Price hikes boost profits at global consumer giants; will spending last?
NEW YORK -Major global brands like McDonald’s, General Motors and Nestle posted steady first-quarter results built on higher prices, demonstrating that shoppers across major economies are still spending despite slowed economic activity.
Price increases for soda, appliances and other goods bolstered profits, but sales volumes declined for many bellwethers in Europe and the United States. Investors and executives are concerned consumers are starting to balk at increased costs as the economic outlook dims.
“There is uncertainty on how the consumer environment may ultimately play out in 2023,” Coca-Cola Chief Executive James Quincey said on a call with investors.
U.S. consumer confidence fell to a nine-month low in April, the Conference Board said. Global shipping leader United Parcel Service forecast full-year revenue at the lower end of estimates.
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“Deceleration in U.S. retail sales resulted in lower volume than we anticipated, and we faced ongoing demand weakness in Asia,” UPS CEO Carol Tomé said. UPS shares fell 10 percent, their biggest one-day drop since 2006.
U.S. automaker General Motors Co lifted full-year profit expectations, citing stronger-than-forecast demand. Even as electric vehicle leader Tesla has been slashing prices to spur demand, GM increased average wholesale prices for North American deliveries by $1,800 per vehicle.
“We feel really good about where we are priced right now and consumers seem to be demanding our products,” Chief Financial Officer Paul Jacobson said during GM’s conference call, but he added the pricing gains probably will not last.
So far, U.S. companies are exceeding quarterly earnings estimates by more than 8 percent, and consumer discretionary names have beaten forecasts by 20 percent, according to I/B/E/S data from Refinitiv. The S&P 500 benchmark U.S. stock index was down 1.6 percent on Tuesday.
Consumers have more wiggle room in their budgets, said Ben Ayers, senior economist at Nationwide Economics, pointing to increased use of revolving credit. Payment processing company Visa Inc said payment volumes rose 10 percent for the quarter. Balances on credit cards surpassed pre-pandemic levels last year, according to the latest New York Fed data.
Beverage giant Coca-Cola Co said average selling prices rose by 11 percent, while rival PepsiCo Inc said its prices gained 16 percent. “We see pricing moderating, which means in the context of markets like the U.S. or Europe is a reduction in the level of off-cycle price increases,” said Coke’s Quincey.
PepsiCo Chairman and CEO Ramon Laguarta said the company is confident about improved growth in China, where first-quarter GDP rebounded after the country loosened coronavirus restrictions.
“We’re seeing in China, an optimism in the customers and that’s driving volume for us across both our food and our beverage business,” Laguarta said on an analyst call.
Executives said inflation is hitting customers, particularly in Europe. McDonald’s Corp quarterly sales rose 12.6 percent worldwide, beating expectations, but CFO Ian Borden said “elevated cost inflation continued to put significant pressure on restaurant cash flows, particularly for our European franchisees.”
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California-based Chipotle also raised prices as comparable sales at the chain jumped about 11 percent in the quarter.
Nestle SA CEO Mark Schneider said “the European consumer has fared better than expected.” Switzerland-based Nestle increased prices by nearly 10% during the quarter even as sales volumes fell 0.5 percent.
The Conference Board reported a grimmer U.S. consumer outlook, with short-term expectations down and reduced plans for big purchases.
“Leading indicators are showing weakness,” said Matt McAleer, director of equity strategies at Cumberland Advisors. “But it calls into view whether we’ll see a harsh recessionary environment if employment stays as strong as it has.”
Companies during the quarter did not necessarily expand sales volumes, but were able to pass on costs, said Jack Ablin, Cresset Capital chief investment officer. That may not last if consumers pull back.
“Consumers right now are willing to go along with it, but I think many of these companies are on a short leash when it comes to pricing,” he added.
