CFOs Fear a Recession Is Coming. Preparation Will Help Them Stand Out
May 16 2019 - 5:59AM
Dow Jones News
By Tatyana Shumsky
In the early stages of the last major economic downturn, Costco
Wholesale Corp. did for its shelves what it preaches to its
customers: It bought in bulk and saved.
The company, sensing a worsening economic slump, slimmed its
product variety and bought more from fewer suppliers, said Richard
Galanti, Costco's chief financial officer. Doing so helped the
retailer boost buying power with its suppliers and take advantage
of the pricing benefits that come with buying more by the
truckload.
"Clearly, it's easier to manage 3,800 active items in a location
than it is 60,000," Mr. Galanti said, adding that operations became
more efficient.
More companies need to think like that as the prospect of
another downturn looms, according to research released Thursday by
Bain & Co. In particular, companies should be assessing
financial strengths and weaknesses to streamline operations and
reduce costs through technology, according to the consulting
firm.
CFOs also must outline strategies for a variety of sour economic
scenarios that include opportunistic investments, mergers and
acquisitions, according to Bain, which examined financial results
for nearly 3,900 companies world-wide across a variety of
industries to determine which characteristics allowed some
companies to thrive during rough economic headwinds.
"The plain vanilla response to recession is often wait for bad
news, and then start cutting costs," said Tom Holland, a partner at
Bain and an author of the report. "But the more successful
companies cut costs early, before things slowed, and did so through
smart steps such as automation, rather than sweeping emergency
cost-cut programs."
That kind of strategy, including introspective downside scenario
planning, helped about 10% of companies, including Costco, increase
earnings before interest and taxes at a compound annual growth rate
of 17% on average during the 2007-09 recession, compared with zero
growth for those that weren't as proactive, Bain said.
Fears of a downturn have resurfaced after more than a decade of
steady economic expansion.
Two-thirds of CFOs said they expect the U.S. economy to enter a
recession by the third quarter of 2020, according to the Duke
University/CFO Global Business Outlook survey of more than 1,500
CFOs around the world. And nearly half of U.S. CFOs say a recession
is likely to by the end of 2019, the December survey found.
But while most finance chiefs expect the U.S. economy to take a
turn for the worse, less than half are preparing for it. Only 49%
said their company had a detailed plan for a downturn, according to
a February survey of 158 CFOs in the U.S. and Canada by Deloitte.
Deloitte sponsors WSJ's CFO Journal.
The absence of a backup plan is risky. A downturn can narrow the
CFO's field of vision to the bottom line, whereas stringent focus
on working capital can help wring cash from inventory or
late-paying customers, Bain said.
Those funds can ensure the company continues to invest in growth
-- another area that can suffer during a recession. Successful
companies continued funding efforts such as research and
development, new business lines and focused marketing campaigns
throughout the recession, helping them win market share and expand
reach, Bain said.
At Twinkie and Ding Dong maker Hostess Brands, finance chief
Thomas Peterson said the executive team regularly reviews its
pipeline of potential measures, such as those aimed at costs or
pricing, that could be implemented in response to shifts in the
market or the broader economy.
"You want to make sure that you have ideas that are somewhat
thought out so that you can do the next measure, if needed," Mr.
Peterson said.
"And you want to have a pipeline of opportunities," he added,
saying that the company continues to be on the search for potential
acquisitions that would dovetail with its core competencies.
Write to Tatyana Shumsky at tatyana.shumsky@wsj.com
(END) Dow Jones Newswires
May 16, 2019 05:44 ET (09:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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