Cost cuts in a recession: cutting one’s nose to spite one’s face?

The Wall Street Journal reports on how employers continue to make cuts despite a belief that an upturn is near at hand leaving a few enlightened analysts wondering whether these reductions will prove costly when the recession ends as unhappy workers look for new jobs. The report notes that "Kitchen & Bath Center, a maker of cultured marble and granite, will
stop offering employees health care. In March, the company did away
with its 401(k) program, and before that it placed employees on reduced
schedules. A new Hewitt Associates survey of 518 large U.S. companies found that 54%
believe the economic upturn will begin at the end of 2009 or early
2010. Nonetheless, a large percentage have plans for further layoffs,
salary reductions, medical-benefit cuts and changes in 401(k) matches".

The New Yorker magazine recently had a compelling piece on an era that is frequently evoked in today's trying economic times, the great depression. The article notes how Kellogg and Post, two cereal companies in what was then a nascent market embarked on radically different strategies in response to the onset of adverse economic conditions. The article notes that "Post did the predictable thing: it reined in expenses and cut back on
advertising. But Kellogg doubled its ad budget, moved aggressively into
radio advertising, and heavily pushed its new cereal". As a consequence, decades later, Post remains a distant second to Kellogg. Similarly, the article notes how "a McKinsey & Company study of the 1990-91 recession found that companies that
remained market leaders or became serious challengers during the
downturn had increased their acquisition, R. & D., and ad budgets,
while companies at the bottom of the pile had reduced them".

The foregoing is arguably true for most if not all industries with the hospitality industry no exception. The good news is that there still are some hotel companies that have persisted with renovations over the past year and continue to do so as seen in this initiative by Sheraton and Marriott. Holiday Inns also announced renovations although on the backs of franchisees. Hotels have also,to a degree, stayed off from some of the widespread layoffs seen in other industries as well as marshaled their advertising dollars to better effect using internet as opposed to traditional print media. One area with little data is training – those that invest in it in a downturn are likely to reap the most as and when the upturn comes.

Published by

Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.

One thought on “Cost cuts in a recession: cutting one’s nose to spite one’s face?”

  1. Totally agree, Vijay. Smart companies are going on offense, innovating for the recession, and are likely to end up far better off than their hunkered down, fearful competitors.
    At Fahrenheit 212, we’ve been helping our hospitality and gaming clients grow their top-line by finding new ways to leverage their existing assets.
    We’re seeing industry leaders recognizing that now’s the perfect time to tackle bigger – but perhaps fewer – projects. An encouraging sign of can-do courage in the face of adversity.

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