Is there a decline in consumer spending? This is what CEOs say

As higher prices and increased rates of interest persist, Chipotle Burrito bowls and a European vacation are still on the table for a lot of consumers. But Big Macs and kitchen remodels will not be.

The latest round of quarterly earnings reports helped divide firms broadly into two camps: MC Donalds, Starbucks And Home Depot were amongst consumer-focused firms that surprised investors with weaker-than-expected results and said customers had reduce on spending. Others, like Sweet green And Delta Airlinesbucked the trend and reported growth.

Take that away? Consumers have change into more selective in terms of how and where they spend their money.

“Consumers are becoming even more selective with every dollar they spend as they face higher prices on their everyday spending,” McDonald’s CEO Chris Kempczinski said in the corporate’s late April conference call.

Consumers have been faced with sharply rising prices for greater than two years. This yr, most firms expect their pricing strategies to return to pre-pandemic levels because of the stabilization of commodity prices. But that doesn’t suggest actual prices on food market shelves or restaurant menus will go down, and shoppers are feeling that pressure.

According to the Labor Department, the patron price index rose 3.4% within the last 12 months through April. On Tuesday, a day before the monthly CPI report, Federal Reserve Chair Jerome Powell reiterated that inflation is falling slower than expected, likely meaning the central bank won’t cut rates of interest any time soon.

Making matters worse, many consumers have depleted savings that they had gathered in the course of the pandemic by collecting stimulus checks as a substitute of traveling. Instead, many pay their each day bills with bank cards as they incur higher costs for gas, rent and groceries. According to a quarterly report from TransUnion released last week, the typical consumer owes $6,218 on their bank cards, an 8.5% increase from a yr ago.

Aurelia Concepcion, 57, a case manager in New York, said she was planning only essential travel this yr and drew the road on family visits in Georgia and Ohio.

“Everything is too high… 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 his spending habits. Executives have been warning a couple of more cautious spending environment for a while. But it’s finally showing up in some firms’ quarterly results.

KFC, Pizza Hut and Starbucks were amongst restaurant firms that reported declining same-store sales last quarter. Home Depot’s sales were weaker than expected because potential customers delay home improvements until rates of interest fall, executives said. And Apple iPhone sales fell 10% within the tech company’s most up-to-date quarter, suggesting that customers haven’t upgraded to the newest version of the smartphone as they’ve previously.

“Some of the things that have seen prices rise the most in recent years are things that people face every day: the cost of eating out, the cost of groceries, and the cost of fuel, gas and rent,” said Brett House, an economics professor at Columbia Business School. “Regardless of whether inflation slows in these goods, prices remain very high even with lower inflation, and people are reminded of that daily.”

Big box giant Walmart said last Thursday that shoppers are prioritizing purchases of groceries and health items over general goods corresponding to household goods and electronics. the retailer reported This trend has been observed for several quarters now. Chief Financial Officer John David Rainey told CNBC that Walmart’s grocery business has received a lift from the growing gap between restaurant prices and the fee of cooking at home.

Lower-income consumers struggle greater than other demographics. They have not been able to avoid wasting as much in the course of the pandemic, and there is evidence that they’ve depleted those savings, House said. Additionally, rental prices have increased, and low-income consumers are more inclined to rent than own.

PepsiCo, for one, it particularly created a vulnerable, low-income consumer. The Gatorade owner reported a 5% decline in volume at its North American beverage business within the quarter.

“The low-income consumer in the U.S. is overwhelmed… [and] is planning many strategies to achieve its budgets by the end of the month,” CEO Ramon Laguarta told analysts on the company’s April conference call.

Pepsi relies on promotions and discounts to re-attract low-income shoppers. Other companies also hope that the offers will attract more customers. McDonald’s, the king of the low-price fast food segment, plans to offer a $5 meal starting June 25.

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

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

Delta and its rival United Last month, they each forecast earnings that were above analysts’ estimates for the second quarter. Both airlines offer extensive global networks and have benefited from a rebound in international travel in the wake of the pandemic, particularly to Europe and popular destinations in Asia for U.S. travelers such as Japan. Both airlines have predicted record demand for summer travel.

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

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

Delta and United also benefit from travelers who were willing to pay for more expensive seats like first class or premium economy. U.S. airlines are scrambling to add more high-priced seats to their planes and create lounges for more frugal passengers. Inflation hasn’t hurt high-income consumers as much as price-conscious consumers, giving them more room to spend.

Higher-income consumers have also patronized fast-casual restaurant chains like Chipotle, whose prices are slightly higher than the cheapest options. The burrito chain’s same-store sales rose 7% in the first quarter, driven by a 5.4% increase in foot traffic. Chipotle has a strong sense of value among its guests, CEO Brian Niccol said on the company’s earnings call. Executives have also previously emphasized that most customers come from higher income brackets.

Even Walmart has attracted consumers with deeper pockets. As customers pay more for groceries, the discount retailer has attracted more wealthy customers and stolen market share from competitors like them Goal, which has historically been more popular with wealthier buyers. The company also praised the remodeled stores and expanded merchandise on its website for targeting households with annual incomes of more than $100,000.

Target is expected to report its quarterly results on Wednesday.

However, not all companies with higher-income customer bases are experiencing the same strong demand. Corporate lapses can also lead to disappointing sales, even if shoppers don’t necessarily hold back on spending.

For example, a sports brand Lululemons U.S. sales lagged last quarter, which CEO Calvin McDonald attributed in part to a lack of key product sizes and not enough colorful items.

Then there is Starbucks, which has always positioned itself as a premium coffee brand. The coffee giant announced a surprise decline in its U.S. same-store sales and cut its full-year forecast, sending its shares plummeting. While CEO Laxman Narasimhan cited a host of factors that explained the weak quarter, including a more value-conscious consumer, Bank of America analyst Sara Senatore wrote in a research note that a social media boycott could still be the root cause.

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 bought its expensive devices or its much cheaper fitness subscriptions in its most recent fiscal quarter.

“With the economic outlook for consumers unlikely to improve later this year, Peloton’s fortunes on the product front are unlikely to change… What’s concerning, however, is that app subscriptions are also under pressure – most likely because consumers are increasing their spending “Be cautious as they suffer from subscription fatigue,” Neil Saunders, chief executive of GlobalData, said in emailed comments.

– CNBC’s MelissaSa Repko And Gabrielle Fonrouge contributed to reporting on this story.