As inflation pressures and recession fears have increased in recent months, the health of the US consumer has come into focus. AllianceBernstein Research Analyst Snezhana Otto joins The Pulse to break down where consumer finances are strong, where demand is rising, and how companies are adjusting.
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00:04 - 00:52
Hi everybody and welcome to the Pulse. Recovery Trends in the Economy, the markets and asset allocation for long term investors. I'm Matt Palazzolo, senior investment strategist at Bernstein and head of our Investment Insights Team. So listeners of our past few episodes have heard us talk a lot about the supply chain issues and the health of the U.S. consumer and inflation. And today we're going to dive even more deeply into the consumer. And we're going to speak with AllianceBernstein senior research analyst Snezhana Otto, who covers a range of consumer companies. She'll help us understand how they're doing at this point in time and what they're spending their money on and what it means for corporate earnings and economic activity, depending on how strong or weak the U.S. consumer is. Snezhana, it's great to have you. Welcome back to The Pulse.
00:53 - 00:55
It's great to be back, Matt. Thanks for having me.
00:56 - 01:17
So a lot has happened in the world of the consumer over the last two years, I think it's fair to say. And I guess one of the biggest trends once the pandemic hit was e-commerce. So if we step back a little bit, take a broader view, what was, in your opinion, what were the biggest impacts of the pandemic for those companies that had meaningful e-commerce businesses?
01:17 - 02:13
Yeah, this is a really interesting question. So e-commerce in the U.S. had sort of consistently been growing at a mid-teens rate for many years prior to the pandemic, the better part of a decade. And all of a sudden, the pandemic hit, lockdowns started. This was in the spring of 2020, and suddenly that growth rate went to 40%. So pretty big spike. And it stayed at the above 30 range right through 2020. And so e-commerce suddenly jumped in terms of its penetration of overall retail in the U.S. from something around 11% to 15%. And at that point, we really didn't know how long this would last. And if this had sort of driven a multi-year pull forward of this e-commerce penetration rate, where were we going to stay at 15% and kind of work off of this higher plateau?
02:14 - 03:09
And then you fast forward to 2021 and then in the spring of 21, we had the stimulus payments to consumers. So e-commerce kept growing at that 30 plus percent above trend rate. But at the same time, you had brick and mortar stores accelerate. And what happened once you move past the spring of 2021 is that you started having a reopening, right. People started going out to physical venues again, spending in brick and mortar stores. So that brick and mortar retail spending continued at its above trend rate. And yet suddenly e-commerce fell back down and it fell back down to growth rates that were below the pre-pandemic trend. So suddenly we were talking sort of seven, eight, 9% growth rates that were well below that 50% we've been seeing for a decade. And I think that left a lot of people scratching their heads and left a lot of e-commerce companies missing topline projections.
03:10 - 03:42
So sort of if you take that long term trend view at this point, the answer to the question of whether there was any pull forward to e-commerce penetration is actually pretty clear now. E-commerce penetration has fallen right back to the pre-pandemic trend line, as if the pandemic never happened. E-commerce at this point in the U.S. is something like 13 to 14% of total retail sales, which is right where you would have expected it to be if the pandemic didn't happen because it had been sort of growing at a one percentage point clip for a number of years.
03:42 - 03:50
So let me let me just ask you what so what I'm just confused on the on this the meaningful slowdown back down to 7% growth. Why did that happen?
03:51 - 04:26
Yeah, it was basically that falling back to trend where you are looking at it sort of on a multi-year growth basis versus pre-pandemic. E-commerce is still growing at similar rates versus the pre-pandemic level. Just so much of that growth was concentrated in that 2020 period before the reopening. And so and since the reopening started happening, that year over year, growth rate has looked pretty terrible. And what it's done is bring the e-commerce penetration rate back to that long term trend line.
04:26 - 04:43
Were there any areas that I guess saw penetration in e-commerce that that weren't visible before the pandemic? Did it all of a sudden opened up new industries or new categories that were being used through e-commerce that weren't there before?
04:44 - 05:13
Not entirely new ones, but some were accelerated much more than others. And so the one that I think people are probably most familiar with is grocery where grocery e-commerce existed before the pandemic, for sure. But so many more people tried it out by necessity during the pandemic that it drove a very meaningful acceleration there. There were other kind of quirky pockets of e-commerce that seem to have picked up like trading cards.
05:14 - 05:14
05:14 - 05:21
So, so certain. Nations that one may or may not have expected, but it was pretty broad based outside of grocery.
05:22 - 05:51
Right. I want to move over to the supply chain because, again, you cover a broad range. And I want you to give us a sense for the types of retailers and consumer businesses that you cover just so we know where you're coming from. But in terms of the supply chain, there certainly were these disruptions that have occurred. And we've talked to a number of analysts on this podcast related to that. How have the companies that you cover been affected by these issues? And I guess what have they done more importantly, to try and mitigate those challenges?
05:51 - 06:39
Yeah. So the caveat here is that I don't cover auto manufacturers, which is one of the kind of poster tours for supply chain disruption. Right. That's where the semiconductor shortage has led to really big issues. Interestingly, I do cover the auto parts retailers where the knock on effect from new cars not being able to be produced has been a huge positive because used car prices are up something like 60% versus their pre-pandemic levels. They've actually started falling sequentially a little bit in the last few months, but they're still up very significantly, and that has meant that people need to hold on to their used vehicles for longer. And so they're buying more auto parts and as a result, the auto parts retailers are doing well.
06:41 - 07:25
So I do cover most consumer discretionary names outside of auto as well as some staples retailers. And because my focus is large cap, interestingly enough, most of those companies have had very little disruption in actual reported sales as a result of supply chain issues. And I think this has been in part because a number of them I have spoken to, to the advantages of scale in securing supply and also doing things that help them get that supply to their customer faster. So some of the biggest retailers in the U.S. have chartered their own ships, which certainly helps get around some, though not all of the kind of supply chain and shipping issues.
07:25 - 07:34
We've also heard of companies and I know this you can't do this at scale, but chartering planes to get goods, you know, from one location to another.
07:35 - 08:17
Right. That's a really good point. And actually, the the increased use of airfreight, that's been where actually the supply chain disruptions have showed up in the numbers for my company. So it's been on the margin front just because airfreight is so much more expensive as a mode of transportation for a lot of these companies, that to the extent they've been forced to use airfreight instead of shipping in order to get their goods to their customer before they are out of season and they need to discount them. That's meant pretty significant pressure on margins and that was pretty evident in the holiday quarter and Q4 last year. But it's becoming even more broad based now.
08:18 - 08:42
So it sounds like these companies have done a good job getting product on the shelf or keeping product on the shelf through the the last couple of years. How about on the on the cost of goods side? The inputs into making their product in many cases have been more expensive. So has that been a challenge for them? To what extent have their margins been squeezed? And if so, have they been able to take price and push that on to the consumer?
08:42 - 09:25
It has been a challenge, but so far they've been able to take price by and large. And again, this is sort of a little bit backwards looking because most of the US retailers have yet to report results for Q1. And so as of Q4 of last year, most were able to more than pass on the cost of goods increases. This varied obviously a little bit by how price elastic the category was. And as you might expect, the more need based categories were less price elastic. It was not a problem at all to pass on price. The more discretionary categories were able to pass on price to a surprising degree as well.
09:26 - 09:55
Yeah. And in some cases, there was a little bit of a of a positive effect as well of all of this on the larger retailers that I look at, which was that to the extent that they were able to get their hands on product when their competitors couldn't, even if it wasn't exactly the SKU or the brand that they would normally source, the fact that they had it on shelves actually in some cases drove some share gains versus smaller competitors who might have had more out of stocks.
09:55 - 10:11
I wanted to ask you and we probably should have started the conversation here. I wanted to ask you about the consumer. As you look at the broad swath of companies that you cover today, what's the state of the U.S. consumer in May of 2022?
10:11 - 11:05
Good question. And I think it's surprisingly. Been the case that it's stronger for longer than we might have expected. There are some initial cracks emerging in the strength of consumer spending, but overall, so far, it's trending way better than one might have thought. Even just looking at 2022 at the beginning of the year. Remember that in 2020 and 21, U.S. consumers got a pretty significant bump to their income from transfer payments in the form of stimulus checks, enhanced unemployment and various other forms of stimulus. So coming into this year, it was already going to be a hard compare for many retailers who had seen consumers spend a large chunk of those checks on their physical cars, given that people couldn't really spend much on services and experiences back during lockdowns.
11:05 - 11:48
Add to that that obviously we've got record inflation and gas prices are really high, and especially for the low end consumer where you had the biggest bump from stimulus payments, but also the biggest headwind given that energy tends to be something like 8% of their total spending versus half of that for the U.S. consumer overall. And you've got a pretty scary mix in terms of factors that could slow down spending. And yet spending has held up in aggregate really well. That's despite consumer sentiment not looking all that rosy. But most retailers have yet to report. But just based on commentary so far and government data on month on month retail sales, it seems to be holding up pretty well in aggregate.
11:48 - 11:59
And so why is that? Is it because the labor market is so strong and everybody. I wouldn't say everybody. Right. But but unemployment is so low and wage increases are occurring or are there other drivers?
11:59 - 12:31
Yeah, I think the tight labor market and the wage increases, which are particularly high in lower wage occupations like leisure and retail, are certainly helping. Another piece of it probably is the excess savings that people had accumulated over the course of the last two years, which, depending on the income quintile, may or may not have been fully drawn down at this point. But there's also room to relever up the balance sheets, which appears to be happening right now. So all of that is helping support consumption likely.
12:31 - 12:43
And so as it relates to those transfer payments, do you have a sense for like where we are with any of that money being left over? I mean, it is still sitting in checking accounts for for individuals or is it largely been been spent?
12:43 - 12:59
So last I looked at it, there was still a significant chunk sitting in checking accounts, but more of it was concentrated in the higher income quintiles, which have a lower propensity to spend that down, whereas the lowest quintile had gotten pretty close to spending it down already.
12:59 - 13:07
Right. And as you know, the consumer are different different areas of the consumer, and consumer retail are different at any point in time.
13:07 - 13:15
So is there anything that stands out to you as holding up fairly well so far this year versus versus areas that are starting to see some cracks?
13:16 - 13:47
Yeah, the areas that are likely starting to see some cracks are the most discretionary, the bigger ticket items. And so I think the poster child for that would be home furnishings, maybe appliances and electronics. We're starting to see some negative commentary around that from companies. And interestingly enough, as I talk to my colleagues who cover similar sectors in the UK and in Australia, those are some areas that they've also called out as areas of potential weakness.
13:49 - 14:32
Other areas that people seem to be expecting to to weaken but haven't weakened yet are things like home improvement. As you know, everyone was working on their home improvement project during the pandemic and that probably led to a bunch of pull forward of sales at those retailers. And yet that seems to have held in for longer, in part probably because there was a big backlog of projects by pros. So you might have been able to complete the project you were working on yourself, but you probably had a big backlog to contend with when you were trying to get a contractor in your house. And so to the extent that those projects are still running, that's supporting some of that spend.
14:32 - 15:01
And then the other area that we've been expecting to revert to pre-pandemic trends is sort of the the spending on services and travel. And that's where I think some pretty upbeat commentary from hotel companies, from from booking sites does seem to suggest that into April, as the latest second wave wore off, people were really ready to pay up to book their summer vacation.
15:01 - 15:23
Yeah, I'm in the middle of that now trying to book some vacations. And I can certainly attest to to the higher prices both. And I know you don't cover airlines, but airline airfare airfares are higher and and hotel prices are. But I guess to be expected. This is a. Joke. Sanjana. But how's the Thai business doing? I haven't bought a tie in probably a couple of years, and I guess that's a long term trend now, isn't it?
15:24 - 15:32
It is. So that was probably affected by more than the pandemic because ties and business wear was on the downtrend even before that.
15:32 - 15:34
Long time ago, before I figured it out.
15:34 - 15:54
Yes, but during the pandemic, everyone reverted to wearing sweatpants. And interestingly enough, that is one of the areas that is showing initial weakness. So the the at home lounge where there have been some signs of people needing to buy less of that this year as they refresh their wardrobe to go out.
15:55 - 16:02
Yeah. We're not allowed to wear athleisure to work yet, but who knows? Maybe, maybe in the future we're going to start to wrap it up. And I appreciate your time.
16:02 - 16:15
But you and I had a chat a while ago and you mentioned this term to me anti recession that that the period post pandemic was the anti recession for the U.S. consumer. What did you mean by that? Explain that to our listeners.
16:16 - 17:12
Yeah, just that a recession is two or more consecutive quarters of negative GDP growth, and that's usually accompanied by negative disposable personal income growth thanks to a weaker job market. In this case, we had the negative GDP growth. We have the the weakening in very temporarily in the job market. But what you didn't see is the corresponding drop in disposable income and spending the transfer payments more than made up for the disposable income shortfall and the spending, even though it actually didn't go above normal trend. So much of it was concentrated in goods rather than services that for retailers who sell goods, it was a pretty big windfall. And so in terms of consumer spending and especially consumer goods, the two years of the pandemic were on an exceptionally strong period as opposed to a weak one.
17:12 - 18:02
That's still one of the best charts that I've seen over the last few years was it was a line of disposable income or spending historically in going into and coming out of recessions. And then this time around. And whereas normally that that line disposable income, let's just say, collapses because people lose their job or they pull back on their spending. This time it went up because of the transfer payments. So interesting dynamic. And as we've often said on this show, no economic cycle is the same as another economic cycle. And so it's always good to be informed by them historically. But but inevitably you're going to get a different situation this time around. Sanjana, we're going to have to leave it there, and we really appreciate your time and your perspective on the consumer. If it's okay with you, we're going to have you back at some point soon just to give us an update on where we stand.
18:03 - 18:05
Of course. Thanks for having me on the show again.
18:06 - 18:53
And thanks to all of you for listening today. The U.S. consumer obviously is very important to everything that we do on the investing front. It is the engine of the U.S. economy, and that's why we spent so much time trying to figure out what the consumer is doing and what they're spending their money on. As you heard today, different consumer businesses can be very different from one another. As always, we'll continue to monitor and keep you updated on the key trends and the risks in the economy and share them with you here on The Pulse. So if you enjoyed this podcast, please subscribe and rate us on Apple Podcasts or Google Play or Spotify or wherever you listen to your podcast and email us your thoughts or questions or any feedback that you have to insights at Bernstein dot com. And be sure to follow us on Instagram and on Twitter at Bernstein PWI. Until next time. Thanks and be well.
- Matthew D. Palazzolo
- Senior Investment Strategist—National Director, Investment Insights