Brian Spillane, senior consumer goods analyst at BofA Securities, joins Market Domination to provide insights on the health of the consumer and explore investment opportunities in consumer staples (XLP) during this economic cycle.
Spillane describes the current state of consumer behavior: “The elasticity isn't back yet. The volume isn't back yet. We're seeing changes in consumer behavior, savings and all sorts of other things. But pricing, the volume isn't coming back. We're seeing organic sales start to go negative for some companies, and that's going to be a big story for the second half of the year.”
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This post was written by Nicholas Giacobino
Video Transcript
The Personal Consumption Expenditures Price Index, P CE J Powell's preferred inflation gauge, shows signs of weakening consumer spending.
This comes as first-quarter U.S. economic growth was revised down, largely reflecting a downward revision in consumer spending, sending shoppers flocking to where they can find the most savings.
Which companies in the consumer staples industry can rise to the occasion?
We're looking at how to use the Yahoo Finance playbook to get a fuller picture.
Brian Spillane, senior consumer analyst at Bank of America;
I just joined you to discuss Brian, thank you so much for being on the show.
Let's start with the big picture.
Brian.
Um, it's okay.
Your coverage includes many names.
You managed to finish reading his report.
Brian, what did you learn listening to the conference call?
I'm curious about the consumer now.
Sure, we can think of certain tailwinds, low unemployment, and decent wage growth.
However, there was also a lot of talk about consumers becoming more cautious and thoughtful.
Brian, what was the lesson for you?
You know, the broad conclusion is that there appears to be a disconnect between what we're seeing in the macro data and what we're seeing in terms of consumer staples companies and their performance.
And, you know, I think we're going to see a key theme throughout earnings season and as we get into what's called conference season, we're going to hear even more about this theme.
It's just the volume.
For most of these companies, growth and volumes have declined significantly in the United States.
And this is even more evident in processed food companies.
The story continues
Hmm, I guess so.
This is followed by beverages, household goods and personal care products.
But it was really quite surprising.
Well, I think our hope going into this year was that, you know, consumption would start to pick up as we get into the spring, but so far that hasn't really happened yet.
And, um, you know, there are a number of reasons given for that.
But right now, volumes are declining and there don't seem to be any solid signs that things are going to get better.
Well, Brian, what's interesting is that for a while it was okay.
Sales volumes did not increase much as companies were increasing prices.
Price was more important than quantity.
But if volume falls, can these companies still make up for it on price?
Don't you feel like you're there?
No, not at all.
And that's going to be a big storyline for this group throughout the year, because we're on anniversary now.
Most of the price increases that have taken place in the last year, as you know, if you take food companies, for example, you can see the background to them.
As you know, beverages have increased in price by 25-30% since 2019, while household and personal care products have increased in price by more than 20%.
But over the last five years, we've raised prices in a way that we haven't seen since the 1970s. Now, consumer elasticity has not yet returned. That means volumes have not yet returned. So we're seeing a change in consumer behavior, people are becoming more thrifty and it's changing in a variety of ways.
But at that price point, anniversary sales won't come back.
We start to see organic sales numbers start to turn negative for some of these companies.
And that's going to be a huge storyline heading into the second half of the year.
That's right, Brian, the conventional view during periods of inflation is that prices don't fall, they just rise at a gradual pace.
But will prices of some of these products actually be reduced to boost sales volumes?
That would be a historic anomaly.
If you look back over the last 40 years or so, there's really only been one instance of inflation – you have to go all the way back to the '60s – and that's when we had inflation and then prices basically fell throughout the O curve, all of the inflationary cycles, of the last 40 years.
You're right, inflation may moderate, but it has never been reversed.
Well, you're right, the volume is weak.
Well, you know, retailers want to provide value to consumers.
Well, you know in the restaurant industry, we're starting to see more promotions in quick service restaurants.
Um, so I think the first step is for companies to start seeing more depth in their promotions.
Does that drive lift?
If not, it could be a scenario where companies have to face either accepting that sales volumes will remain sluggish or act accordingly.
But I think a lot needs to happen for that to happen.
Because lowering the price would destroy value.
Brian, we just dropped the headlines about Boston Beer's plans to sell to Suntory, but we're not asking you to comment on that deal.
Brian, there are those names, but I'm only interested in the general trends in alcohol consumption.
Brian, what do you see?
Yeah.
So in the conversation about this volume, there are two things I would say in response to that.
Prices of alcohol, including wine, beer and distilled spirits, are falling in the United States.
right?
As you know, the U.S. beer industry has been declining at a rate of 2-3% so far this year.
The alcohol industry is approaching a plateau, and the wine industry is also declining slightly.
In other words, savings are also being seen in the areas of beverages and alcohol.
And I think that trend could lead to more of this happening.
Um, trading activity.
More self-improvement actions.
And when you think about a company like Boston Beer, well, again, let's think about this.
In theory, the beer industry is not growing.
As the distinction between beer and spirits becomes more blurred as we sip cocktails, I'm beginning to think that it might make more sense than ever for beers, brewers and spirits companies to somehow merge or work even more closely together than they do now.
Brian, nice to meet you.
Thanks for coming.
As usual.
appreciate.
Yes, you're welcome.
Have a nice weekend.
you too.
