Is there a decline in consumer spending? Here's what CEOs are saying – Business News (Trending Perfect)

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People walk past Sweetgreen restaurant in Manhattan on September 14, 2023.

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As prices and interest rates continue to rise, Chipotle Burrito bowls and European vacations are still on the table for many consumers. But Big Macs and kitchen remodels are not.

The latest round of quarterly earnings reports has largely helped sort companies into two camps: McDonald's, Starbucks And Home Depot It was among the consumer-focused companies that surprised investors with weaker-than-expected results, saying customers cut back on spending. Others, such as Sweet green And Delta Airlinesbucked the trend and reported growth.

Takeaway? Consumers are becoming more selective about how and where they spend their dollars.

“Consumers continue to be more discerning with every dollar they spend, as they face higher prices in their daily spending,” McDonald's CEO Chris Kempczinski said on a company conference call in late April.

Signs for restaurants including Applebee's, McDonald's, Pizza Hut and Burger King appear along US Route 11 in Bloomsburg, Pennsylvania.

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For more than two years, consumers have faced sharp price increases. This year, most companies expect their pricing strategies to return to pre-pandemic methods, thanks to stabilizing commodity prices. But that doesn't mean the actual prices that appear on grocery store shelves or restaurant menus will drop, and shoppers are feeling the pinch.

The Consumer Price Index rose 3.4% over the past 12 months through April, according to Labor Department data. On Tuesday, a day before the monthly CPI report was released, Federal Reserve Chairman Jerome Powell confirmed that inflation is falling more slowly than expected, which likely means the central bank will not cut interest rates anytime soon.

To make matters worse, many consumers have exhausted the savings they accumulated during the pandemic when they were collecting stimulus checks instead of traveling. Instead, many pay their daily bills with credit cards because they face rising gas, rent and grocery costs. The average consumer owes $6,218 on their credit cards, up 8.5% year over year, according to a quarterly report from TransUnion last week.

Cautious consumers

Aurelia Concepcion, 57, a case manager in New York, said she plans only essential travel this year, putting an end to visiting family in Georgia and Ohio.

“Everything is so high…taxis and rent.” Concepcion says she avoids restaurants: “They're expensive. I prefer to prepare my own food.”

Concepcion isn't the only consumer changing their spending habits. Executives have been warning for a more cautious spending environment for some time. But it's finally starting to show up in some companies' quarterly results.

KFC, Pizza Hut and Starbucks It was among the restaurant companies that reported same-store sales declines last quarter. Home Depot's revenues were weaker than expected because potential customers are putting off renovations until interest rates fall, executives said. And apple iPhone sales fell 10% in the technology company's latest quarter, suggesting that consumers are not upgrading to the latest version of the smartphone in the patterns they have in the past.

Customers shop at a Home Depot store on November 14, 2023 in Miami, Florida.

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“Some of the things that have seen the biggest price increases over the last few years are items that people face on a daily basis: the cost of dining out, the cost of groceries, the costs of fuel and gasoline and rents,” said Columbia Business School economics professor Brett House. “Regardless of whether inflation slows among those commodities, even as inflation declines, prices remain very high, and people get a daily reminder of that.”

Big box giant Walmart He said last Thursday that shoppers are prioritizing purchases of food and health-related items over general merchandise, such as household goods and electronics. The retailer reported This trend has been going on for several quarters now. Walmart's grocery business got a boost from the widening gap between restaurant prices and the cost of cooking at home, Chief Financial Officer John David Rennie told CNBC.

Low-income consumers suffer more than other demographics. They haven't been able to save much during the pandemic, and evidence suggests they've exhausted those savings, according to House. Moreover, rental prices have risen, and lower-income consumers are more likely to rent than to own.

PepsiCo, for example, particularly advocated for the most vulnerable low-income consumers. The Gatorade owner saw volume in its North American beverage business decline 5% during the quarter.

“The low-income consumer in the United States is stretched… [and] “They are strategizing a lot to get their budgets to the end of the month,” CEO Ramon Laguarta told analysts on a company conference call in April.

Pepsi tends to offer promotions and discounts to attract low-income shoppers. Other companies similarly hope the deals will attract more customers. McDonald's, the king of low-priced fast food, plans to start offering a $5 meal on June 25.

What's the rollback?

A Delta Air Lines Boeing 737-932 (ER) is seen at Owen Roberts International Airport (GCM) in Georgetown, Cayman Islands on February 14, 2024.

Daniel Slim | AFP | Getty Images

Delta and United also benefited from passengers who were willing to pay for more expensive seats, such as first class or premium economy. US airlines are racing to add more premium seats to their planes and develop lounges for big spenders. Inflation has not affected higher-income consumers as much as it has hurt the budget, giving them more room to spend.

Higher-income consumers have also patronized fast-casual restaurant chains, such as Chipotle, which come at a slightly higher price than cheaper options. The burrito chain's same-store sales grew 7% during the first quarter, driven by a 5.4% increase in traffic. Chipotle has a strong perception of value among diners, CEO Brian Nicol said on a company conference call. Executives have also previously confirmed that most of its clients come from higher income brackets.

Even Walmart was attracting consumers with deeper pockets. As customers paid more for groceries, discounting attracted more affluent customers and stole market share from competitors e.g Goal, which has historically been more popular with wealthier shoppers. The company also credited its remodeled stores and expanded merchandise on its website for attracting families with annual incomes of more than $100,000.

Target is scheduled to announce its quarterly earnings on Wednesday.

Exceptions to the rule

A customer exits a Starbucks store in Manhattan in New York City.

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Peloton's latest report was the latest in a string of disappointing results for the company. Earlier this month, the pandemic company fired its CEO and announced plans to lay off 15% of its employees as fewer consumers bought its expensive equipment or much cheaper fitness subscriptions in its latest fiscal quarter.

“With the economic outlook for consumers across the scale unlikely to improve this year, Peloton's trajectory on the product front is unlikely to change course… but what's concerning is that app subscriptions are also under pressure — likely as consumers take a closer look at their spending,” Neil Saunders said. “They've been cautious because they're suffering from subscription fatigue,” GlobalData managing director, comments via email.

– CNBC MelessRepco And Gabriel Vonrug He contributed reporting to this story.

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