Businesses trim costs to combat lagging sales

December 22, 2010

USA-RETAIL/BLACKFRIDAYTina Bean’s wish for 2011 is that people will open their wallets more.

“People don’t want to spend money,” said Bean, the owner of Port Arthur, Texas-based pet food dealer, Five Star Feed Store. “They are buying necessities and that’s it.”

Annual sales at Five Star Feed Store have declined approximately $100,000 since the recession, said Bean. She has been forced to lay off three workers and has given pay cuts to the remaining five. The cutbacks have also had a personal effect. “For a long time, I didn’t draw a paycheck,” she said.

Bean’s experience is highlighted by recent financial data from Sageworks Inc., which showed a number of sectors are suffering from declining sales. The report analyzed 2010 sales, profit per employee and payroll as a percentage of sales data for private companies in six major industries: construction, manufacturing, wholesale trade, retail trade, healthcare and education.

All the sectors except health and education experienced a decrease in annual sales. Manufacturing was down 3.6 percent, wholesale trade declined about 4 percent and retail trade dipped a little more than 1 percent in sales for 2010.

Construction showed the most marked decline as sales plummeted by more than 13 percent this year, but that was an anomaly according to Mike Lubansky, a senior financial analyst at Sageworks.

“There are just not a lot of new (residential) buildings going up,” he said. “We haven’t seen a substantial rebound in housing yet. In commercial construction because businesses aren’t investing in additional overhead, they won’t be expanding so they won’t need additional commercial space.”

Healthcare and education are two sectors bucking the trend with sales rising 2.21 percent and 8.64 percent respectively.

“We have trends in demographics that would indicate that healthcare should continue to do decently well,” said Lubansky, adding educational services also tend to fare better in a recession as people who are out of work “are looking for ways to improve themselves.”

Sageworks’ data suggests that industries with a decline in sales have compensated by cutting expenses, including overhead, employees and employee costs.

“They’ve increased their efficiency to the point where they’ve increased their profitability back to pre-2008 levels or even better,” said Lubansky.

Overall the data indicates that industries have found a way to improve their efficiencies in the economic downturn, he added. “Even though sales haven’t rebounded as much as they like, they have rightsized or cut employee expenses to increase their profit per employee numbers and margins to what they had pre-recession.”

So what will it take to get these companies hiring again? Increased revenue, which depends on a rise in sales, said Lubansky. “The good thing is many of them have good cash positions so when things start to get better in terms of revenue they can justify bringing on additional expense (such as hiring more people).”

The outlook for 2011 is unsure, but according to the Sageworks data, the decline in sales have flattened out. Ultimately it depends on the consumer to spend more before companies may think about hiring again.

Bean has her fingers crossed that an oil refinery expansion will create more jobs and put more money in people’s pockets. “I hope things kick up a little bit,” she said.

One comment

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I am in the IT industry and see more and more companies engaging us for internal process and systems improvement. As stated in the abovearticle, companies are increasing profits and cash flow by working smarter.

Unfortunately, there are still many companies out there still using outdated and manual processes that are draining cash flow and profits. I wonder when they will “wake up” an look within for higher profits. If wages are froze or decreased, their employees will not be fueling increased consumer spending.

On the other hand, if companies with increased profits would share the wealth with their employees, maybe that’s the starting place for increased consumer spending……

If companies with increased profits would share the wealth with their employees, maybe that’s the starting place for increased consumer spending……

Posted by allynconway | Report as abusive