More grim news overnight on the plight of the American consumer from the latest sales and earnings figures from some of the country’s icons. Costco, one of America’s ultra cheap retailers and the country’s biggest wholesale retailer, is foregoing profit margins to try and keep price rises low.
The background of course is Americans losing their houses and their jobs. Higher petrol costs are hurting their wallets and inflation is crunching their available income, forcing them to abandon some retailers and brands for cheaper outlets and products.
PepsiCo, McDonald’s, Hershey and sandwich chain Panera Bread all reported solid profits this week. Is it a sign that, despite all the gloom, the consumer is hanging in there? Or is it a sign that the US consumer is downscaling their calorie intake and trying to make their money go further?
The Fed provided a clue with its latest “Beige Book”, a collection anecdotal reports on economic activity from across the US. The central bank used words like “grim”, “morose” and “bleak” to describe economic conditions in some parts of the country. “All reporting districts characterized overall price pressures as elevated or increasing,” the Fed said in its report on the state of the economy to July 14.
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And Costco, which is the leader in the retail clubs business, is showing signs of strain, shocking Wall Street overnight by revealing that earnings were falling because of easing demand from consumers who are resisting price rises.
The warning by Costco (which effectively sells at near wholesale prices to customers through its big barn-like stores) that its fourth-quarter results would be “well below” Wall Street’s consensus estimate of $1 per share saw the shares sold down. The company blamed inflation, particularly rising petrol and fuel prices, which has either stopped some customers from driving to its stores, or lifted its own retailing and transport costs sharply. Costco said profits would take a hit because it had decided to absorb some of the cost increases in its profit margins to “help drive sales and maintain the confidence” among its customers.
Despite the slowdown, Costco have been doing well in the past few months. In June it posted a 9% rise in sales at stores open a least a year, while BJ’s, the third-largest US warehouse club, had a 16.5% jump in sales and Wal-Mart’s Sam’s Clubs saw sales rise 8.3% in the month.
But companies like Costco are not benevolent organisations: they are aggressively-run profit generators. No wonder Wall Street was shocked. It’s almost un-American for a company to eat margin when there’s a chance to maximise earnings from compliant customers. But Costco’s customers are not compliant. They are resisting price rises or cutting back on their shopping and going elsewhere to save money on driving costs.
It’s highly likely Costco won’t be the last big US company to reveal this trend.