Two years ago, Robert Murphy was already worried about whether the economy might hit the brakes.
It was the eve of the short-lived “Hot Vax Summer,” the dawn of the boom that interrupted the pandemic gloom. Affluent consumers were enjoying a post-vaccine spending spree that saw patio sets and kayaks flying off the digital shelves, and companies like Peloton and Wayfair raced to hire enough workers to meet demand.
But Murphy, an economist at Boston College, was pensive, and not so sure that the good times would last.
“Will we see a shift away in the boom of online shopping and the purchase of online goods?” Murphy mused to a Globe reporter in March 2021. “Are we going to continue to see people buying Pelotons?”
Murphy himself had bought one of the red-hot, pricey exercise bikes early in the pandemic, when he was camped out at his place on the Cape. Within a year, he bought another for his primary residence. But there are only so many Pelotons one can have.
And therein lies the problem: As the pandemic kicked consumer spending into high gear, some companies came out as clear winners, with the expanding payrolls to match. But for many, that winning streak couldn’t last, and now they’re cutting their losses.
It’s a sharp turn that upends expectations; the overall labor market remains strong, with news Friday that the US economy added 517,000 jobs in January alone. But the layoffs in the tech industry signal a pullback on the part of companies that hired fast in the height of the pandemic. And while the Metas and Googles and the Microsofts of the world are making cuts, their businesses are diversified enough that it won’t have a long-lasting impact, industry analysts say. For consumer-driven tech companies though, the calculus is a bit different.
Take Wayfair. The Boston-based online furniture retailer saw sales soar as homebound workers scooped up desks and expat urbanites outfitted their spacious new suburban homes. But since last summer they’ve laid off 2,600 people. Home fitness companies like Peloton and Hydrow saw sales take off when gyms closed, but hit the wall when people decided they had enough $2,500 rowing machines. WHOOP sold its fitness-tracking wristbands at warp speed, but has cut nearly 20 percent of its workforce since August. Overall, tech employment in Boston remains stable, even as a number of high-profile companies have announced cuts in the past several weeks.
It’s worth asking the question: Did this have to happen?
The answer, says Peter Cohan, associate professor of management at Babson College, is basically yes. And the reason is pretty simple: Business leaders are subject to human nature, too. And so when a company’s sales are booming, it’s easy for executives to enter into a bit of a fever dream state when it comes to hiring — one that also gives them a bad case of FOMO (or Fear of Missing Out) about not wanting to miss the wave or the chance to hire the best people onto your team.
“Wayfair is among a group of pandemic hero companies that benefited from a burst of demand that weren’t able to sustain it,” he said. “People get emotional, they’re not rational. They are basically suffering from these fears that cause them to go to extremes.”
Recall, for a second, just what the economy was like in those heady days: White collar workers largely had money to burn, while the federal government sent pandemic relief checks to over 150 million households. Saving levels rose significantly in late 2020 into 2021 and the supply chain issues that have plagued the last two years hadn’t yet kicked into high gear.
Many market-makers and forecasters believed the shifting consumer trends early in the pandemic had brought a more enduring change, foreshadowing a new and lasting era of spending.
“There was a reasonable argument that some of these pandemic behaviors” — online grocery shopping, subscription fitness services, furniture shopping on the Web — “were going to usher in permanent new consumer behaviors or accelerations of trends,” said Jason Goldberg, chief commerce strategy officer for the Publicis Groupe, a marketing agency in Chicago.
And for nearly three years, it appeared they had. Retail sales grew 30 percent between 2020 and 2022, more than twice their typical rate, Goldberg said. E-commerce sales topped $1 trillion for the first time last year, while retailers added 190,000 jobs. Companies like Amazon went on a building spree, scooping up warehouses to deliver products even faster to click-happy customers.
While it’s easy to point at overinvesting in physical products — like stocking too many exercise bikes — as the problem, it goes deeper than that. E-commerce companies needed to hire marketing teams and six-figure software engineers to get those goods into the hands of customers. And they needed to bulk up their human resources teams to do all that hiring. Now some of those jobs are the ones they’re cutting.
“I don’t think they were overzealous. You have to invest ahead of the curve to build up inventory like hardware, and you want to invest in innovation too,” said David Chang, general manager of the Hunt Club recruiting firm and a longtime observer of the city’s startup and venture capital scenes. “I personally find it very difficult to fault companies that are subject to it.”
Most executives, Murphy said, think “it’d be crazy” for a company not to ramp up hiring to meet demand. He cites two reasons: “You’re leaving money on the table if you don’t sell to people who want to buy.” And if you can’t deliver even once, you’ll lose customers for good.
“It’s the reputation effect,” he continued, with executives thinking: “If I can’t fulfill my order now . . . I may lose these people forever.”
For companies selling high-end fitness products, it was the matter of seizing a moment versus looking at the long term.
“With respect to exercise equipment, there’s a novelty component to the business, and something new and different supported by a large advertising budget is going to get an initial pop,” said Donald Shobrys, who works with startups at MIT’s Venture Mentoring Service after a career in supply chain management. “But the question is where do you get your sustainable sales, what market segments are going to give you long-term revenue?”
Then there’s the investment community. Venture capital firms have pumped money into consumer tech startups in recent years, said Cohan, and 2021 was a boom time for IPOs. With that money comes big expectations.
“There was pressure to grow as fast as they possibly could and try to go public,” he said.
Now, of course, the tables have turned. Consumer spending first shifted back toward travel, entertainment, and restaurants — things people needed to leave their homes to do. Inflation and fears of a recession are causing some shoppers to tighten their pursestrings, and rising interest rates mean fewer people are taking the leap to buy new homes, or the furniture and fitness equipment to outfit them.
“We’re seeing consumers trading down to more value-oriented brands, choosing needs versus wants, and all those things are new headwinds for Wayfair to sell a new patio set,” said Goldberg. Hydrow’s momentum stalled as Peloton pushed into its space with its own rowing machine. And Whoop backtracked on its plans to go public, citing how “the bullish tech market conditions have turned.”
But despite those factors, investors are still pressuring companies to drive profits. And that’s where job cuts can come in. Cutting headcount signals to investors that a company is righting the ship, and often results in a bump up in stock prices, said Goldberg. Sure enough, Wayfair’s stock price jumped 20 percent shortly after it announced its most recent round of layoffs.
“The challenge is the Wayfairs and Hydrows are more ‘tweener’ companies,” he continued. “Technically they’re retail but neither has a meaningful number of stores or warehouse employees. And they have corporate headquarters look a lot like tech workers.”
Still, despite these job losses, the overall tech job market in Boston is still strong, Chang asserts, and as an optimist, he sees opportunity. Laid-off workers will launch their own startups, he says. Experienced executives can help new companies grow.
And then the cycle begins anew, Shobrys said. “If you’re in startup mode there’s always tremendous pressure on you to scale,” he said. “You literally run into the mindset of go big or go home.”
And sometimes it’s the workers who end up going home.