The state of the consumer in 2024 is already taking shape — even before the country’s major retailers begin to report first-quarter earnings, starting with Home DepotWalmart
There are signs that the U.S. consumer is still spending, especially on experiences. But stubbornly high prices are squeezing consumers with lower incomes, pressuring everyday purchases and corporate profits.
Broadly speaking, credit card companies like American Express,VisaMasterCardPayPalBlock
Airlines and hotels are expecting a strong travel season ahead, particularly when it comes to international destinations, with Morgan Stanley’s
In fact, a Morgan Stanley survey showed that 60% of U.S. consumers are planning a summer vacation this year — and just about half of those traveling are expecting to spend more than they did last summer.
Priceline parent Booking HoldingsCaesars
What’s more, cruise lines are seeing record bookings, even as prices have soared. Passengers are also spending freely onboard the ships, despite having to pay significantly more for food and drinks.
Concerts, too, are still hot tickets even at sky-high prices — with Live Nation
Everyday purchases
But the picture is different when it comes to more discretionary items and everyday purchases as consumers appear more tight-fisted due to economic headwinds like elevated food costs, rising mortgage rates and fewer government rebates.
As online artisan marketplace Etsy
Consumers have been delaying large purchases for their homes amid the economic uncertainty — potentially a key factor to watch when Home Depot and Lowe’s
Wayfairreported results Thursday, told analysts that the bigger-ticket category “remains weak” and it’s uncertain when demand for home furnishings will improve. Stanley Black & Decker
Consumers have also become more discerning with how often or where they dine out. Restaurant sales in the quarter largely disappointed Wall Street amid traffic struggles.
Starbuckstold analysts, “We continue to feel the impact of a more cautious consumer, particularly with our more occasional customer. And a deteriorating economic outlook has weighed on customer traffic, an impact felt broadly across the industry.” McDonald’s
Price sensitivity
What has become clear this earnings season is that U.S. consumers are increasingly price-sensitive, particularly when it comes to those everyday purchases. Bank of America’s
Here are just some of the companies warning about price sensitivity:
Both Coca-ColaPepsiCoMeat producer Tyson FoodsHersheySpecial K and Pringles owner KellanovaBurger King and Popeyes parent Restaurant BrandsFootwear and apparel maker Steve Madden
Weakness in the lower-end consumer could pose issues for discounters like Dollar GeneralDollar TreeTJXRoss StoresBurlington Stores
Profit squeeze
As a result, companies are now being forced to compete for consumers’ dollars via promotions and deals. Some have found at least near-term success.
While there’s growing pressure on companies to cut prices to win over consumers, sticky inflation in food, energy, labor and other input costs poses a major hurdle to profitability for restaurants, retailers and consumer product firms alike.
Most companies have already seen decelerating pricing power in recent quarters — partly due to the more challenging demand climate and partly due to prices already being at very high levels.
Shake Shack said it raised prices in mid-March, but executives told analysts they have “no current plans to further increase price this year.” That decision was made even though they “expect inflationary pressures in wages and food and paper to persist.”
With a greater focus on promotions, profit margins will be under more pressure. Look at Starbucks, which saw margins that both missed Wall Street estimates and shrunk compared to a year ago. One of the reasons cited in its earnings report for the disappointing margin performance: “increased promotional activities.” Compound that with weak traffic, and it’s a recipe for trouble.
Ultimately, as companies face more pricing pressure ahead, they will likely have to rely on other cost cuts or effective cost management to help preserve their profit margins in the coming quarters.
Brace yourself for an intriguing retail earnings season in the coming weeks.
