A Sign the Economy is Tilting Down: Look at Cost-Cutting
Want to know how companies achieve strong earnings growth despite a revenue collapse?
The answer: cost-cutting. (The terms vary on earnings calls. Maybe you’ve heard a few variations: operational efficiency, cost management, spending discipline, etc.)
How much business pain do companies feel Today?
The first place companies trim spending is on company perks and travel and entertainment (T&E).
Back in 2009, Cisco stopped providing employees free waters and canned soft drinks. It saved about $5 million in annual costs. This showed that Cisco was so desperate to find pockets of cost savings that even a small employee perk like water and canned soft drinks were fair game.
Growing Signs of Corporate Financial Stress
When companies need to get serious about cutting expenses the first place they target are the travel and entertainment budgets.
T&E cutbacks offer a lot of bang for the buck: pure cost with minimal impact on revenue generation.
As I reported recently, premium steak houses are a proxy for business dining.
Over 50% of premium steakhouse chain sales comes from business dining – typically sales people entertaining clients.
Premium steakhouse chains Ruth Chris and Del Frisco each reported in their most recent earnings call that business is slower because of a decrease in foot traffic.
This basically means corporate sales teams are being told to cut down on the steak dinners.
That was for business activity in the first half of the year. Now we are deep in the second half and the trend is just picking up. Once a company exhausts the benefits of reducing sales team expenditures (like steak dinners), they turn to overall T&E cuts.
Every department and team has some budget for quarterly get-togethers and team building. Team morale doesn’t stand a chance in the face of dwindling company profits.
As a sign of the steady pullbacks in corporate travel, on its recent earnings call, Marriott hotels reported that their Top 300 corporate clients reduced room bookings:
“Over the last three quarters, room sales of our nearly 300 largest corporate customers have gradually weakened from 4% growth year-over-year in the fourth quarter to 2% in the first quarter and less than 1% in the second quarter.”
Cutbacks are accelerating, especially with smaller businesses.
The Las Vegas Convention & Visitors Authority reported that the number of conferences and meetings in Las Vegas fell 24%. And overall attendance fell -5%.
Essentially small and medium business are stopping their get-togethers. That’s why the number of attendees fell less than the number of meetings: smaller meetings and conferences.
This is a lagging indicator on corporate cutbacks: Vegas meetings have to get scheduled months in advance.
First half (1H) cutbacks by big companies affected small business spending decisions that are finally showing up in the second half (2H).
That is to be expected: smaller businesses are the most affected by corporate cut-backs.
The pullback is sudden, not gradual: The year-to-date (YTD) number of Vegas conferences is up 5%.
KEY POINT: 2H revenues and profits are under pressure and companies are scrambling. What comes next: without a rise in revenues, the benefits of these cuts will be played out by the first quarter of 2016. Expect another round of layoffs.
Sincerely,
Andrew Zatlin
Editor of Moneyball Economics
P.S. I am now ranked 4th most accurate forecaster of Private Payrolls by Bloomberg. Here’s a screenshot of the rankings:
Over a two year period, I have consistently beaten almost every other forecaster: JP Morgan, Citibank, UBS, Credit Suisse…
One reason is better data because I develop my own data.
Another reason is that I have worked in the industry and know first-hand how companies translate business activity into staffing decisions.
Having strong understanding of payrolls means that I have a strong finger on the pulse of the economy.
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