Monday 24th of Aug 2024
Listen to this financial market update by playing this audio...
As earnings season draws to a close, Walmart, one of the last US retail giants to report its quarterly results, will provide a final feel of the pulse of the American consumer. By analysing the earnings reports of major US consumer focussed companies, several key trends appear to emerge this quarter, shedding light on how the consumer landscape is evolving.
In the food industry, the demand landscape is highly nuanced, with significant variations depending on where a product falls on the price and quality spectrum. Interestingly, this doesn’t imply that the cheapest option always wins. Instead, consumers are making more discerning choices about value, even if it means spending more.
Chipotle, for example, the mid-tier fast food chain, has been thriving, despite being pricier than fast-food giant McDonald’s. This suggests that for higher-income consumers, Chipotle represents a ‘trade-down’ from even more expensive dining options, rather than a trade-up from cheaper alternatives. This highlights a crucial distinction in consumer behaviour: people are not merely looking for the lowest price but are seeking the best value within their perceived quality threshold.
Mondelez, the snack manufacturer (owner of Oreo, Cadbury and Philadelphia), emphasised this point in its earnings release by noting a shift in consumer purchasing patterns. Two to three years ago, consumers gravitated towards larger, family-sized packages, which were seen as offering better value. Now, particularly among lower-income shoppers, there’s a move towards smaller basket sizes that fit tighter budgets. The key takeaway here is that if a product can meet the consumer’s price expectations within these constraints, it will sell; if not, it will be left on the shelf.
Pepsi echoes a similar sentiment, noting that a segment of US consumers is becoming more value conscious. This shift is forcing companies to adapt, offering more value-oriented products to retain brand loyalty.
The travel and leisure sector, meanwhile, continues to see robust demand. During the immediate post-pandemic years, there was a rush to book vacations well in advance, driven by pent-up demand and fears of rising prices. However, this behaviour has now shifted, with companies like Booking.com and Airbnb reporting that consumers are now booking trips with much shorter lead times.
Despite this change in booking behaviour, the US consumer is still prioritising vacation spending. Booking.com notes stability in the types of accommodations and the length of stays, with only a slight indication of consumers trading down in the US.
Cruise lines, such as Royal Caribbean and Norwegian Cruise, have had particularly strong quarters, with expectations to maintain pricing power, indicating that for certain experiences, consumers are still willing to spend.
Big consumer product brands are holding their ground remarkably well too, despite concerns about a weakening consumer. Procter & Gamble’s CEO remarked that, contrary to expectations, they have not seen a significant shift towards private label products, which typically gain market share during times of economic stress. Instead, brand loyalty remains strong, with consumers continuing to purchase established brands even as they face economic pressures.
Colgate experienced a positive response when it cut some prices in the US, seeing a notable improvement in volume and household penetration. This suggests that while consumers are price-sensitive, they are not abandoning trusted brands; rather, they are waiting for the right price point to make their purchases.
Similarly, Kenvue, the maker of Band-Aid and Tylenol, observed that consumers are still willing to pay a premium for brands that are perceived as science-backed, indicating that trust and perceived efficacy play crucial roles in consumer decisions, even in a tighter economic environment.
The overarching theme from this earnings season is that the American consumer is still spending, but with a more discerning approach. Impulse buys are out, and value is being redefined, with consumers carefully considering each purchase. This behaviour is likely driven by a combination of low unemployment, the depletion of excess savings accumulated during the pandemic, and the lingering effects of a significant rise in price levels, even as inflation cools.
For investors, this means that consumer spending patterns may be shifting somewhat, but they are not declining rapidly. The consumer remains in good health overall, and this is good for the economy and a positive signal for equity markets.
We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.
Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.
Copyright © 2023 Dominion Capital Strategies, All rights reserved.
Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.