Where will Americans spend their next dollar? CEOs are worried

At what stage do customers say enough is enough to pay more for products and services?

The question is on the minds of C-suit executives regardless of industry, as inflation has risen to levels not seen for decades. And with the start of the income season, there are concerns about rising costs and maintaining a balance between consumers.

“Either businesses are going to make a lot less money or they’re going to raise their prices,” RH CEO Gary Friedman said in a March 30 earnings call for the company. “I don’t think anyone really understands how much the price is going to have to go everywhere.… I think it will go beyond consumers, and I think we’ll go to some complicated place.”

According to the Department of Labor, consumer prices rose 8.5% in March from a year earlier. This data reflects an increase not seen in the United States in the late 1970s and early 1980s, where core inflation was the warmest since August 1982. The producer price index, which measures what wholesalers are paying, recorded the biggest increase of the year, rising 11.3% in March.

So far in 2022, rising prices have not significantly reduced consumer spending. Year-on-year retail spending rose 17.6% through February, according to the Commerce Department, and January spending revised up to 4.9%, well ahead of the initial 3.8% estimate.

The continued strong demand is providing an opportunity for many companies to pass on the increased pricing they have seen to the equipment and supply chain cost customers.

In a recent earnings call for the company on March 21, CFO Matt Friend said, “Nike has raised its gross margin expectations by at least 150 basis points compared to the previous year due to the strategic pricing advantage.

Conagra reported that its organic sales rose 6% in its most recent quarter, although volume fell 2.6%. The reason? Prices / blends rose 8.6%. CFO Dave Marburger said in an April 7 earnings call with analysts that the volume decline was “primarily due to the effect of price elasticity on price increases.”

A heated job market, low unemployment and historically high savings rates have encouraged Americans to pay higher prices for goods and services. But despite rising wages, they have not been able to keep up with inflation. According to the Bureau of Labor Statistics, real income rose 5.6% year-on-year, while real-time average hourly earnings fell 0.8% month-on-month.

Consumers are showing signs of weakening, starting with a key gain from the used car market on Monday.

Carmax has seen its used car unit vibrations fall 6.5% in its most recent quarter, although its used car revenue has risen 32.6% to average sales prices that have skyrocketed. The company cited a number of macro-factors as to why sales declined, including “declining consumer confidence, increasing Omicron-fuel in the case of Covid, increasing vehicle capacity, and squandering stimulus benefits provided over the previous year.”

According to a CNBC poll published last week, 48 percent of Americans say they are always thinking about raising prices. In addition, 75% said they were concerned that higher prices would force them to reconsider their financial choices in the coming months.

To fight high prices, Americans say there are several things they are doing. 53% said they had stopped eating in the last six months, while 35% said they had canceled a monthly subscription and 29% had been forced to cancel a trip or vacation.

On top of that, 32% said they have already switched from a brand-name product to a generic version.

Historically, high earners have become a safe haven for companies when it comes to spending even in rough times. But even with an income of $ 100,000, 68% of respondents indicated that they were worried about higher prices so they changed financial decisions.

Brian Nicole, CEO of Chipotle Mexican Grill, told CNBC’s “Closing Bell” on Friday that while the company “continues to see strength in consumers,” he thinks “they’re going to continue to discriminate because they’re moving forward. How to spend their dollars.” Decide. “

“Our data tells us that people are thinking twice about how far they want to drive, how often they want to drive; they are also thinking twice about whether they want to spend their dollars for a restaurant experience or entertainment experience,” said Nicole. “I think it’s becoming more and more, I would say, a conscious decision a few months ago about how they would choose to spend their next dollar.”

Nicole said Chipotle, which earlier said it had raised prices by about 6% so far this year, had customers pay about 10% more for their orders than a year ago, “We have the ability to take prices when we need them.” However, he also mentioned that he “does not want to hold the price, but we must see how things move forward.”

CNBC research suggests that S&P 500 companies are expected to grow revenue by 6.4% in the first quarter and 6.8% in the second quarter of 2022, which will eventually lead to a growth of about 10% in the second half of the year. However, it is mainly driven by the energy sector, which is projected to grow revenue by 233.5% in the first quarter.

By comparison, earnings growth in the first quarter is projected to be 1.9% and -11.9% in the consumer-led and consumer-oriented sectors, which could eventually hit the wall on consumer spending and demand in the Covid era.

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