Companies lean more on cost savings amid persistent inflation

Inflation, at 8.3% in April, is at a nearly 40-year high and companies are being squeezed by snoring in global supply chains, high commodity prices and a tight labor market. Meanwhile, consumer sentiment has deteriorated in recent months as prices for everything from gas to groceries have risen and demand for big-ticket products has picked up. with mattress And tools, have become softer.

According to data provider S&P Global Market Intelligence, the operating expenses of 442 businesses in U.S. investment-grade non-financial companies—all in all—increased 23% from a year ago to a total of $2.75 trillion during the fourth quarter. According to S&P, those companies spent 83.5% of their total revenue on operating expenses during the quarter, the highest level in a year. The increase reflected rising costs for wages, energy, inventory and rent.

Companies may soon be the ones to respond to rising costs with higher prices. Participate in resistance from inflation-weary consumers, Once that happens, companies typically look more toward efficiency improvements or cost savings to maintain their profit margins and meet the guidance provided to investors, said Michael Herrick, a partner at the consulting firm Bain & Co. “Eventually you come to that tipping point,” he said.

Twenty percent of CFOs and their representatives, including vice presidents of finance, plan to cut costs from July during the next three months in response to inflation.

gartner,

Which in May surveyed finance executives at more than 180 companies with annual revenues ranging from about $500 million to $100 billion. Gartner said that number could almost double in the fourth quarter if inflation remains at current levels.

Corporate advisors said that while companies made emergency, across-the-board spending cuts in the early days of the pandemic, they are now taking less drastic measures aimed at providing long-term savings.

Companies’ earnings results are starting to show pressure on profits

target Corporation

And

walmart Inc.

—two of the country’s largest retailers—both reporting lower-than-expected earnings. Target said earlier this month that it would absorb Higher costs for freight and fuel Instead of giving to customers. Walmart also said increased cost ate into its fiscal first-quarter profits, and that it expects to ease some of the pressure through supplier talks.

Business including restaurant chain franchise

Dine Brands Global Inc.

and retailers

container store group Inc.

And

1-800-Flowers.com Inc.

Have identified or implemented cost savings and want to streamline their operations through both major and minor changes. Some want to reduce delivery costs or invest in automation. Others are looking at more mundane changes, such as installing energy-efficient lightbulbs or upgrading telephone systems.

“Companies are starting to compile a list of levers they can pull,” said Alexander Bant, head of finance research at advisory firm Gartner Inc. While most companies have not yet adopted large-scale cost-cutting plans, many are blueprinting the potential savings they can achieve in areas such as marketing, sales and real estate, Mr Bunt said.

Glendale, Calif.-based Dine Brands, which owns the Applebee’s and IHOP brands, has compiled a list of 140 ideas to cut costs with the help of a brand-specific task force that includes suppliers, distributors, franchisees and members of its operations team. Are included. , Chief Financial Officer Vance Chang said. The groups were set up years ago, but their work was suspended in 2020 and 2021 as Dine Brands focused on navigating the pandemic.

Ideas the company came up with: Experimenting with robots to serve guests or operate a deep fryer. Others include asking your employees to take orders and install energy-saving lightbulbs on tablets, Mr. Chang said. Dine Brands operates as a franchise, meaning that individual restaurant owners make many of their own financial decisions.

In the last quarter, Dine Brands franchisees have increased prices between 5% and 8% on an average. Mr Chang said the price hike is large enough to offset a roughly 20% increase in food prices. “Pricing doesn’t happen in a vacuum,” he said. The company’s net income during the first quarter declined 3% compared to a year ago to $24.3 million.

Jody Foldesi, managing director and senior partner at Boston Consulting Group, said companies reinstated many of the expenses that ended during the spring of 2020, as the economy recovered from the economic turmoil caused by the pandemic. Foldesi said companies looking to offset inflation today are focused on implementing existing plans to improve long-term efficiency or reduce discretionary spending such as travel or software.

1-800-Flowers said it aims to cut its labor and transportation costs, including investing in automation. The company, which sells gifts that include chocolate-covered strawberries and flowers, is looking at ways to shorten the delivery distance so that it can qualify for next-day ground shipping, which is cheaper than next-day air shipping. , according to Bill Shea, the company’s CFO.

Mr. Xi expects shipping costs to remain high in the near future. “It’s really a big operational play to save on labor and shipping rates,” Mr. Xi said.

1-800-Flowers net revenue fell 1% to $469.6 million during the quarter ended March 27, Mr. Shea said. The company reported a net loss of $23.4 million, compared to a profit of $1.4 million a year ago. Its average ticket price increased by about 10% due to price increases and a shift toward higher-priced goods, Mr. Xi said.

Many companies have annual cost savings programs that are independent of how the economy is doing.

perkin elmer Inc.,

which manufactures scientific instruments, is an ongoing initiative to improve productivity and lower costs in areas such as product rollout. CFO Jamie Mock said the Waltham, Mass.-based business has also taken steps to find new savings by consolidating its packages, which reduce transportation costs.

Meanwhile, Texas-based container store Coppell said it is changing the way delivery trucks unpack, which frees up staff, and is upgrading its phone system, which has improved customer service, the finance chief said. According to Jeff Miller. Net sales at The Container Store fell 3% to $305.5 million during the quarter ended April 2.

The company has also changed its strategy for promotion over the past year, rewarding customers for buying more rather than cutting them out entirely. This resulted in lower than average promotion overall and higher than average ticket prices, Mr. Miller said. He declined to say how much the company has raised prices or how much cost savings it has made.

—Nina Trentman contributed to this article.

write to Kristin Broughton et kristin.broughton@wsj.com