Airlines and FedEx are among the businesses that are beginning to erode their pricing power.

Certain companies are currently discovering the boundaries of their power over pricing following years of unrestrained spending by customers on everything from dream vacations to home renovations.

FedEx, a major shipping company, reported last week that customers are choosing less expensive but faster shipping options. In the autumn, airlines, including Southwest, offered reduced off-peak fares. Companies that manufacture Cheerios, such as General Mills and Target, have lowered their sales projections due to consumers being more frugal.

Contrary to recent years, when consumers spent lavishly and quickly, driving up corporate revenues to all-time highs, this represents a change in consumer behaviour. However, some industries are now required to find ways to boost profits without the tailwind of increases in prices due to declining demand, more price-sensitive users, easing inflation, and improved supply.

Reducing expenses has been the solution in all sectors, whether it be by buyouts, layoffs, or just increasing productivity. For the last few weeks, executives have been pitching these cost-cutting initiatives to Wall Street.

Nike last week announced plans to reduce expenses by a total of two billion dollars over the course of three years and lowered its forecast for annual sales growth. Businesses like Spirit Airlines, which was negatively impacted by a decline in domestic travel and increased expenses, extended buyout offers to salaried employees.

Meanwhile, Hasbro, a toy manufacturer, announced 1,100 employee layoffs due to poor toy sales. Chief global strategist David Kelly of J.P. Morgan Chase Asset Management stated, “I think companies are more effective at managing costs than keeping pricing power.”

“Some in the hotel as well as travel [industries] don’t have the power to price they did in the very first post-Covid period, and goods companies don’t have the cost power they did during the pandemic,” he continued.

Average quarterly revenues and profits for S&P 500 companies, FedEx as an Example.

According to FactSet’s mid-December analyst estimates, sales growth for S&P 500 companies is expected to average 2.7% this year. This is a decrease from the 11% growth on average in 2022 compared to the previous year. According to FactSet, net margins will only marginally decline from 11.9% to 11.6% in the coming year. Kelly stated, “Businesses are incredibly dedicated to maintaining margins.” For its fiscal year that closes on May 31, FedEx, for instance, maintained its adjusted earnings outlook despite its lower sales forecast. Last year, the business disclosed plans to reduce expenses.

Sector changes

Although consumer spending has generally remained stable, growth is now slowing. According to the Mastercard SpendingPulse survey, holiday retail spending—which does not include auto sales or travel expenses—rose 3.1% between November 1 and December 24, 2022, compared to the same period in 2022, when consumers’ retail spending boosted 7.6% year over year. There is no inflation adjustment on those numbers. The drag varies depending on the industry.

The Mastercard survey indicates that over the holiday season, restaurant spending increased 7.8%, exceeding overall gains. For example, executives at Starbucks claim that sales are still high and that consumers are choosing more expensive drinks, which is driving up sales and profits.

The survey found that consumer spending on groceries and clothing increased 2.1% and 2.4%, respectively, from the same time last year. On the other hand, the report indicated that spending on electronics decreased by 0.4% and jewellery fell by 2.4%.

Executives from airlines have bragged about strong demand this summer as travel resumes after being halted by the pandemic; however, prices are declining compared to 2022, when staffing shortages and plane delays limited capacity. According to the U.S. Dept. of Labor’s most recent inflation report, travel expenses decreased by 12% in November compared to the previous year.

Despite some reductions during off-peak travel periods, southwest airline CEO Bob Jordan stated to news channel prior this month that the airline’s fares are still higher than they were a year ago. The airline has reduced its capacity growth projections for 2024 and intends to make greater use of its aircraft during times of increased demand.

According to Jordan, “the goal of the capacity adjustments for next year is to optimize the network to meet the new demand patterns.” The demand trough and peak can occasionally be found farther apart. In addition, automakers are losing their ability to set prices after years of strong demand and limited supply of new cars, which helped Detroit automakers and international firms like Toyota Motor achieve record profits in North America.

Between January 2020 and January 2023, the average transaction price of new cars increased by 32%, an unprecedented rise from less than $38,000 to over $50,000. The most recent information from Cox Automotive shows that although prices are still high, they have decreased by over 3.5% within October to approximately $47,936. Ohsung Kwon, a Bank of America equities strategist, stated, “The customer is definitely pushing back,” in reference to certain prices. He went on, “But we believe the consumer is healthy.” “The consumer’s balance sheet continues to look amazing.”

Experiencing a hangover

Regarding the status of American consumers, there are many reasons to be optimistic: spending has been resilient, unemployment is low, and the job market is still robust.

However, the Federal Reserve Bank of New York reports that at the close of the third month of the year, credit card debt reached an unprecedented $1.08 trillion as a result of consumers using their savings as well as accruing credit card debt. Delinquent credit card rates have risen above pre-pandemic levels.

Due to these factors, some consumers are cutting back on their spending at a time when businesses were already having to deal with changes in spending as pandemic fears subsided. When the restrictions were lifted, customers who had spent a lot of money during the Covid lockdowns on items like home improvement supplies switched to services like dining out and travel.

Although many retailers, airlines, and others have predicted a robust holiday season, it is unclear if consumers will stick to their spending patterns in the upcoming months, which are normally a slow time for travel and shopping, especially as they settle down from recent purchases. That may indicate a difficult time ahead for businesses trying to raise prices on customers.

Despite the inability of companies to raise prices and the muted growth in sales, analysts remain optimistic about earnings for the upcoming year.

Net quarterly margin averages for S&P 500 companies

According to FactSet data, analysts project a 6.6% rise in S&P 500 companies’ earnings in the first period of 2024 compared to the same period the previous year. They predict a 4.4% rise in sales. A quarterly improvement as well as an annual improvement would be indicated by both growth metrics. Net margins should increase by 11.8%.

According to Kwon of Bank of America, changes in corporate strategy will likely contribute to higher profits even in the event that U.S. economic growth slows.

“What they can cut is really what companies are concentrating on,” he stated. Businesses have overbuilt and overhired. That is no longer what they do.

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