OPINION
Many companies are failing. They are being forced to implement severe cost-cutting programs. But cost-cutting needs a balance.
Across South Africa’s poor economic environment, some cuts are very deep—like the need to dispose of thousands of employees. Others are aimed at bringing companies back to profitability as CEOs underperform and new CEOs take over. Since the start of the year, the structural cost-cutting cycle has hit heavy manufacturing, primary resources, consumer retail, and automotive supply chains. Five prominent examples: Samancor Chrome (over 2,400 jobs at risk), Goodyear South Africa (900 retrenched), ArcelorMittal South Africa (ongoing operational downscaling), Pick n Pay (a store labour reset targeting 22,000 workers), and Motus Holdings (salary and benefit cuts for 579 remaining staff).
Stats SA’s latest Quarterly Labour Force Survey shows South Africa shed 345,000 jobs in the first quarter alone, pushing the official unemployment rate to 32.7%. Global geopolitical shocks have driven up oil prices, creating a secondary wave of input, transport and logistics costs.
Companies that spent the last two years “trimming fat” are now being forced to structurally alter their operations just to maintain basic solvency.
But the problem is that while cost-cutting is absolutely necessary in many instances, it can be done to the detriment of a business. Look, we’ve had a lot over the years on lean thinking and lean organisations, but when it comes to working in companies and running them, you’ll see that every budget time managers come with a wish list rather than a reality list. That means fat is built into the business at the start of the year. Thank goodness budgets can be revised mid?year, because if you let managers continue with big budgets they will run amok. You’ve got to keep them in check.
Some companies have ongoing cost?cutting that almost becomes a culture. I’ve worked in companies like that—not where they count every paper clip, but where budgets are cut so thin that you have hardly any room to perform your job. So you have to become more creative or innovative about how you’re going to do things without money.
Then there is the employee cut. A lot of it is happening now, and the remaining employees have to take on another person’s work. This reduces morale, because someone who was doing a full?time job now has to fit in secondary functions from the people who were chopped. Just take a simple one over the years: go to most supermarkets and they don’t even have bag packers anymore because that’s got too expensive. So the cashier with a long face has to pack the bags themselves. What else will they expect cashiers to do? Banking, bill payments, and so it goes. The same happens in any company.
But then you’ve got a lot of new young managers in companies these days with high expectations coming from certain communities, and they help the company to quickly become fat. There needs to be a balance between ongoing examination of costs and forecasting of what costs are going to rise. The basics: rental and occupation costs of your office, building or factory; wages and salaries (they don’t come cheap these days); and your suppliers.
Now, the problem is that no one—or very few—predicted the Iran war, and that is having a major impact on all sorts of businesses. Businesses have cut down deliveries, rescheduled deliveries onto trucks, and had to become a lot more efficient after years of slack because of the jump in the petrol price. Who could have anticipated that?
And markets shrink. Consumer markets come and go. Even industrial markets come and go. For example, how many power lines are being built in South Africa these days? It used to be a big business, cabling too, but now with imports from the Far East and India, those markets have shrunk. That goes for a lot of industries—steelmaking, even basic manufactured goods.
So I say there is a balance, but there also needs to be the balance on the other side: you can only go on for so long without money to do your job properly, whatever function you’re in, including the CEO. Money is needed for building the business. Look how much money a company like Pick n Pay is spending now. They’ve had to get a second tranche of money by selling their Boxer shares just to keep Pick n Pay afloat. That is a very big question. None of us like to cut back. None of us like to tighten belts. But to survive… we have to.
Chesney Bradshaw is an editor, and journalist. For strategic analysis on economic trends, systemic risk, and corporate governance, visit Idea Accelerator.
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Disclaimer: The information contained in this macroeconomic briefing is for general informational purposes only and does not constitute formal financial, investment, or legal advice.
