- Companies catering to low-income consumers face sales, profit challenges
- Credit markets shaken by bankruptcies of lenders to low-income consumers
- Affluent consumers remain resilient, driving overall spending despite inflation
Oct 24 (Reuters) - U.S. companies across industries are feeling the squeeze from the deepening split between lower-income and affluent consumers as tariffs pile on more uncertainty.
Executives at bellwethers such as Coca-Cola, along with toymakers, hoteliers and financial-service providers have noted how lower-income households are canceling or delaying purchases, exposing a hidden belt-tightening even as affluent consumers keep U.S. spending afloat.
"There is bifurcation in the consumer behavior," Andre Schulten, CFO at consumer goods giant Procter & Gamble, said Friday, adding that while financially secure consumers are buying larger pack sizes, those living paycheck to paycheck are seeking out deals as inflation remains above the U.S. Federal Reserve's preferred 2% target.
While some estimates have shown steady headline spending, consumer sentiment surveys show pessimism over future conditions and inflation, which is currently rising at a 3% rate, according to federal data.
Nearly two-thirds of customers, up from 59% last year, plan to wait until Thanksgiving weekend for most of their holiday shopping to take advantage of discounts, according to a National Retail Federation survey.
Brad Beckham, CEO of O'Reilly Automotive, said some customers were delaying major repairs even as the replacement auto-parts retailer raised its annual revenue target.
Some companies, like Procter & Gamble and Coca-Cola, are experimenting with smaller-sized products aimed at lower-income consumers. Coca-Cola introduced mini single-serve cans of some of its sodas in U.S. convenience stores earlier this month.
"Our system in the U.S. is adapting to both the higher and the lower end, and both offer opportunities and challenges. At the lower end, affordability and value are really important," Coca-Cola's CFO John Murphy told Reuters.
Meanwhile, Target, which predominantly stocks non-essential products that lower-income consumers have steered clear of, is cutting about 1,800 jobs as part of a turnaround. It will report results next month.
While the broad-market S&P 500 has gained nearly 15% this year, the SPDR Consumer Staples ETF, which tracks companies that sell basic consumer needs, is up less than 1% in that period.
CREDIT MARKET JITTERS RAISE WORRIES
The credit market has been rattled by several bankruptcy filings by lenders that predominantly serve lower-income groups.
PrimaLend Capital Partners, which finances car purchases for customers with poor or limited credit through the "buy-here-pay-here" auto market, filed for bankruptcy earlier this week.
Tricolor, which sold cars and offered auto loans primarily to low-income Hispanic communities in the U.S. Southwest, also went bankrupt in September.
Financial-tech firm PROG Holdings, which caters to customers who may not qualify for traditional credit, cut its revenue outlook on Wednesday. Its shares are down 26% so far this year.
"While the overall unemployment rate is still low, the heightened financial stress and greater caution among lower-income consumers across our leasable categories is a headwind to gross merchandise volume," CEO Steve Michaels said.
U.S. President Donald Trump's new 25% tariffs on all medium- and heavy-duty truck imports from November 1 add another challenge, said Telsey Advisory Group analyst Dana Telsey.
"For companies operating in highly competitive sectors where price elasticity is high, there may be limited room to raise prices, forcing some firms to absorb part of the cost increase," she said.
WIN SOME, LOSE SOME
The split is also reflected within individual companies.
Hotel chains, including Hilton and Wyndham Hotels, reported softness in their budget brands and introduced discounts to woo price-sensitive travelers.
"Our franchisees in the lower chain scales are beginning to discount... more so to try to capture demand right now," Wyndham Hotels' CEO Geoffrey Ballotti said. "We're helping franchisees where we can and urging franchisees to hold rates where it makes sense."
Barbie maker Mattel and GI Joe parent Hasbro reported a steep drop in toy sales in the third quarter, as retailers delayed orders due to a more cautious customer.
On the flip side, Hasbro's gaming business, which caters to wealthier consumers, helped it raise its annual targets.
"Businesses are increasingly feeling the fallout on their sales and profits from the mounting skew between the haves and the have-nots," said Mark Zandi, chief economist at Moody's Analytics.
"It is a tough business environment for those companies that don't cater to the well-to-do."
Reporting by Juveria Tabassum and Niket Nishant in Bengaluru; Editing by Sriraj Kalluvila and David Gaffen
Source: Reuters