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The State of the Consumer in 2024: Spending Trends, Price Sensitivity, and Profit Squeeze

The state of the consumer in 2024 is already becoming evident as major retailers prepare to report their first-quarter earnings. While there are signs that the U.S. consumer is still spending, especially on experiences, stubbornly high prices are putting pressure on consumers with lower incomes and impacting everyday purchases and corporate profits.

Credit card companies like American Express, Visa, and MasterCard have described spending trends as relatively strong and stable. Payment firms like PayPal and Block are also seeing strong transaction volumes and payment growth. This indicates that consumers are still actively using their credit cards for purchases.

Airlines and hotels are expecting a strong travel season ahead, particularly for international destinations. One-third of consumers prioritize travel over other discretionary purchases and services. A Morgan Stanley survey showed that 60% of U.S. consumers are planning a summer vacation this year, with about half of them expecting to spend more than they did last summer.

Cruise lines are experiencing record bookings despite higher prices. Passengers are still spending freely onboard, even though they have to pay more for food and drinks. Concerts, too, are still in high demand, even at sky-high prices, with Live Nation reporting no issues with fan demand compared to last summer.

However, when it comes to more discretionary items and everyday purchases, consumers seem to be more cautious due to economic headwinds such as elevated food costs, rising mortgage rates, and fewer government rebates. Consumers have been delaying large purchases for their homes amid economic uncertainty.

Companies like Wayfair and Stanley Black & Decker have reported weak demand for home furnishings and bigger-ticket items. Appliance sales have also struggled, as seen with Whirlpool. Pool construction and other discretionary purchases have been weaker due to high interest rates.

Consumers have also become more discerning with where and how often they dine out. Restaurant sales in the quarter have largely disappointed Wall Street. Starbucks CEO Laxman Narasimhan noted that the impact of a more cautious consumer has weighed on customer traffic, a sentiment shared by McDonald’s.

Price sensitivity among consumers has become increasingly evident. Companies like Coca-Cola, PepsiCo, Tyson Foods, Hershey, and Kellanova have observed behavioral shifts in consumers seeking out value, particularly at the low end. Consumers are more price-sensitive when it comes to everyday purchases.

As a result, companies are being forced to compete for consumers’ dollars through promotions and deals. Some companies have found success with effective promotions and loyalty programs. However, sticky inflation in food, energy, labor, and other input costs poses a major hurdle to profitability for restaurants, retailers, and consumer product firms.

Companies are already facing decelerating pricing power and increasing pressure to cut prices. This puts profit margins under strain, as seen with Starbucks. To preserve profit margins in the coming quarters, companies may have to rely on cost cuts or effective cost management.

In conclusion, the retail earnings season in the coming weeks is expected to be intriguing as companies navigate price sensitivity among consumers and the challenge of maintaining profitability in the face of rising costs.

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