely on price hikes. Meanwhile, currently 20% said they’re relying on cutting costs, but that percentage grew to 39% if inflation is high in Q4.
“Tell me when CFOs shouldn’t be concerned about costs. And I’ll tell you that you’ve got a CFO that isn’t doing his or her job,” Lawrence Harris, professor at the USC Marshall School of Business, told me.
I asked Harris, a former chief economist with the U.S. Securities and Exchange Commission, if he thinks cost cutting will continue to pick up steam. He said it won’t be the same across the board.
“If you are in a business where you’re going to start getting pinched because people are going to use you less because of the rise of interest rates by the Fed, you’ve got to cut costs,” Harris explains.
But, “if a company’s factor prices (labor or physical capital) are rising slower than their output prices, and they’re making a ton of money, like the oil companies, they’re not going to think about containing costs right now,” he says. “They’re going to be thinking, ‘How can I produce more so I can get, for a period, these super prices?’”
Harris continues, “On the flip side, you’ve got the Target story that we saw yesterday, which is their labor costs are going up very quickly. And while they’ve undoubtedly have been raising their product prices, if they’re selling to people who are starting to get squeezed, then Target is going to be in trouble.”
During this time when inflation is at a 40-year high, the central bank may continue to increase interest rates until prices begin to fall back to sustainable levels. “We will go until we feel like we are at a place where we can say, yes, financial conditions are in an appropriate place. We see inflation coming down,” Federal Reserve Chair Jerome Powell told the Wall Street Journal on Tuesday.
When a company does decide to cut costs, it usually starts with discretionary expenses, Jason Schloetzer, associate professor at Georgetown University’s McDonough School of Business, told me.
“Things like business travel, employee training, maybe some advertising, repairs, postponing maintenance, maybe postponing a capital expenditure, some of those kind of tactics are pretty common,” Schloetzer says.
“And the kind of email that a CFO sends out in the middle of the year, where they just take a haircut off of everybody’s budget that’s a cost center—a department that just creates cost and doesn’t bring in revenue,” Schloetzer explains. “I can imagine some of those emails being sent down where everybody gets a 5% or 10% or maybe 15% reduction in their in their budget this year.”
But in some cases, there are companies choosing layoffs, such as Netflix, in a cutback after subscriber loss. “Our slowing revenue growth means we are also having to slow our cost growth as a company,” Netflix said in an emailed statement to Fortune. “So sadly, we are letting around 150 employees go today, mostly U.S.-based.”
Will layoffs and hiring freezes become more commonplace? “I think after the pandemic, in particular, companies realized it’s not always that easy to just hire people back when they want them,” Schloetzer said. “So, I think you’ll see some stickiness where management will want to hang on to talent for a little while. I think it would take some time for layoffs to begin on a large scale.”
However, “if you don’t see layoffs happening, you could see positions going on unfilled,” he says. “That would be the first natural step.”
Schloetzer continues, “For instance, if you go to your local restaurant, you might notice that the tables are a little dirtier than usual, or maybe the trash is overflowing a little bit,” he says. Some of that is when businesses “draw back on some services as a way to reduce costs.”
Have a great weekend. See you on Monday.
Amid inflation and strained global supply chains, consumer discretionary stocks (nonessential goods and services) are the "worst-performing sector of the S&P 500 index this year," S&P Global Market Intelligence data found. On May 18, the sector fell 6.6%, which is the largest decline since mid-March of 2020, "when fears of COVID-19 impacts created a sell-off," according to the report. The S&P 500 consumer discretionary sector has fallen 21% in the past month, compared to the 10.7% decline the broad S&P 500 index has seen.
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Some notable moves this week:
Liz Brittain was named CFO at Foursquare, a technology company, effective May 16. She brings more than 30 years of experience to the role. Prior to joining Foursquare, Brittain most recently served as CFO at HackerOne, where she led financial and business operations at the security start-up. Before that, Brittain was CFO of Base CRM, where she helped navigate the company’s sale to Zendesk in 2018. She was also previously VP of financial planning and analysis at Fusion.
Franklin Byrd will be resigning his role as CFO at Intrusion Inc., effective May 30. Intrusion (Nasdaq:INTZ), is a cyberattack prevention solutions company. The company will initiate a search for Byrd’s successor, and he has agreed to support the Intrusion through this transition. Byrd’s departure is “not based on any disagreement with the company’s strategy, or any irregularities in the company’s accounting principles or financial statement disclosures,” according to Intrusion.
Michael LaCerda was named CFO at Tusk Venture Partners, which invests in early-stage consumer technology startups. LaCerda brings more than 15 years of experience in alternative asset management finance from his time at BlackRock, Blackstone and KKR. Tusk Venture Partners has closed its third flagship fund with $140 million in commitments.
Kari Moore was named CFO at JenaValve Technology, Inc., effective May 10. Moore joins JenaValve after most recently serving as the chief accounting officer of Envista Holdings Corporation. Prior to joining Envista Holdings Corporation, Moore was the chief accounting officer at Applied Medical Corporation. She began her career at PricewaterhouseCoopers.
Sean O’Neil was named EVP and CFO at Ocwen Financial Corporation (NYSE: OCN), a non-bank mortgage servicer, effective June 13. O’Neil joins Ocwen from Bayview Asset Management, LLC, where he served as the company’s CFO since 2015. Prior roles include, serving as group financial officer for Wells Fargo, Eastern Community Bank and as CFO for Wachovia’s Wealth Management Group.
Laurie Stelzer was named CFO at Mirati Therapeutics, Inc. (Nasdaq: MRTX), a clinical-stage targeted oncology company, effective May 16. Stelzer joins the company most recently from Arena Pharmaceuticals, Inc., where she served as EVP and CFO since 2020. Prior to joining Arena, she was the CFO at Halozyme Therapeutics. Stelzer has also held senior management roles at Shire Plc.
"The latest housing data shows that this sector is the most vulnerable to the rising rates environment with the growing prospect of a slowdown and potential correction in coming quarters."
—ING's chief international economist James Knightley wrote in a recent note, as reported by Yahoo Finance.
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