Shoppers are slowing down spending on everything from burgers to dishwashers, and that's bad news for a growing number of companies.
Companies as varied as McDonald's, PepsiCo, and UPS have increased prices over the past few years, helping to push inflation sharply higher. While inflation has since cooled, Americans are still stuck with higher prices for many of the things they buy.
But now consumers are cutting back — and it's up to companies to lower prices and make other changes to try to win them back.
Shoppers are slowing down food spending
The spending slowdown has slammed restaurant chains, which have launched new deals to get customers in the door. McDonald's said its $5 value meals have lured some customers back.
But rivals, including Burger King and Taco Bell, have launched longer-lasting discounts. Peter Saleh, an analyst at BCIG, wrote in a research note that the $5 meal deal from McDonald's, which was initially scheduled to last one month but has been extended, wasn't enough to boost sales in the long term.
More discounts could be attractive in this economy, consumer-industry analysts at Jefferies wrote in a research note Monday.
"Consumers are choosing to stay at home or look for cheaper alternatives than more expensive sit-down restaurants," the analysts wrote.
Starbucks also reported a decline in visits, which CEO Laxman Narasimhan has attributed to "a challenging consumer environment," especially among casual customers.
People aren't just giving up coffee breaks. The sales of essential products like packaged foods, soap, and dish detergent are also seeing a dip, companies said in their latest earnings reports.
Dirk Van de Put, the CEO of the snack conglomerate Mondelēz, said during the company's earnings call on Monday that shoppers shifted their purchases of things like Oreo cookies and Ritz crackers from supermarkets to discount stores like Walmart, which have a reputation among consumers for offering better value.
Food prices aren't rising as much as they did over the past couple years, but consumers are still feeling the pinch, he said.
"They see the food prices that have increased and they have a feeling of less purchasing power," Van de Put said, adding that Mondelēz plans to offer smaller packs of its products to appeal to lower-income shoppers.
Food prices at grocery stores have risen 24% since March 2020, though they've leveled out in the past year, according to the Bureau of Labor Statistics. The data indicates that prices at restaurants are up 27% over the same period.
Unilever, the consumer-goods company that makes Hellmann's mayonnaise and Axe body spray, and Nestlé, which makes San Pellegrino sparkling water and Kit Kat bars, also pointed to low-income shoppers spending less on their brands in North America. PepsiCo CEO Ramon Laguarta told analysts last month that the company may need to lower prices on some of its products to bump sales.
The spending slowdown is also hitting appliance purchases
Bigger-ticket items are also seeing a pullback from cost-conscious shoppers.
Whirlpool reduced its per-share earnings target for the year in its second-quarter earnings report last week, citing lower demand for dishwashers and other home appliances due to a cooling housing market.
Southwest Airlines said its revenue metrics would be lower than expected next quarter. While the number of business trips on the airline has grown faster than its capacity this year, the company's chief operating officer, Andrew Watterson, said that in terms of vacation travelers, the airline was seeing "choppiness with regards to off-peak times and how much leisure spending is going on."
And UPS said last month it would begin to cut prices to try to attract more customers.
Some analysts say consumers may be spending less for a few reasons: US households have largely used up all their COVID-era savings, saving rates are now at historic lows, and workers are receiving fewer (and smaller) pay increases.
A Wells Fargo survey earlier this year found that up to two-thirds of respondents cut spending — and more than 60% said they had little left for "extras" after paying their monthly bills.
"The data tells us that Americans — no matter who they are — are uncertain about the sustainability of their financial lives," Michael Liersch, the bank's head of advice and planning, said.
Income growth has helped consumer spending beat expectations over the past few years, Corey Tarlowe, an analyst at Jefferies, said in a note on Monday. But the recent slowdown in income growth could be acting as a drag on sales across industries.
Americans are still spending on experiences
With the sales slowdown affecting purchases of everything from groceries to furniture, there are some things people are still spending money on, the Jefferies consumer team wrote in a separate note Monday.
Americans "are still traveling, heading to sporting events, attending concerts, and playing more golf," the analysts wrote, citing data indicating that people are still booking cruise vacations and attending WrestleMania events in record numbers.
Even Starbucks' decline in visits was partially offset by bigger multi-beverage orders from the company's loyalty program, and its new boba-inspired beverages are so popular the company said supplies were running low.
Meanwhile, value-oriented retailers are doing pretty well.
Walmart continues to report strong sales — not just among low-income shoppers but increasingly from higher earners. Meanwhile, Costco raised its annual membership fee for the first time in seven years.
The economy is still humming along nicely, but if consumer brands want to keep it that way, they'll need to get creative about giving customers more bang for their buck.
Do you work in retail and have a story idea to share? Reach out to these reporters at abitter@jkmperu.com and dreuter@jkmperu.com
