Cost of living crisis? Consumers keep spending for now

By Richa Naidu and Sachin Ravikumar

LONDON (Reuters) – Shopper-focused companies are seeing no scarcity of demand regardless of the hovering cost-of-living, prompting a number of to improve gross sales forecasts for the present yr, although questions stay about how lengthy that can final.

Whereas some customers are shielding themselves from worth hikes by buying and selling all the way down to personal label merchandise, sufficient are spending extra for McDonalds to threat lifting the value of a cheeseburger in Britain for the primary time in 14 years on Wednesday.

In one other instance, U.S. burrito chain Chipotle Mexican Grill Inc reported better-than-expected outcomes on Tuesday and mentioned it plans to boost menu costs once more in August after a greater than 4% enhance within the second quarter.

“Firms will elevate costs if and once they really feel customers are prepared and in a position to pay them,” mentioned Nuveen’s Chief Funding Strategist Brian Nick. “It is develop into more durable to do that in 2022 as wage development slows and extra financial savings fall.”

The worldwide economic system is mired in a critical slowdown, with some key economies at excessive threat of recession over the approaching yr, in line with Reuters polls of tons of of economists worldwide.

“There’s a actual concern that demand could also be weakening, which is able to make it onerous to justify additional worth hikes,” mentioned Nick.

Outlets and supermarkets in Britain elevated costs by 4.4% within the 12 months to July, the biggest rise since these information started in 2005, reflecting a bounce in meals and transport prices, the British Retail Consortium mentioned on Wednesday.

Shopper items giants Reckitt Benckiser and Danone each lifted gross sales forecasts on Wednesday together with automaker Mercedes, healthcare agency GSK and sportswear agency Puma.

Reckitt, maker of Dettol and Lysol cleansing merchandise, on Wednesday raised its full-year income forecast after steep worth hikes helped it beat second-quarter gross sales expectations.

Danone lifted its annual income development forecast after second-quarter like-for-like gross sales beat analysts’ estimates on sturdy demand for child meals and bottled water.

Like rival Unilever, Reckitt and Danone’s worth rises have pushed income. The most important query for traders is how lengthy that can proceed.

“What we have seen is that the patron has accepted these worth will increase, however inflation just isn’t pulling again,” mentioned Ashish Sinha, portfolio supervisor at Gabelli. “In order inflation will increase, that raises questions on demand elasticity.”

Kraft Heinz Co, maker of Philadelphia Cream Cheese and Heinz Ketchup, mentioned on Wednesday its worth hikes are largely on hiatus after quarterly volumes dipped on provide chain and demand woes.

Chief Government Officer Miguel Patricio mentioned about 99% of the supposed worth will increase for the yr have been introduced, with a majority of those applied, including that any additional pricing the corporate takes will probably be “surgical”.

LUXURY GOODS IN VOGUE

Low-income households have been hit onerous by inflation as a result of a excessive proportion of that earnings is spent on important gadgets starting from meals to gasoline and lodging.

In distinction, middle- and high-income households had been in a position to construct up substantial financial savings in the course of the pandemic as restrictions made every thing from overseas holidays to consuming out tougher. Whereas a few of these financial savings have since been eroded by inflation, they’ve extra flexibility to maintain spending.

That has resulted in booming demand for luxurious gadgets similar to sports activities automobiles and designer purses.

LVMH, the world’s greatest luxurious items agency, on Monday reported better-than-expected second-quarter gross sales, with sturdy U.S. development and a restoration in Europe offsetting declining income in Asia.

“We’re rising double-digit with most of our manufacturers so we can’t complain about European prospects. On high of that, we have got important touristic actions in Europe,” mentioned LVMH monetary chief Jean Jacques Guiony.

American vacationers vacationing in London have been spending extra due to the sturdy greenback, analysts say.

For now, the elevated prosperity of prosperous customers is offsetting the hit to revenues from decrease earners spending much less.

“It is a type of moments the place traders are these leads to Europe and pondering … enterprise has been resilient,” mentioned Danni Hewson, monetary analyst at AJ Bell.

($1 = 0.8293 kilos)

(Reporting by Richa Naidu and Sachin Ravikumar; Further reporting by Susan Mathew and Mehr Bedi in Bengaluru; Writing by Matt Scuffham; Modifying by Kirsten Donovan, Elaine Hardcastle and Lisa Shumaker)