Certain corporations are currently discovering the boundaries of their pricing power following years of unrestrained consumer spending on anything from fantasy trips to house renovations.

The transportation behemoth FedEx claimed last week that consumers are choosing less expensive, faster shipping alternatives. In the autumn, airlines, like Southwest, offer lower off-peak tickets. As more consumers scrutinise their finances, companies like Target and General Mills, the maker of Cheerios, have lowered their sales projections.

This is a change from the past few years, when people spent a lot of money at high prices and at a rapid pace, setting records for business revenues. However, several industries are now required to find profit growth without the tailwind of price hikes due to declining demand, more price-sensitive consumers, lowering 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 announced plans to reduce expenses by $2 billion over the next three years last week, while also lowering its expectation for annual sales growth. Employers such as Spirit Airlines, which was negatively impacted by a decrease in domestic travel and increased expenses, extended buyout offers to salaried staff. Meanwhile, Hasbro, the toy manufacturer, declared the termination of 1,100 employees due to poor toy sales.

“I think companies are better at controlling costs than maintaining pricing power,” said David Kelly, chief global strategist at J.P. Morgan Asset Management.

“Goods companies don’t have the pricing power they did in the pandemic, and some in the hotel and travel [industries] — they don’t have the pricing power they did in the immediate post-Covid,” he added.

Mid-December FactSet analyst forecasts show that this year’s average sales growth for S&P 500 businesses is expected to be 2.7%. This is a decrease from the 11% growth on average in 2022 compared to the previous year. According to FactSet, net margins are expected to decrease somewhat from 11.9% to 11.6% in the same time period.

According to Kelly, “Companies are incredibly committed to maintaining margins.”

FedEx, for instance, kept its adjusted earnings goal for the fiscal year ending May 31 despite its lower sales forecast. A cost-cutting initiative was unveiled by the corporation last year.

Although consumer expenditure has generally been stable, growth is now declining.

According to the Mastercard SpendingPulse study, holiday retail spending increased 3.1% between November 1 and December 24, 2022, compared to the same period in 2022, when consumers’ retail spending increased 7.6% year over year. This data excludes auto sales and travel expenses. There is no inflation adjustment on those numbers.

The drag varies depending on the industry.

The Mastercard poll indicates that over the holiday season, restaurant spending increased 7.8%, above overall gains. For example, executives at Starbucks claim that sales are still high and that consumers are choosing more expensive drinks, which boosts revenue.

According to the poll, consumer spending increased 2.4% and 2.1%, respectively, on food and clothing compared to the same period last year. According to the survey, however, spending on jewellery decreased by 2.4% and spending on gadgets decreased by 0.4%.

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

Despite modest reductions during off-peak travel periods, Southwest Airlines CEO Bob Jordan stated to CNBC earlier 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 planes during times of increased demand.

“The capacity changes next year are all about getting the network optimized to match the new demand patterns,” Jordan said. “In some cases, the peak and trough [of demand] are farther apart.”

After years of strong demand and limited supply of new cars, which helped Detroit manufacturers and foreign-based businesses like Toyota Motor achieve record profits in North America, automakers are now losing their ability to set prices.

From less than $38,000 in January 2020 to more than $50,000 at the beginning of 2023, the average transaction price of new cars increased by an astounding 32% during that period. The most recent statistics from Cox Automotive shows that although prices are still high, they have decreased by more than 3.5% through October to approximately $47,936.

“The consumer is definitely pushing back,” said Ohsung Kwon, an equities strategist at Bank of America, referring to some prices.

“But we think the consumer is healthy,” he continued. “The balance sheet of the consumer still looks phenomenal.”

The situation of American consumers is generally positive: spending has been steady, the labour market is still robust, and unemployment is low.

However, the New York Federal Reserve reports that at the conclusion of the third quarter, credit card debt reached a record $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 customers are cutting back on their purchasing at a time when businesses were already having to deal with changes in expenditure as pandemic worries subsided. When the limits were relaxed, 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 when people settle down from recent purchases. That may indicate a difficult time ahead for businesses trying to raise prices on customers.

Despite the inability of corporations to boost prices and the subdued growth in sales, economists remain optimistic about profitability for the upcoming year.

According to FactSet statistics, experts see a 6.6% rise in S&P 500 businesses’ earnings in the first quarter of 2024 compared to the same period the previous year. They predict a 4.4% rise in sales. A quarterly improvement as well as a yearly improvement would be shown by both growth indicators. 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.

“Companies are really focusing on what they can cut,” he said. “Companies have overhired and overbuilt capacity. They’ve stopped doing that.”

(Adapted from CNBC.com)