Companies are losing pricing power after years of rampant spending

It's a shift from recent years when consumers were spending at a rapid pace — and at high prices — pushing corporate revenues to new records. But faced with weak demand, increased consumer price sensitivity, easing inflation and improving supply, some sectors are now forced to achieve earnings growth without the tailwind of higher prices.

The answer across industries has been to cut costs, whether through layoffs, acquisitions, or simply becoming more efficient. Executives have spent the past few weeks selling these cost-cutting plans to Wall Street.

Nike last week lowered its forecast for annual sales growth and revealed plans to cut costs by $2 billion over the next three years. Companies including Spirit Airlines, hit by a slowdown in domestic bookings and rising costs, offered buyouts to salaried workers, while toy maker Hasbro announced 1,100 layoffs as it struggles with lackluster toy sales.

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

“Commodity companies don't have the pricing power they had during the pandemic, some of which are in hotels and travel [industries] “They don’t have the pricing power they had in the immediate post-Covid period,” he added.

Sales growth for S&P 500 companies is on track to average 2.7% this year, according to mid-December analyst estimates published by FactSet. This is down from an average growth of 11% in 2022 compared to the previous year. Meanwhile, net margins are expected to decline only slightly year over year to 11.6% from 11.9%, FactSet reported.

“Companies are extraordinarily committed to maintaining margins,” Kelly said.

For example, FedEx, despite its weaker sales outlook, maintained its revised earnings forecast for the fiscal year ending May 31. The company announced cost-cutting measures last year.

Consumer spending has been largely resilient, but growth is slowing.

The Mastercard SpendingPulse survey showed that holiday retail spending, which excludes auto sales and travel spending, rose 3.1% from Nov. 1 through Dec. 24 of this year during the same time frame in 2022, when consumer retail spending increased year over year. 7.6%. These figures have not been adjusted for inflation.

The pull is not being felt equally across industries.

According to a MasterCard survey, restaurant spending rose 7.8% during the holidays, outpacing overall gains. Starbucks executives, for example, say sales remain strong and customers are choosing pricier drinks, increasing sales and profits.

Consumer spending on clothing and groceries rose 2.4% and 2.1%, respectively, compared to the same period last year, according to the survey. The report showed that spending on jewelry decreased by 2.4% and spending on electronics decreased by 0.4%.

Airline executives have praised strong demand over the summer as travel rebounds from pandemic shutdowns, but prices will fall from 2022, when capacity was constrained by staff shortages and plane delays. The latest inflation report from the US Department of Labor showed airfare prices fell 12% in November compared to the previous year.

Southwest Airlines CEO Bob Jordan told CNBC on the sidelines of an industry event in New York earlier this month that the company's fares remain higher than last year, despite some reductions during off-peak travel times. The carrier has trimmed its capacity growth plans for 2024 and plans to use aircraft more during periods of high demand.

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

Automakers are also losing pricing power after years of resilient demand and declining supplies of new cars led to record profits in North America for Detroit automakers as well as foreign companies such as Toyota Motor.

Average transaction prices for new vehicles rose from less than $38,000 in January 2020 to more than $50,000 at the beginning of 2023 – an unprecedented 32% increase during that period. Prices are still high but fell more than 3.5% during October to nearly $47,936, according to the latest data from Cox Automotive.

“The consumer is definitely pulling back,” said Osung Kwon, equity strategist at Bank of America, referring to some of the prices.

He continued: “But we believe that the consumer is healthy.” “The consumer balance sheet continues to look exceptional.”

There is much to cheer about the state of the American consumer – the labor market remains strong, unemployment is low, and spending is resilient.

But consumers also used their savings and credit card debt piled up, with balances reaching a record $1.08 trillion at the end of the third quarter, according to the New York Federal Reserve. Credit card Deviation rates Higher than pre-pandemic levels.

These dynamics have led some consumers to hold back on spending at a time when companies were already grappling with spending shifts as fears of the pandemic subside. Consumers who spent heavily during the Covid lockdowns on things like home improvement supplies shifted their money to services like travel and restaurants when restrictions were lifted.

While airlines, many retailers and others are anticipating a strong holiday season, the question remains whether consumers will continue their spending habits in the coming months, which is typically a low season for shopping and travel, especially as they pay off their recent purchases. This could mean a difficult period for companies to push price increases to consumers.

Even if companies are unable to raise prices and if sales growth is weak, analysts are still optimistic about next year's profits.

FactSet data shows that analysts expect a 6.6% increase in profits for S&P 500 companies in the first quarter of 2024 compared to the previous year. They expect sales to increase by 4.4%. Both growth metrics would represent year-over-year improvement and quarter-on-quarter improvement. Net margins are expected to expand by 11.8%.

Bank of America's Kwon said he expects earnings to improve even if U.S. economic growth slows, partly due to shifts in the company's strategy.

“Companies are really focusing on what they can cut,” he said. “Companies have been hiring too much and increasing capacity. They have stopped doing that.”

— CNBC's Michael Weiland contributed to this article.

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