Are consumers reducing their spending? It depends on which CEO you ask

With higher prices and high interest rates stubbornly persisting, Chipotle Burrito bowls and European vacations are still on the agenda for many consumers. But Big Macs and kitchen renovations are not.

The latest round of quarterly earnings reports helped classify companies into two camps: McDonalds, Starbucks And Home deposit are among the consumer-focused companies that surprised investors with weaker-than-expected results, saying customers cut back on spending. Others, like Soft green And Delta Airlinesbucked the trend and recorded growth.

Takeaway meals? Consumers have become more selective about how and where they spend their money.

“Consumers continue to be even more discriminating with every dollar they spend as they face premium prices in their everyday spending,” McDonald’s CEO Chris Kempczinski said during the company’s conference call late april.

For more than two years, consumers have been facing a sharp rise in prices. This year, most companies expect their pricing strategies to return to their pre-pandemic approaches, thanks to stabilizing commodity prices. But that doesn’t mean the actual prices displayed on grocery store shelves or restaurant menus will go down, and shoppers are feeling that pinch.

The consumer price index rose 3.4% in the 12 months through April, according to Labor Department data. On Tuesday, a day before the monthly CPI report, Federal Reserve Chairman Jerome Powell reiterated that inflation was falling more slowly than expected, likely meaning the central bank will not cut interest rates. interest anytime soon.

Worse yet, many consumers depleted the savings they had accumulated during the pandemic when they collected stimulus checks instead of traveling. Instead, many pay their daily bills with credit cards as they face higher costs for gas, rent and groceries. The average consumer owes $6,218 on their credit cards, up 8.5% year over year, according to a TransUnion quarterly report released last week.

Aurelia Concepcion, 57, a case manager in New York, said she plans only essential travel this year, setting the limit on family visits in Georgia and Ohio.

“Everything is too expensive… taxis, rent.” Concepcion says she avoids restaurants: “It’s too expensive. I prefer to prepare my own food.”

Concepcion is not the only consumer changing their spending habits. Executives have been warning of a more cautious spending environment for some time. But it’s finally starting to show up in some companies’ quarterly results.

KFC, Pizza Hut and Starbucks were among the restaurant companies that reported a decline in same-store sales in the most recent quarter. Home Depot’s revenue was weaker than expected because potential customers are putting off renovations until interest rates fall, executives said. And Apple iPhone sales fell 10% in the tech company’s most recent quarter, suggesting consumers weren’t upgrading to the latest version of the smartphone as they had in the past.

“Some of the things that have seen the biggest price increases in recent years are things that people face every day: the cost of dining out, the cost of groceries, the cost of fuel, gas and rents,” said Brett House, an economics professor at Columbia Business School. “Whether or not inflation slows for these goods, even with lower inflation, prices remain very high, and people get a daily reminder of that.”

Big box giant Walmart said last Thursday that shoppers are prioritizing the purchase of food and health products over general merchandise, like household items and electronics. The retailer reported this trend for several quarters now. Chief Financial Officer John David Rainey told CNBC that Walmart’s grocery business has benefited from the growing gap between restaurant prices and the cost of cooking at home.

Low-income consumers are struggling more than other demographic groups. They haven’t been able to save as much during the pandemic, and evidence suggests they’ve exhausted those savings, according to House. Additionally, rent prices have skyrocketed and low-income consumers are more likely to rent than own.

PepsiCo, for example, particularly resonated with a lower-income, lower-income consumer. The Gatorade owner saw volume in its North American beverage business fall 5% in the quarter.

“The low-income consumer in the United States is at their wit’s end… (and) strategizing a lot to get their budget to the end of the month,” CEO Ramon Laguarta told analysts on the conference call of the company in April.

Pepsi is banking on promotions and discounts to re-attract low-income shoppers. Other businesses are also hoping the deals will attract more customers. McDonald’s, king of the low-cost fast food segment, plans to start offering a $5 meal on June 25.

While some CEOs said consumers were becoming more cautious, others — like those in the airline industry — celebrated strong and persistent spending.

“Consumers continue to prioritize travel as a discretionary investment,” Ed Bastian, CEO of Delta Air Lines, the most profitable U.S. airline, said in an interview in April.

Delta and its rival United Last month, each forecast earnings above analyst estimates for the second quarter. Both carriers offer extensive global networks and have benefited from a rebound in international travel following the pandemic, particularly to Europe and popular Asian destinations for U.S. travelers like Japan. Both carriers predicted record travel demand in the summer.

These airline trends align with a broader consumer shift that began after the pandemic lockdowns: spending more money on experiences rather than clothes or electronics.

“We still spend disproportionately on activities and services rather than goods,” House said.

Delta and United also capitalize on travelers who are willing to pay for more expensive seats, like first class or premium economy. U.S. airlines have rushed to add more expensive seats to their planes and expand their lounges for big spenders. Inflation hasn’t hurt higher-income consumers as much as it has hurt budget-conscious consumers, giving them more room to maneuver.

Higher-income consumers have also supported fast-casual restaurant chains, like Chipotle, which offer slightly higher prices than cheaper options. The burrito chain’s same-store sales rose 7% during the first quarter, fueled by a 5.4% increase in foot traffic. Chipotle has a strong perception of value among diners, CEO Brian Niccol said during the company’s conference call. Executives have also previously pointed out that most of its customers come from higher income brackets.

Even Walmart attracts consumers with deeper pockets. As customers pay more for their groceries, the discounter has attracted a wealthier clientele and stolen market share from competitors like Target, which has always been more popular with wealthier buyers. The company also credited its renovated stores and product expansion on its website with attracting households with annual incomes of more than $100,000.

Target is expected to report quarterly results on Wednesday.

However, not all businesses with higher-income customer bases have experienced the same high demand. Company misfires can also lead to disappointing sales, even if their buyers don’t necessarily cut back on spending.

For example, an athletic brand from Lululemon U.S. sales lagged in the most recent quarter, which CEO Calvin McDonald attributed in part to a shortage of key product sizes and a lack of colorful items.

Then there’s Starbucks, which has always positioned itself as a premium coffee brand. The coffee giant reported a surprise drop in U.S. same-store sales and lowered its full-year forecast, sending its shares tumbling. While CEO Laxman Narasimhan gave a long list of factors explaining the weak quarter, including a more value-conscious consumer, Bank of America analyst Sara Senatore wrote in a research note that a boycott social media could still be the main culprit.

And Peloton’s latest report was the latest in a string of disappointing results for the company. Earlier this month, the pandemic darling fired its chief executive and announced plans to lay off 15% of its staff as fewer consumers purchased its expensive equipment or much cheaper fitness memberships over the past year. its last fiscal quarter.

“With consumers’ economic prospects unlikely to improve by the end of this year, Peloton’s product trajectory is unlikely to change course… But worryingly, subscriptions to “Applications are also under pressure – likely because consumers are more cautiously reviewing their spending as they suffer from subscription fatigue,” Neil Saunders, managing director of GlobalData, said in emailed comments.

—CNBC Melissasa Repko And Gabrielle Fonrouge contributed reporting to this story.