New Economic Realities   //   January 2, 2024

How 2023 became the year of cost cutting for retailers

After years of focusing on scaling their business, retailers hit pause on growth ambitions and opted to trim away expenses.

Arts and crafts retailer Joann has been negotiating with suppliers in a range of categories to cut back on product costs. Amazon, on the other hand, opted to close a handful of distribution centers to save millions of dollars in their operations. Other retailers, such as Bark and CVS, cut back on their employee base in an effort to reduce expenses and drive more profitability. 

Pressuring suppliers, closing distribution centers and conducting layoffs were some of the most common ways retailers have been doing to reduce operating expenses this year. Just a few years ago, during the pandemic, retailers heavily invested in their operational capacity when people were spending frivolously. This year, those investments no longer have the retail sales to justify the cost as shoppers opted to spend money on experiences and essential items.

This trend has forced retailers to rethink their growth initiatives and focus instead on improving their profitability, said Matthew Katz, Managing Partner, SSA & Company, a global management consulting firm advising companies on strategic execution. “The things that we did to build capability and create new environments were costly and the shopping behaviors and patterns are continuing to evolve,” Katz said. “Retailers recognize that after years of capital investment, it was prudent to rethink the way they manage expenses.”

Retailers binged on expansion during the pandemic. In the second quarter of 2020, Amazon bumped up its capital expenditures by 48% and 34% in the third quarter — which mostly went to the expansion of its fulfillment and shipping capabilities, data from ADA Insights indicates. Its warehouse footprint scaled from 272 million square feet in 2019 to 525 million square feet at the end of 2021.

Similarly, CVS was on a hiring spree during the pandemic when it was preparing to roll out more Covid vaccines and testing had helped bring foot traffic to its business. In October 2020, CVS was aiming to immediately hire up to 15,000 employees to drive its investments in healthcare. While the company has not scaled back its healthcare push, it did cut about 5,000 corporate jobs to save costs.  

“Cost cutting implies that it was too high,” Katz said. “It’s an alignment of cost to sales realities. Retailers that are engaged in significant cost-cutting programs right now are doing so right now because their performance requires them to.”

Back in 2021 when pet ownership skyrocketed, Bark — the company behind the pet subscription business BarkBox — planned to create 500 jobs in four years in Columbus, Ohio. But in February this year, the company said that it laid off 12% of its workforce to save costs. The job cuts are part of the company’s goal to save $12 million per year. In its latest earnings report in November, Bark’s total revenue declined 14.4% to $123.0 million. 

Joann had recently raised its cost cutting target to $225 million from $200 million. As part of its effort to scale back costs, the retailer had been pushing negotiating vendor costs across all its product categories. In its third-quarter earnings report earlier this month, Joann posted a net loss of $21.6 million compared to $17.5 million the previous year. Its net sales declined 4.1% in the quarter, while comp sales declined 4.1%.

“The basic idea is to improve profitability. I mean, that’s a fundamental thing,” Kirthi Kalyanam, professor and executive director of the Retail Management Institute at Santa Clara University, said about the cost-cutting measures. “The market doesn’t reward growth for the sake of growth. The market is rewarding profit performance.” 

But when retailers choose to cut back on growth initiatives to focus on saving costs, they could be vulnerable against competitors who could swoop in and take their market share. When they cut back on product expenses or labor, customer satisfaction could take a nosedive. Closing warehouses could slow down order fulfillment. 

“If the retailers don’t have a strategy to compete and invest, I think they’re gonna run into risk factors,” Kalyanam said. Kalyanam added that the state of the economy next year could dictate whether this cost-cutting trend continues.