Consumers continue to prioritize Chipotle burrito bowls and European trips despite rising prices and interest rates. But Big Macs and kitchen renovations aren't.
In recent quarterly earnings reports, consumer-centric corporations such as McDonald's, Starbucks, and Home Depot reported lower-than-expected revenues, indicating a decrease in customer spending. Some companies, such as Sweetgreen and Delta Air Lines, claimed growth despite the overall trend.
What's the takeaway? Consumers are becoming more choosy about how and where they spend their money.
"Consumers continue to be even more discriminating with every dollar that they spend as they faced elevated prices in their day-to-day spending," McDonald's CEO Chris Kempczinski stated on the company's conference call in late April. For more than two years, customers have had to contend with dramatic price increases. Most corporations expect their pricing strategies to revert to pre-pandemic levels this year as commodity prices stabilize. However, this does not guarantee that actual prices on grocery store shelves or restaurant menus will decline, and buyers are feeling the pinch.
According to Department of Labor data, the consumer price index increased 3.4% in the 12 months ending in April. On Tuesday, a day before the monthly CPI data, Federal Reserve Chair Jerome Powell reaffirmed that inflation is decreasing slower than projected, implying that the central bank would not cut interest rates anytime soon.
To make matters worse, many people have spent the funds they amassed during the outbreak. When they collected stimulus checks instead of traveling. As petrol, rent, and food become more expensive, more people are turning to credit cards to pay their expenditures. According to a TransUnion quarterly study released last week, the typical customer owes $6,218 on their credit cards, an 8.5% increase over the previous year.
Aurelia Concepcion, 57, a case manager in New York, said she plans to travel exclusively for vital purposes this year, with the exception of seeing family in Georgia and Ohio.
"Everything is too high ... taxis, rent." Concepcion says she avoids restaurants because they are "too expensive." I'd rather cook my own meals."
Concepcion isn't the only one who's adjusting her spending habits. Executives have been warning of a more cautious spending environment for some time. But it's finally begun! to appear in certain firms' quarterly reports.
KFC, Pizza Hut, and Starbucks reported falling same-store sales in the most recent quarter. Home Depot's sales was lower than projected because potential customers are postponing renovations until loan rates decrease, officials said. Apple's iPhone sales declined 10% in the last quarter, indicating that buyers are not upgrading to the latest generation of the smartphone as they did in the past. "Some of the things that have seen the biggest run-up in prices over the last few years are items that people confront on a daily basis: the cost of eating out, the cost of groceries, the costs of fuel, gasoline, and rents," said Columbia Business School economics professor Brett House. "Regardless of whether inflation is slowing amongst those goods, even with lower inflation, prices remain very high, and people get a daily reminder of that."
Last Thursday, Walmart reported that buyers prioritize buying food and health-related items over general commerce such as home goods and gadgets. The store has documented this development for multiple quarters. Finance chief John David Rainey told CNBC that Walmart's food sector has received a boost. from the increasing disparity between restaurant costs and the expense of cooking at home.
Lower-income customers are hurting more than other groups. They couldn't save as much during the epidemic, and data shows they've depleted their funds, according to House. Furthermore, rent prices have risen, making low-income customers more likely to rent rather than purchase.
PepsiCo specifically targeted low-income consumers. Gatorade's North American beverage volume fell 5% in the quarter.
"The lower-income consumer in the U.S. is stretched... [and] is strategizing a lot to get their budgets to the end of the month," CEO Ramon Laguarta told investors on the company's conference call in April.
Pepsi is leaning Invest in marketing and discounts to get low-income shoppers to return. Other businesses are hoping that bargains would attract more clients. McDonald's, the king of the low-price fast-food industry, is to begin providing a $5 value meal on June 25. While some CEOs claim that consumers are becoming more cautious, others, such as those in the airline sector, have praised robust and consistent spending.
"Consumers continue to prioritize travel as a discretionary investment in themselves," Ed Bastian, CEO of Delta Air Lines, the most profitable airline in the United States, said in an April interview.
Delta and United recently forecasted earnings for the second quarter that exceeded analyst expectations. Both airlines have extensive worldwide networks and have profited from a boom in foreign travel in the aftermath of the epidemic, notably to Europe and popular Asian destinations for US passengers, such as Japan. Both carriers expect record summer travel demand.
These airline developments are consistent with a larger consumer change that began after During pandemic lockdowns, spend more money on experiences rather than clothes or technology.
"We're still spending disproportionately on activities and services rather than on goods," House stated. Delta and United are also benefiting on consumers willing to spend more for higher-priced seats, such as first class or premium economy. Airlines in the United States have been rushing to add additional high-priced seats to their flights and expand lounges for high-spending passengers. Inflation has not harmed high-income customers as much as it has the budget-conscious, giving them more money to spend.
Higher-income clients have also boosted fast-casual restaurant chains, such as Chipotle, which are slightly more expensive than the cheapest choices. The burrito chain's same-store sales increased 7% in the first quarter, driven by a 5.4% rise in foot traffic. Chipotle's customers have a strong notion of value, according to CEO Brian Niccol during the company's conference call. Executives have Previously, it stressed that the majority of its consumers are from upper economic levels.
Even Walmart has been drawing customers with larger budgets. As grocery prices rise, discounters have drawn more affluent customers, stealing market share from rivals such as Target, which were previously more popular among wealthy buyers. The firm also praised its refurbished storefronts and additional inventory on its website for attracting households with yearly incomes more than $100,000.
Target is slated to release its quarterly earnings on Wednesday. However, not all enterprises serving higher-income customers have seen the same level of demand. Corporate missteps can sometimes result in disappointing sales, even if customers aren't actually cutting down on their spending.
For instance, Lululemon's U.S. sales. faltered in its most recent quarter, which CEO Calvin McDonald ascribed to a lack of essential product sizes and colorful goods.
Then there's Starbucks, which has consistently positioned itself as a premium coffee brand. The coffee giant reported a surprising decrease in same-store sales in the United States and cut its full-year outlook, sending its stock plunging. While CEO Laxman Narasimhan cited a slew of variables for the bad quarter, including a more value-conscious customer, Bank of America analyst Sara Senatore stated in a research note that a social media boycott might still be the root cause. Peloton's most recent report was the latest in a line of poor outcomes for the firm. Earlier last month, the pandemic darling dismissed its leader. president and revealed plans to lay off 15% of its workforce as fewer customers purchased its expensive equipment or much cheaper workout memberships in the most recent fiscal quarter.
"With the economic outlook for customers unlikely to improve throughout the remainder of this year, Peloton's product trajectory is unlikely to shift... However, app subscriptions are also under pressure, most likely due to customers' increased scrutiny of their costs as a result of subscription weariness," GlobalData managing director Neil Saunders said in an emailed statement.
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