PYMNTS MonitorEdge May 2024

Consumers Pull Back on Spending; Companies Cut Costs

consumer checking prices in store

Companies are reportedly facing the reality of limited pricing power as demand weakens and consumers become more price sensitive.

This marks a shift from recent years, when companies across various industries enjoyed strong consumer spending and the ability to increase prices, CNBC reported Friday (Dec. 29).

FedEx, Target, General Mills and Southwest are among the companies that have experienced a decrease in demand, causing them to cut their sales outlook or slash prices, according to the report.

Several factors have contributed to the challenges faced by companies in maintaining their pricing power, the report said. One significant factor is changing consumer behavior, with more price-sensitive consumers emerging. Additionally, easing inflation and improved supply have created an environment where companies can no longer rely solely on price increases to drive profits.

To counter the limitations on pricing power, companies have been implementing cost-cutting measures, per the report. This includes layoffs, buyouts and improving operational efficiency.

For example, Nike recently announced plans to reduce costs by $2 billion over the next three years, according to the report. Spirit Airlines and Hasbro have taken similar actions to address slowing demand and rising costs. Executives are actively communicating these cost-cutting plans to investors and Wall Street.

Sales growth for companies in the S&P 500 is projected to average 2.7% this year, a significant decrease from the 11% growth experienced in 2022, the report said. However, net margins are expected to only slightly decline from the previous year.

Despite weaker sales forecasts, companies like FedEx have managed to maintain their adjusted earnings outlook by implementing cost-cutting measures, per the report.

While consumer spending remains resilient overall, certain industries are experiencing varying degrees of challenges, according to the report. The Mastercard SpendingPulse survey revealed that holiday retail spending increased by 3.1% this year, compared to a 7.6% increase in 2022. However, restaurant spending rose by 7.8%, outpacing overall gains. Apparel and grocery spending also saw modest growth, while jewelry and electronics spending declined.

Airlines are facing a similar situation, with fares dropping despite robust demand in the summer, the report said.

Automakers, after enjoying years of resilient demand and low vehicle supplies, are also losing their pricing power, per the report. Average transaction prices of new vehicles experienced a 32% increase from January 2020 to the start of 2023. However, prices have declined 3.5% through October.