People walk past a Sweetgreen restaurant in Manhattan on September 14, 2023.
Gina Moon | The Washington Post | Getty Images
As prices rise and interest rates continue to rise, Chipotle For many consumers, taco bowls and European holidays are still on the table. Not so with Big Macs and kitchen remodels.
The latest round of quarterly earnings reports divided companies into two camps: McDonald’s, Starbucks and The Home Depot One of the consumer-focused companies surprised investors with lower-than-expected performance and said customers had cut back on spending.Others, e.g. sweet green and Delta Airlinesgrowing against the trend.
takeout? Consumers are becoming more discerning about how and where they spend their money.
“Consumers are becoming more picky about every dollar they spend as prices rise on everyday expenses,” McDonald’s Chief Executive Chris Kempczinski said on a company conference call in late April.
Signs for restaurants such as Applebee’s, McDonald’s, Pizza Hut and Burger King can be seen along U.S. Route 11 in Bloomsburg, Pennsylvania.
Paul Weaver | Sopa Images | Getty Images
Consumers have been dealing with steep price increases for more than two years. This year, as commodity prices stabilize, most companies expect their pricing strategies to return to pre-pandemic levels. But that doesn’t mean actual prices seen on grocery store shelves or restaurant menus will drop and shoppers will feel the pinch.
The consumer price index rose 3.4% in the past 12 months through April, according to Labor Department data. On Tuesday, a day before the monthly consumer price index report is released, Federal Reserve Chairman Jerome Powell reiterated that inflation is falling slower than expected, which may mean the central bank will not cut interest rates soon.
To make matters worse, many consumers have depleted the savings they accrued while receiving stimulus checks during the pandemic instead of traveling. Instead, many people are paying their daily bills with credit cards as they face higher gas, rent and grocery bills. According to TransUnion’s quarterly report released last week, the average consumer’s credit card balance is $6,218, an increase of 8.5% year over year.
cautious consumer
Aurelia Concepcion, a 57-year-old case manager in New York, said she is planning only essential travel this year and will no longer visit family in Georgia and Ohio.
“Everything is too expensive … taxis, rent.” Concepcion said she avoids restaurants: “It’s too expensive. I’d rather prepare my own food.”
Concepcion isn’t the only consumer changing her spending habits. Executives have been warning of 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 one of the restaurant companies to see same-store sales decline in the latest quarter. Home Depot’s revenue fell short of expectations as potential customers put off renovations until interest rates dropped, executives said.and apple The tech company’s iPhone sales fell 10% in the most recent quarter, a sign that consumers aren’t upgrading to the latest versions of smartphones as they have in the past.
Customers shop at a Home Depot store on November 14, 2023 in Miami, Florida.
Joe Reddell | Getty Images
“Some of the things that have seen the biggest price increases over the past few years are issues that people face every day: the cost of eating out, the cost of groceries and the cost of fuel and gasoline and rent,” said Brett House, an economics professor at Columbia Business School. “Whether or not inflation slows for these commodities, even with lower inflation, prices remain high and people are being reminded of that every day.”
big box giant Walmart It said on Thursday that shoppers were prioritizing food and health-related items over general merchandise such as household items and electronics.The retailer has reported This trend has been going on for several quarters. Walmart’s grocery business is being driven by the widening gap between restaurant prices and home cooking costs, finance chief John David Rainey told CNBC.
Low-income consumers have it harder than other groups. House said they have not been able to save as much during the pandemic, and there is evidence they have depleted those savings. On top of that, rental prices have soared, making low-income consumers more likely to rent rather than buy.
Pepsi, one of which is especially vulnerable low-income consumers. The Gatorade owner saw sales in its North American beverage business drop 5% for the quarter.
Chief Executive Ramon Laguarta told analysts on the company’s conference call in April: “Low-income consumers in the United States are stretched thin…and are developing a number of strategies to keep their budgets going through the end of the month.
PepsiCo is trying to attract low-income consumers through promotions and discounts. Other companies are similarly hoping that offers will attract more customers. McDonald’s, the king of low-priced fast food, plans to offer $5 value meals starting June 25.
What callback?
While some CEOs said consumers were becoming more cautious, others, such as those in the airline industry, praised strong and sustained spending.
“Consumers continue to view travel as a discretionary investment,” Ed Bastian, chief executive of Delta Air Lines, the most profitable U.S. airline, said in an interview in April.
Delta Air Lines and its competitors Unity Last month, both companies forecast second-quarter profits above analysts’ expectations. Both airlines offer large global networks and have benefited from a post-pandemic rebound in international travel, particularly to Asian destinations such as Europe and Japan that are popular among U.S. travelers. Both airlines are predicting record summer travel demand.
The trends at these airlines are in line with a broader consumer shift that began in the wake of lockdowns: spending more on experiences rather than clothing or electronics.
“We are still spending too much on events and services rather than on goods,” House said.
On February 14, 2024, a Delta Air Lines Boeing 737-932(ER) appeared at Owen Roberts International Airport (GCM) in Georgetown, Cayman Islands.
Daniel Slim | AFP | Getty Images
Delta and United also take advantage of travelers who are willing to pay for more expensive seats, such as first class or premium economy. American airlines have been racing to add more high-priced seats on their planes and add lounges for top customers. Inflation hurts high-income consumers less than it hurts budget-conscious consumers, giving them more room to spend.
Higher-income consumers have also supported the growth of fast-casual restaurant chains such as Chipotle, which offer slightly higher prices than the cheapest restaurants. The burrito chain’s same-store sales rose 7% in the first quarter, driven by a 5.4% increase in traffic. Chipotle CEO Brian Niccol said on the company’s conference call that diners have a strong sense of Chipotle’s value. Executives have previously emphasized that most of its customers are from high-income groups.
Even Walmart has been courting consumers with deep pockets.As customers pay more for groceries, discounters attract more affluent customers and take market share from rivals Target, historically more popular with affluent consumers. The company also touted the appeal of its revamped stores and expanded offerings on its website to households making more than $100,000 a year.
Target is scheduled to report quarterly earnings on Wednesday.
Exceptions to the rules
However, not all companies with high-income customer bases are seeing equally strong demand. Business misfires can also result in disappointing sales, even if their shoppers don’t necessarily spend less.
For example, sports and leisure brands lululemon U.S. sales lagged in the latest quarter, which Chief Executive Calvin McDonald blamed in part on shortages in key product sizes and a lack of colorful items.
Then there’s Starbucks, which has always positioned itself as a premium coffee brand. The coffee giant announced an unexpected drop in U.S. same-store sales and cut its full-year forecast, sending shares tumbling. While Chief Executive Laxman Narasimhan listed a number of factors to explain the quarter’s weakness, including more value-conscious consumers, Bank of America analyst Sara Senatore Senatore wrote in a research note that social media boycotts may still be to blame.
A customer walks out of a Starbucks store in Manhattan, New York City.
Spencer Pratt | Getty Images
Peloton’s latest report is the latest in a string of disappointing results for the company. The pandemic darling fired its CEO earlier this month and announced plans to cut 15% of its workforce as fewer consumers bought its pricey devices or much cheaper fitness subscriptions in its latest fiscal quarter.
“With consumers’ economic outlook unlikely to improve for the rest of the year, Peloton’s trajectory on the product front is unlikely to change… But the concern is that app subscriptions are also under pressure – most likely because of Consumers are scrutinizing their spending more, Neil Saunders, managing director at GlobalData, said in emailed comments: “Please proceed with caution as they are suffering from subscription fatigue. “
—CNBC MelissasRepko and Gabrielle Fontrouge contributed reporting to this story.
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