Companies Weigh Fresh Cuts as Operating Costs Go Up

Companies Weigh Fresh Cuts as Operating Costs Go Up

Businesses are reducing office space, scaling back on consulting and opting for cheaper packaging of goods as they look to stay ahead of the downturn.

Also, operating expenses at investment-grade nonfinancial companies rose 19.9% to $2.72 trillion during the first quarter from a year earlier, according to data provider S&P Global Market Intelligence. Those U.S. companies spent 83.1% of their total revenue on operating expenses during the quarter, up from 82.6% a year earlier, S&P data show.

Companies say they are reducing real estate and consulting expenses at a faster pace, because those areas are least likely to be essential if the economy were to rebound, said

Alexander Bant,

chief of finance research at

Gartner Inc.,

an advisory firm.

About 46% of businesses plan to decrease spending on consulting over the next year, while 45% expect real estate reductions in that time, more than any other categories, according to Gartner, which in July surveyed 234 finance executives at mostly U.S. companies with annual revenue ranging from around $300 million to $100 billion.

“CFOs don’t want to be the loser of this recession and pare back spending on things that will be really important to quickly accelerate if growth does recover and a recession subsides,” Mr. Bant said, referring to investments in digital technology or employee compensation.

Some companies already have implemented plans aimed at offsetting higher costs from raw materials, freight and labor.

Bottled-water supplier

Alkaline Water Co.

Inc. plans to generate $7 million in annual cost savings, Chief Financial Officer

David Guarino

said. The Scottsdale, Ariz.-based company in the coming weeks expects to begin production at a new plant in northern California, in part to reduce freight costs. The company also recently removed cardboard from its packages and is in talks with its contract packagers about further savings, the CFO said.

“We’ve not really had a focus on expense reduction in our past, but certainly it’s an extensive focus right now,” Mr. Guarino said. “We’ve gone through this extensive companywide review to make sure that anything that happens in the future with the economics, that we’re prepared for it.”

Earnings results are showing that a pullback in consumer spending is beginning to weigh on public-company profits despite efforts to pass along to customers higher labor and fuel costs. U.S. gross domestic product contracted for a second consecutive quarter, raising fears that inflation and a slowdown in inventory-building are pulling the economy into a recession. Demand for U.S. workers, though declining, remains above the number of available workers.

Credit-ratings and risk-assessment firm

Moody’s Corp.

last week launched a new restructuring program that would reduce its real-estate footprint and expand lower-cost operational hubs. The company, which had 35 U.S. and 107 international office locations at the end of 2021, said it expects the program to result in $40 million to $60 million in annualized savings, the majority of which would be invested toward promotions, hiring and workplace improvements.

“One of the most important things I can do is to ensure financial flexibility for us as a firm and I can do that by being more efficient in terms of expense usage,” CFO

Mark Kaye

said. “If we have a deep or moderate recession, we can certainly take additional actions … to support our margins and profitability.”

Other finance executives who are not taking new actions are still watching for signals of a downturn.

Xavier Heiss, chief financial officer of Xerox.



Photo:

Xerox Holdings Corp.

The energy-infrastructure firm

Kinder Morgan Inc.

is continuing to reduce costs the same ways it has over the past year, such as delaying nonessential maintenance and hedging commodity and fuel prices, CFO

David Michels

said. The Houston-based company doesn’t expect a potential recession to significantly affect the business as most of its revenue stems from long-term contracts, he said.

“We think that the strategies that we’ve been practicing are the appropriate ones that will protect us going into next year,” Mr. Michels said.

Printer maker

Xerox Holdings Corp.

benefits from a largely contract-based revenue, according to CFO

Xavier Heiss.

Two-thirds of the Norwalk, Conn.-based company’s business is contracted out for multiple years, which offers some resilience in the face of a potential recession, according to second-quarter earnings. At the same time, demand remains strong for products and services, Mr. Heiss said.

Xerox isn’t seeing a dip in demand, or customers buying lower-end products, he said.

“When we start to see this, I will say, ‘Yeah, this could have an impact on us’,’’ Mr. Heiss said. “I say ‘could’ because today, we don’t see it.”

Write to Mark Maurer at Mark.Maurer@wsj.com and Jennifer Williams-Alvarez at jennifer.williams-alvarez@wsj.com

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