At what point do consumers consider enough to be enough to pay more for goods and services?
The question is at the forefront of C-suite executives, regardless of industry, as inflation surges to levels not seen in decades. And as earnings season kicks in, concerns about the balance between costs rise and so do consumers.
“Businesses will make less money or they will raise their prices” RH CEO Gary Friedman said on the company’s earnings call on March 30. “I don’t think anyone really understands how high prices are going to go around. … I think it’s going to pass. away from the consumer and I think we’re going to be in some complicated space.”
Consumer prices up 8.5% from a year ago in Marchbased on Labor Department Data. That data reflects an increase the United States has not seen since the late 1970s and early 1980s, with core inflation the hottest since August 1982. Manufacturers’ Price Index, which measures measure what wholesalers are paying, post its biggest increase record year-over-year, up 11.3% in March.
So far in 2022, rising prices have not slowed consumers down significantly. According to the Commerce Department, annual retail spending was up 17.6% through February, and January spending was modified up increased by 4.9%, far exceeding the original 3.8% estimate.
That continued strong demand is creating an opportunity for many companies to offset the price increases they’ve seen in raw materials and supply chain costs by passing it on to customers.
Nike Chief Financial Officer Matt Friend said during the company’s most recent earnings press conference on March 21 raised its gross margin expectations to at least 150 basis points year-over-year for “the benefit of strategic pricing”.
Conagra reported that its organic sales were up 6% in the most recent quarter even as volumes fell 2.6% percent. The reason for that? Price/mix rose 8.6%. Chief financial officer Dave Marberger said during the company’s April 7 earnings call with analysts that the drop in volume was “primarily due to the elastic effect of price increases.”
A hot job market, low unemployment, and historically high savings rates have spurred Americans, making them willing to pay higher prices for goods and services. But while wages have risen, they have not kept pace with inflation. Real earnings rose 5.6% from a year ago, while average hourly real earnings fell 0.8% seasonally adjusted last month, according to Bureau of Labor Statistics data.
There are signs that consumer strength is getting worse, starting with the main earnings from the used car market on Monday.
CarMax saw used car sales drop 6.5% in the most recent quarter even as used car sales grew 32.6% as average selling prices skyrocketed. The company cited several macro factors as to why sales were down, including “falling consumer confidence, increasing COVID cases using Omicron fuel, affordability vehicle pay and the lack of stimulus benefits paid in the previous year.”
Forty-eight percent of Americans say they always think about rising prices, according to one CNBC survey released last week. Furthermore, 75% said they worry that higher prices will force them to rethink their financing choices in the coming months.
To counter the higher prices, yes something that the Americans say they are doing. 53% said they’ve cut back on eating out in the past six months, while 35% said they’ve canceled a monthly subscription and 29% were forced to cancel a trip or vacation.
On top of that, 32% said they had switched from the branded product to the generic version.
Historically, high earners have been a safe haven for companies to keep spending even during tough times. But even 68% of respondents with an income of $100,000 said they worry about higher prices causing them to change financial decisions.
Chipotle Mexican Grill CEO Brian Niccol said on CNBC’s “Closing Bell” on Friday that while the company “continues to see consumer strength,” he thinks “it will continue to more discrimination in the future when they decide how to spend their money.”
“Our data tells us people are thinking hard about how far they want to drive, how often they want to drive; they’re also thinking hard about whether they want to spend their money for a restaurant experience or an entertainment experience”. Nicol said. “I just think it’s becoming more and more a conscious decision about how they’re going to choose to spend their next dollar compared to maybe a few months ago.”
Niccol said Chipotle, which previously said it has raised prices by about 6% so far this year, resulting in customers paying about 10% more for their orders than they did a year ago, has the “right to” pricing to set prices when we need them.” However, he also noted that he “doesn’t want to have to keep lowering prices, but we’ll have to see how things play out in the future.”
CNBC research shows that S&P 500 companies are expected to grow earnings of 6.4% in the first quarter of 2022 and 6.8% in the second quarter, ultimately resulting in growth of about 10% in the second half of the year. But that was largely driven by the energy sector, which is forecast to post earnings growth of 233.5 percent in the first quarter.
Meanwhile, the consumer staples and consumer discretionary sectors are estimated to have posted earnings growth of 1.9% and -11.9% respectively in the first quarter, an indication that consumer spending and consumer demand in the Covid era may have finally reached a wall.
