The 'Cost Reduction Paradox'

Mindful of shoppers focused on getting the most of their grocery dollars and operating on razor thin margins, it's no surprise that cost-cutting is top of mind with retailers these days. A recent conversation among our editorial team was the genesis of the article "Cost-Cutting Redefined" that you'll find on p.12 of this issue of Retail Leader. The piece explores the queston: Is cost cutting a legitimate growth strategy and when does it go too far?

In the article, McMillanDoolittle senior partner Neil Stern cautions, "No one has ever cut their way to prosperity. You certainly need to get costs into control so you can be competitive, but cost control in itself isn't a winning strategy."

A recent study by Deloitte Consulting and market research firm Ipsos, "Save to Grow: Deloitte's Third Biennal Cost Study," explored these questions by surveying Fortune 100 companies about their cost reduction and growth strategies. What they found reinforces Stern's comment, but also revealed some compelling findings about these companies' top drivers for strategic growth. One such tidbit: the likelihood of cost-cutting during the next 24 months is greater for companies with growing sales (78 percent) than it is for companies facing flat or decreasing sales (70 percent).

Many companies limit their cost-cutting efforts to the same business areas every year, the study found, instead of looking for new ways to save. Companies also tend to focus on administration (75 percent) and operations (67 percent) and apply tactical measures like process streamlining (54 percent), organizational streamlining (50 percent) and external spend reduction (41 percent).

But companies that take a more strategic approach, such as outsourcing some processes or changing their business models, often discover significant savings while also growing their top lines.

However, McMillanDoolittle senior partner Neil Stern, cautions, "No one has ever cut their way to prosperity. You certainly need to get costs into control so you can be competitive, but cost control in itself isn't a winning strategy."

Time will tell whether rising cost-reduction efforts across the majority of companies surveyed will have a positive impact on organic growth.