The time when any business could rely on pent-up demand following a pandemic to produce results is long gone. Airlines, hotels, casinos, credit card companies, and select restaurants are just a few of the sectors that continue to profit from this. Price increases are still a possibility as businesses look for methods to protect their margins and address demand difficulties, at least for those who concentrate on the core consumer basket.
Double-digit price increases have boosted earnings for major brands, even as they have reduced demand elasticity. Just take a look at a few of the businesses whose prices have increased but whose volume has decreased in the most recent quarter:
ConAgra: Volumes down 8%, prices up 17%
Kraft Heinz: 15% price increase, 5% volume decrease
Clorox: 14% price increase, 10% volume decrease
Colgate-Palmolive: 13% price increase, 4% volume decrease
Coca-Cola: Volumes down 1%, prices up 12%
Procter & Gamble: Volumes down 6%, prices up 10%
But consumer bellwethers’ predictions are becoming more cautious. Both Walmart and Home Depot issued warnings about an impending harsher year on Monday. And that warning came as S&P 500 companies’ earnings turned out to be at their poorest level since the third quarter of 2020, falling 2.8% year over year thus far this season. According to research by Tajinder Dhillon of Refinitiv, earnings have only exceeded projections by 1.6% on occasion, which is the narrowest margin in 15 years. The lowest beat percentage in eight years, only two-thirds (67%) of the companies that have reported have exceeded earnings projections. And that’s even after predictions were drastically reduced in the weeks and months before earnings season, resulting in a pitiful beat rate even with an extremely low bar.
Recession clouds have returned over the economy, according to the most recent assessment of the Fed, which suggests that it may not lower rates quite as soon as the market had thought. This means that maintaining margins and profitability necessitates a closer examination of expenditure, not just from consumers but also from within the company.
Expense reductions are becoming more and more crucial to the profitability of businesses. This was evident during the initial stages of the epidemic, when demand vanished and economies all around the world collapsed. Businesses became leaner. They became more effective. They had to decide on some difficult options. It is once more taking place as businesses prepare for a potential recession and demand is dwindling.
Reducing the workforce is an apparent approach to save expenses. In recent weeks, leading up to and during current earnings season, we have witnessed numerous examples of this, from Disney under activist pressure to the nation’s main banks to the headline-grabbing layoffs in the tech industry. Nevertheless, laying off employees isn’t the only or necessarily the best strategy for businesses to reduce costs, especially in a labor market that’s tight.
Companies are looking for ways to streamline operations and provide the public with better results, from marketing expenses to adjusting capex plans. We have observable instances from other businesses that demonstrate the significance of general cost reductions throughout this earnings season.
Although though revenue was only marginally over predictions, Airbnb’s earnings per share more than twice Wall Street expectations. Since the business had difficulties with both bookings and rates, controlling expenditures was essential. Although costs and expenses increased by 14% during the quarter, revenue increased by 24%, allowing for what the business called “substantial margin expansion.” Of course, when the pandemic struck, Airbnb was among the first businesses to reduce expenses. The business’s management claims that the change is now becoming permanent: “We made several challenging decisions to cut our spending, making us a smaller and more focused organization, and we’ve kept this discipline ever since.”
Source (CNBC)
