What To Watch Next In The Layoff Cycle

In late 2021, laggard companies like Peloton were the leading indicators of deeper trouble to come. Businesses that are already in trouble are the first to respond to changing market conditions. This month, new companies are providing a glimpse of what’s likely to come next.

Peloton revealed the mistakes many other companies made, but their financial and investor situation forced them to do it first. They had over-hired and would reduce headcount in response to changing economic conditions. Inventory ballooned as customer demand shifted post-pandemic.

By Spring 2022, unprofitable startups and anyone touching the ad market were making similar statements. Fall brought a tidal wave of tech layoffs. Meta was the first MAANG name to cut back on staff. This month has seen the cycle spread to Google, Amazon, and Microsoft.

Growing Signs That This Isn’t Isolated To Tech

McDonald’s, Wendy’s, and Burger King are all restructuring to keep expenses down. Burger King plans to increase spending on their marketing and store redevelopment. They will likely offset those investments with corporate job cuts. McDonald’s and Wendy’s have already announced their efforts to do that.

Fast food restaurants typically do well in a recession, so I’m paying attention to this as a sign of things to come. The prospects for all three businesses are strong, so their reasons for laying people off will likely impact most companies in the coming months.

First, they are shifting where they allocate their money. Burger King and Wendy’s were experimenting with new restaurant formats. Those initiatives have been scrapped in favor of refocusing on core business and proven methods to drive growth.

More people will look for deals at fast food restaurants, and demand will grow in the next 12 months. All three chains want to capture as much of that demand as possible using 2 levers, restaurant development, and marketing. Spending more in one area must be offset by cutting back on more speculative growth bets.

The restructuring and cutbacks are a flight to safety. What’s telling is that businesses benefitting from tailwinds and expecting increased demand are cutting staff. Rather than continuing their long-term growth initiatives in tandem with proven approaches, they have decided to reallocate and go all in on what’s worked in the past.

What Started In Fast Food

Many other companies are making the same decisions for different reasons. Faced with the prospect of decreasing demand, companies are also cutting long-term growth initiatives. Instead of reallocating the budget elsewhere, they are using layoffs to balance rising costs and slowing sales.

J&J was the first major brand that caught my attention with its plans to reduce costs. This week, 3M and Newell both announced similar moves. These companies have made it through the worst of the inflationary cycle. The decision to cut back now is due to slowing demand rather than an attempt to offset inflation.

These are the first of many and a signal that traditional businesses will reduce staff this year. However, these cuts don’t seem to be as deep as the ones playing out in tech. 20% and up is the standard reduction in headcount for startups. Traditional businesses are usually under 10%, with some closer to 5%.

While this layoff cycle will play out on a broader scale, the impacts will be much narrower at each company. It’s a familiar cycle for people outside of tech, and this won’t feel as dramatic except in the worst-case scenario.

Bed Bath and Beyond is my newest Peloton. They have struggled for years, and this downturn is likely the end of their story. Like McDonald’s, they dropped their Chief Transformation Officer. For BBBY, it’s a sign that they are ending transformation initiatives, whereas McDonald’s is only cutting back to reallocate the budget.

I see BBBY as the first of many embattled businesses that won’t survive the downturn. In the next 3 months, more of them will file for bankruptcy protection or seek a buyer. The easy money cycle has helped many struggling businesses hang on longer than they should have. Those businesses can’t operate without frequent cash infusions and those days are over now.

How many businesses fail is a function of the depth and duration of this downturn. As I’ve been saying since last Spring, the consensus is 18 months of near 0 growth. That means we should see the leading recovery indicators by the end of this year and early 2024. Growth won’t be anywhere near as easy as it has been since 2012, but the macro headwinds will die down. We will see a more sensible and sustainable growth trajectory return in 2024.

And That’s When It Gets REALLY Bad

It sounds like a rosy outlook with moderate impacts, but the way companies are cutting costs steals from their futures to finance today. The cuts to transformation initiatives and long-term growth will come back to haunt most companies. The budget shuffling couldn’t come at a worse time.

Companies that invest in efficient growth will be the best positioned coming out of this relatively short downturn. Like tech over-hired and missed the obvious signs of a downturn, traditional businesses are overcorrecting and ignoring the obvious signs of disruption. With the rate of change today, a company can only fall so far behind before it cannot catch back up.

Over the last 10 years, businesses have been able to spend their way back to parity with more innovative competitors. The Federal Reserve is signaling that interest rates will remain high for a prolonged period. Money will not flood in to save struggling laggards for at least 48 months. If they cut too much or don’t reallocate funds to long-term initiatives soon enough, they will fall into a death spiral.

They will get beaten on two fronts. Competitors that continue to transform will be more efficient. Competitors that invest in modernizing their product lines with targeted bets on innovative features will have offerings that meet higher customer expectations and changing preferences.

Companies that look for efficient innovation and transformation will have better offerings and higher margins. They’ll maintain pricing power, while competitors who have fallen behind will see customers leave and margins decline. They won’t have the resources to spend their way back into the market.

It’s an excellent time for companies to reevaluate their transformation initiatives because there is a lot of fat to trim from the budget. Small investments in tools can go a long way to reducing transformation costs. Infrastructure consolidation can save some businesses as much as layoffs will. There are a lot of inefficiencies operating under the surface.

When businesses get serious about efficient innovation, strategy comes to the front. Developing a data and AI strategy reveals efficient growth opportunities. This also helps the company choose an innovation mix that fits its opportunity and risk profiles. Embracing incremental innovation and self-sustaining transformation principles pulls returns forward. It doesn’t make sense to wait 2+ years for breakeven.

Efficiency is a positive area of focus for our field, but many businesses are overcorrecting. That trend is the one I’m most worried about. This downturn is hiding a more profound challenge behind it.