What we know about the consumer so far

A customer walks through The Home Depot store on February 20, 2024 in Austin, Texas.

 Brandon Bell | Getty Images

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 Depot and Walmart next week.

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, Visa and MasterCard have described spending trends as “relatively strong,” “relatively stable,” and even “healthy.” Payment firms like PayPal and Block are still seeing strong transaction volumes and payment growth.

Airlines and hotels are expecting a strong travel season ahead, particularly when it comes to international destinations, with Morgan Stanley’s Michael Wilson noting that “one third of consumers prioritize travel over other discretionary purchases and services.”

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 Holdings told analysts there are no signs consumers are taking shorter vacations or trading down in their hotel choices. Caesars said overall spending is still strong at its Las Vegas casino resorts.

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.

Royal Caribbean’s Icon of the Seas, the world’s largest cruise ship, docked at the Port of Miami on Jan. 11, 2024. 

Mike Stocker | Tribune News Service | Getty Images

Concerts, too, are still hot tickets even at sky-high prices — with Live Nation saying there are “no issues at all on fan demand relative to last summer” and that “global fan demand is stronger than ever.”

Everyday purchases

Stars Coffee logo is displayed on a mobile phone screen and Starbucks logo in the background for illustration photo. Krakow, Poland on August 23, 2022. Stars Coffee, owned by a pro-Putin rapper Anton Pinsky, opened the chain of coffee shops in Russia replacing Starbucks Corp which withdrew from the Russian market in March after Russian invasion of Ukraine. (Photo by Beata Zawrzel/NurPhoto via Getty Images)

Beata Zawrzel | Nurphoto | Getty Images

Starbucks CEO Laxman Narasimhan told 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 added that “the consumer is certainly being very discriminating in how they spend their dollar.”

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 Savita Subramanian notes that “consumer cracks are emerging,” especially among lower incomes.

Here are just some of the companies warning about price sensitivity:

  • Both Coca-Cola and PepsiCo have observed behavioral shifts in consumers seeking out value, particularly at the low end.
  • Meat producer Tyson Foods told analysts that cumulative inflation pressures have “created a more cautious, price-sensitive consumer” and that it’s experiencing “a little slippage to private label with lower-income households.”
  • Hershey said that it continues to see “value-seeking behavior from consumers.”
  • Special K and Pringles owner Kellanova saw a 5% decline in North America volumes amid elasticity pressures as a result of prices being 5% higher than a year ago.
  • Burger King and Popeyes parent Restaurant Brands noted, “We’ve seen consumers become a bit more sensitive to price, resulting in moderating check growth.”
  • Footwear and apparel maker Steve Madden bluntly said, “We do see a customer that still is price sensitive” and noted that its outlet stores have outperformed its full-priced business.

Weakness in the lower-end consumer could pose issues for discounters like Dollar General and Dollar Tree as well as off-price retailers like TJX, Ross Stores and Burlington Stores when they all report earnings in the coming weeks.

Amazon succinctly describes the new normal: “Customers are shopping but remain cautious, trading down on price when they can, and seeking out deals.” Etsy shared that same sentiment: “Consumers feel really pressured and so they are seeking value and deep discounts and deep promotions.”

Profit squeeze

Pavlo Gonchar | Lightrocket | Getty Images

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.

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