Layoffs are coming as companies focus on profitability

The news: A wave of cost-cutting measures, including layoffs and job freezes, is hitting the retail sector.

  • The announcements are coming amid signs of softening consumer demand; April US general merchandise unit sales were 7% lower than a year ago, creating a 1% decline in sales revenue, according to The NPD Group.
  • The situation has driven retail companies—including GoPuff, Peloton, Thrasio, and Reef—and other tech companies to rethink their staffing levels as the changing economic conditions force them to shift focus to turning a profit.

How we got here: With consumers flush with cash thanks to fewer ways to spend their money and an influx of stimulus cash, many retail and tech companies experienced a huge boom earlier in the pandemic that drove them to rapidly add staff to keep up with demand.

  • Amazon, for example, nearly doubled the size of its workforce over the past two years. As a number of fulfillment center employees went on COVID-19-related leaves, the company hired new employees to cover those absences.
  • But as absences subsided, it quickly went from being understaffed to being overstaffed, which resulted in lower productivity that cost Amazon about $2 billion, said CFO Brian Olsavsky during the company’s earnings call.

A stark contrast: Cost-cutting moves offer stark counterexamples to a still-tight labor market in which many companies continue to struggle to hire enough workers.

  • The two situations are related as the tight labor market has boosted wages, which, in turn, has contributed to rising inflation.
  • To curb inflation, the US Federal Reserve aims to gently pump the brakes on the economy by steadily increasing interest rates throughout this year (including a 50-basis-point increase last week). That increases borrowing costs, which leads companies to hold off on investments.
  • At the same time, many retail companies are dealing with ongoing supply chain challenges and rising raw materials costs, which eats into their bottom lines and causes funding to dry up.

A tale of two growth trajectories: Slowing demand and growing digital ad and borrowing costs have quickly hindered many retailers’ growth trajectories.

  • Take direct-to-consumer (D2C) ecommerce, where there’s a sharp dichotomy between established brands such as Nike and digitally native brands such as Peloton, Warby Parker, and the retail brands that Amazon aggregators like Thrasio purchase. While digitally native brands used cheap capital to build their businesses, they’re having trouble adapting to the new landscape. That helps explain why D2C ecommerce sales of established brands are now growing faster than those of digitally native vertical brands (DNVBs), per our estimate. Last year, established brands grew their D2C ecommerce sales 27.2%, significantly outpacing the DNVBs’ 19.8% growth rate despite larger baseline comparisons, and we expect that trend to continue in 2022.
  • The situation has driven Thrasio to lay off about 20% of its staff, Peloton to cut 20% of its corporate workforce, fast-delivery startup GoPuff to lay off 3% of its employees, and ghost-kitchen startup Reef to shed 5% of its workforce.
  • More layoffs and hiring freezes are likely to come in retail and other sectors. For example, Uber said it is cutting back on spending and will treat hiring as a privilege, while Meta ordered a hiring freeze amid slowing growth.

The big takeaway: It has been some time since there was a significant cost to borrowing money.

  • As those costs rise, companies have no choice but to pay heed to their bottom lines.

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