On October 24, 2021, pedestrians carrying Nike and Allbirds shopping bags in the SoHo neighborhood of New York.
Nina Westervelt | Bloomberg | Getty Images
After years of consumers spending recklessly on everything from home improvements to dream vacations, some companies are now finding their pricing power limited.
shipping giant fedex said last week that customers had given up on faster, more expensive shipping options.Airlines include southwest Autumn off-peak fares are discounted.like Target and cereal machine general mills As more consumers focus on their budgets, they have revised down their sales outlook.
It’s a shift that has seen consumers spend at breakneck speed and at high prices in recent years, pushing business revenue to new records. But faced with weak demand, more price-sensitive consumers, easing inflation and improving supplies, some industries are now forced to seek profit growth without the boost of higher prices.
The answer across industries is to cut costs, whether through layoffs or acquisitions, or simply improve efficiency. Executives have been pitching these cost-cutting plans to Wall Street over the past few weeks.
Nike Last week it lowered its annual sales growth forecast and unveiled plans to cut costs by $2 billion over the next three years.Companies include spirit airlinesHit by slowing domestic bookings and rising costs, toy makers offer buyouts to salaried workers Hasbro The company announced it would lay off 1,100 employees due to sluggish toy sales.
“I think companies are better at containing costs than maintaining pricing power,” said David Kelly, chief global strategist at J.P. Morgan Asset Management.
“Commodity companies do not have pricing power during the epidemic, and some companies in the hotel and tourism fields also do not have pricing power. (Industry) – They don’t have the pricing power that they will have after COVID-19 is over,” he added.
Sales growth for companies in the region S&P 500 Index Average growth this year is expected to be 2.7%, according to mid-December analyst estimates released by FactSet. This is lower than the average growth rate of 11% in 2022. Meanwhile, net margins are expected to decline only slightly year over year, from 11.9% to 11.6%, FactSet said.
“The company is very committed to maintaining profits,” Kelly said.
FedEx, for example, maintained its adjusted profit outlook for the fiscal year ending May 31 despite a weaker sales forecast. The company announced cost-cutting measures last year.
Departmental Shifts
Consumer spending has remained largely resilient, but growth is slowing.
this MasterCard The SpendingPulse survey shows that between November 1 and December 24 this year, holiday retail spending (excluding car sales and travel spending) increased by 3.1% compared with the same period in 2022, while consumers’ retail spending in 2022 increased compared with the same period last year. 7.6%. These figures are not adjusted for inflation.
The resistance felt varies across industries.
According to the Mastercard survey, restaurant spending increased 7.8% during the holiday season, outpacing overall increases.administration staff at starbucksOn the one hand, he said sales remain strong, with customers opting for pricier drinks, driving sales and profits.
The survey showed that consumer spending on clothing and groceries increased by 2.4% and 2.1% respectively compared with the same period last year. However, the report showed that spending on jewelry fell by 2.4% and spending on electronics fell by 0.4%.
Airline executives said demand was strong through the summer as travel rebounded from the pandemic shutdown, but fares began to fall in 2022 when capacity was limited by staff shortages and plane delays. The latest inflation report from the U.S. Department of Labor shows that air ticket prices fell by 12% year-on-year in November.
On December 23, 2023, passengers walked with luggage at New York’s John F. Kennedy International Airport.
Gina Moon | Getty Images
Southwest Airlines CEO Bob Jordan told CNBC on the sidelines of an industry event in New York earlier this month that the airline’s fares are still up from last year, despite some discounts during off-peak travel times. The airline has slashed capacity growth plans for 2024 and plans to utilize aircraft more during periods of higher demand.
“Next year’s capacity changes are all about optimizing the network to adapt to new demand patterns,” Jordan said. “In some cases, the peaks and troughs (of demand) are farther apart.”
Automakers have also lost pricing power due to years of strong demand and dwindling new-vehicle supply, which has led to Detroit automakers and companies such as Toyota Automotive.
The average transaction price of a new car climbed from less than $38,000 in January 2020 to more than $50,000 in early 2023, an unprecedented 32% increase. Prices remain higher, but fell more than 3.5% to about $47,936 as of October, according to the latest data from Cox Automotive.
“Consumers will definitely resist,” Bank of America equity strategist Ohsung Kwon said of certain prices.
“But we think consumers are healthy,” he continued. “Consumer balance sheets continue to look alarming.”
consumption hangover
There’s a lot to like about the state of the U.S. consumer — the job market remains strong, unemployment is low and spending is resilient.
But consumers also used their savings Credit card debt balances hit a record $1.08 trillion at the end of the third quarter, according to the Federal Reserve Bank of New York.credit card delinquency rate All are above pre-pandemic levels.
Businesses are already grappling with changes in spending as concerns about the pandemic ease, and those developments have led some consumers to cut back on spending. During the coronavirus lockdown, consumers spent a lot of money on items such as home improvement items, but once restrictions were lifted, they shifted their money to services such as travel and dining.
While airlines, many retailers and others are predicting a strong holiday season, the question remains whether consumers will continue their spending habits in the coming months, which is typically a slow season for shopping and travel, especially when they When paying off a recent purchase. This could mean a challenging time for companies to push prices higher to consumers.
Even if the company can’t raise prices and sales growth is lackluster, analysts remain optimistic about profits next year.
FactSet data shows that analysts predict that profits of S&P 500 companies in the first quarter of 2024 will increase by 6.6% annually. They forecast sales growth of 4.4%. Both growth metrics will mark year-over-year and quarter-over-quarter improvements. Net profit margin is expected to expand by 11.8%.
Bank of America’s Kwon said he expects earnings to improve even as U.S. economic growth slows, in part due to a shift in the company’s strategy.
“Companies are really focused on what they can cut,” he said. “Companies have overhired and overbuilt capacity. They’ve stopped doing that.”
—CNBC’s Michael Wayland contributed to this article.
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