US Markets
Friday, December 29th, 2023 8:12 pm EDT
Key Points
- Consumer Spending Slowdown: After a period of exuberant consumer spending on various goods and services, companies are now facing the limits of their pricing power. Notably, FedEx reported a reluctance among customers to opt for faster and more expensive shipping, airlines like Southwest discounted fares, and companies such as Target and General Mills revised their sales outlooks due to budget-conscious consumers. This marks a departure from the rapid and high-priced consumer spending that previously boosted corporate revenues to record levels.
- Cost-Cutting Measures: Faced with weakening demand, increased price sensitivity among consumers, easing inflation, and improved supply chains, companies across industries are compelled to find avenues for profit growth without relying on price hikes. The prevalent response has been a widespread adoption of cost-cutting measures, including layoffs, buyouts, and efficiency improvements. Executives are actively communicating these strategies to Wall Street. Notable examples include Nike’s plan to cut costs by $2 billion over three years and Spirit Airlines offering buyouts to salaried workers in response to a slowdown in domestic bookings.
- Resilient Consumer Spending, Varied Industry Impact: Despite a general slowdown, consumer spending remains resilient, though growth is decelerating. The Mastercard SpendingPulse survey indicates a 3.1% increase in holiday retail spending from Nov. 1 to Dec. 24, 2023, compared to the same period in 2022. However, the impact is not uniform across industries, with restaurant spending, apparel, and grocery spending showing positive trends, while spending on jewelry and electronics declined. Airlines, including Southwest, are facing challenges as fares drop, even though demand remains robust. Automakers are losing pricing power after years of resilient demand, with average transaction prices of new vehicles declining.
In the wake of years marked by robust consumer spending, corporations are encountering the boundaries of their pricing power. Notable examples include FedEx observing a retreat from pricier shipping choices, airlines like Southwest offering discounted fares, and companies such as Target and General Mills revising their sales projections due to more budget-conscious consumers. This shift contrasts with the prior trend where consumers spent extravagantly, propelling corporate revenues to unprecedented heights. Now, confronted with waning demand, heightened price sensitivity, alleviating inflation, and improved supply chains, various sectors must seek profit growth without the luxury of price hikes. Consequently, companies across industries are implementing cost-cutting measures, whether through layoffs, buyouts, or operational efficiencies, as executives pitch these strategies to Wall Street.
Nike recently revised its annual sales growth forecast downward and unveiled a plan to slash costs by $2 billion over the next three years. Similarly, Spirit Airlines, grappling with a domestic booking slowdown and increased costs, offered buyouts to salaried workers, while Hasbro announced layoffs of 1,100 employees amid lackluster toy sales. David Kelly, Chief Global Strategist at J.P. Morgan Asset Management, notes that companies are currently more adept at controlling costs than maintaining pricing power, reflecting a broader trend in the business landscape.
Sales growth for S&P 500 companies is anticipated to average 2.7% this year, a substantial decline from the 11% growth recorded in 2022. Despite this, companies are resolute in maintaining margins, exemplified by FedEx, which, despite a weaker sales forecast, maintained its adjusted earnings outlook for the fiscal year ending May 31. The commitment to margin preservation is indicative of the current economic landscape, where consumer spending remains resilient but is slowing.
The Mastercard SpendingPulse survey reveals that holiday retail spending, excluding auto and travel expenses, increased by 3.1% from Nov 1 to Dec 24, 2023, compared to a 7.6% YoY increase in the same period in 2022. However, this slowdown is not uniform across sectors, with restaurant spending rising by 7.8%, apparel and grocery spending increasing by 2.4% and 2.1%, respectively, while jewelry and electronics spending experienced declines of 2.4% and 0.4%. Airline executives acknowledge robust demand, but fares are decreasing, and the latest inflation report indicates a 12% decline in airfare in November YoY.
Automakers are also witnessing a loss of pricing power after years of strong demand and low vehicle supplies. Average transaction prices of new vehicles reached over $50,000 at the beginning of 2023, reflecting a 32% increase from January 2020. However, prices have since declined by more than 3.5% to around $47,936 by October. Despite this, Ohsung Kwon, an equities strategist at Bank of America, notes that while consumers are pushing back against some prices, their overall financial health remains strong.
Despite the uncertainties surrounding consumer spending, companies are optimistic about earnings in the coming year. Analysts expect a 6.6% increase in earnings for S&P 500 companies in the first quarter of 2024 compared to the previous year, with a forecasted sales increase of 4.4%. Even if sales growth is restrained and price hikes prove challenging, analysts anticipate improved earnings, reflecting the focus on cost-cutting and strategic shifts by companies.
For the full original article on CNBC, please click here: https://www.cnbc.com/2023/12/29/companies-are-losing-their-pricing-power.html
