When do consumers say enough is enough when it comes to paying more for goods and services?
The question is paramount for C-suite executives, regardless of industry, as inflation surges to levels not seen in decades. And as earnings season begins, so does concern about balancing rising costs and the consumer.
“Either companies are going to make a lot less money or they’re going to raise their prices,” RH CEO Gary Friedman said on the company’s March 30 conference call. “I don’t think anyone really understands how high the prices are going to go anywhere. … I think it’s going to run away from the consumer and I think we’re going to be in a difficult area.
Consumer prices rose 8.5% year-on-year in March, according to data from the Department of Labor. This data reflects a rise not seen in the US since the late 1970s and early 1980s, with core inflation being the highest since August 1982. The producer price index, which measures what wholesalers are paying, posted its biggest year-on-year rise on record, up 11.3% in March.
So far in 2022, rising prices have not slowed down consumers significantly. Retail spending rose 17.6% year-on-year through February, according to the Commerce Department, and January spending has been revised to a 4.9% increase, well above the original estimate of 3.8%.
This continued strong demand offers many companies an opportunity to offset the increased prices of materials and supply chain costs by passing them on to customers.
Nike raised its gross margin expectations by at least 150 basis points year over year due to the “benefits of strategic pricing,” CFO Matt Friend said on the company’s recent conference call March 21.
Conagra reported that its organic sales were up 6% in the most recent quarter, although volume was down 2.6%. The reason for this? Price/mix increased by 8.6%. CFO Dave Marberger said on the company’s April 7 conference call with analysts that the decline in volume was “primarily due to the elasticity effects of price increases.”
A hot job market, low unemployment, and a historically high savings rate have buoyed Americans and made them more willing to pay higher prices for goods and services. But while wages have risen, they have not kept pace with inflation. Real wages rose 5.6% from a year earlier, while real average hourly wages fell a seasonally adjusted 0.8% last month, according to data from the Bureau of Labor Statistics.
There are signs that consumer strength is weakening, starting with a key reading from the used car market on Monday.
CarMax saw its used-car units fall 6.5% last quarter, even as used-car revenue rose 32.6% on skyrocketing average selling prices. The company cited a number of macro factors as to why sales fell, including “softening consumer confidence, Omicron-driven surge in COVID cases, vehicle affordability and overlapping of stimulus benefits paid in the year-ago period.”
According to a CNBC poll released last week, 48 percent of Americans said they think about rising prices all the time. Additionally, 75% said they are concerned that higher prices will force them to reconsider their financial decisions in the coming months.
To combat higher prices, there are several things Americans say they are doing. 53% said they have eaten out less in the past six months, while 35% said they canceled a monthly subscription and 29% were forced to cancel a trip or vacation.
Additionally, 32% said they had already switched from a branded product to a generic version.
In the past, high earners were a safe haven for companies when it came to spending money even in difficult times. But even 68% of respondents with an income of $100,000 said they were concerned about higher prices, which would cause them to change financial decisions.
Brian Niccol, CEO of Chipotle Mexican Grill, said on CNBC’s Closing Bell on Friday that while the company “continues to see strength in consumers,” he believes “they will continue to be more discriminatory than they decide.” how they spend their dollars.”
“Our data shows us that people think twice about how far they want to drive, how often they want to drive; they also think twice about spending their dollar on a dining experience or an entertainment experience.” Nicol said. “I just think it’s becoming more of a, I would say, conscious decision about how they’re going to spend their next dollar compared to maybe a few months ago.”
Niccol said Chipotle, which previously said it has increased prices about 6% so far this year, resulting in customers paying about 10% more for their orders than a year ago, has “the pricing power to… to take over the prices if we need it”. However, he also noted that he “wouldn’t like to have to keep taking the award, but we’ll have to see how it all plays out in the future.”
CNBC research suggests that S&P 500 companies are expected to report earnings growth of 6.4% in the first quarter of 2022 and 6.8% in the second quarter, ultimately leading to about 10% growth in the second half of the year will lead. But that’s mostly driven by the energy sector, which is expected to post 233.5% earnings growth in the first quarter.
In comparison, the consumer staples and discretionary sectors are forecast for Q1 earnings growth of 1.9% and -11.9%, a harbinger that Covid-era consumer spending and demand may finally hit a wall .