Inflation revolutionizes consumption in the US and puts companies in trouble: more white brands and less eating out and spending on fashion

"Customers are buying more hot dogs, canned tuna or chicken." The phrase is from John David Rainey, chief financial officer of Walmart. Delivered last week at a conference with analysts, it is just one example of how US consumers are changing their buying patterns to weather the highest inflation in four decades. Less use of the car, cheaper food, more white brands, fewer meals away from home, less spending on fashion and durable goods and the search for the cheapest shops are some of the trends, but habits are changing so much that they are putting trouble for some companies.

“Many consumers are cutting back on discretionary spending and looking for cheaper options for everyday staples like gas and groceries, while others are delaying purchases, especially high-value items,” says Nicki Zink, analyst at the firm Morning Consult, in a recent report.

This is the third year in a row that the big consumer firms are on the wrong foot. The pandemic was, of course, an earthquake for consumption. The confinement, telecommuting, the stoppage of transport, the closure of hotels, cinemas, bars and restaurants changed in 2020 the way in which Americans (like the rest of the world) spent their money. To begin with, they spent much less. There were some winners (Netflix, Peloton, Zoom, Amazon...) and obvious losers (the airlines, hotels and restaurants at the forefront), but the hangover is not over.

When the worst of the pandemic was behind us, consumption woke up strongly in 2021, but problems in the supply chain caused many companies to run out of supplies to meet demand. And when they finally expected a normal year, inflation has changed the rules of the game again in 2022. Faced with high prices for gasoline and food, consumers have spent less on non-essential products just when many companies had hoarded stock for if supply problems continued.

Less spending on appliances and clothes

The giant Walmart is the largest distribution company in the United States. With annual sales of some 560,000 million dollars (563,000 euros at current exchange rates), omnipresent throughout the country, it serves as an X-ray of the evolution of consumption in the United States. “As the year has progressed, we have seen more pronounced changes in consumption and purchasing activity,” Rainey noted. Inflation has had multiple effects. More tuna and chicken and fewer delicacies is one of those trends. Another: "The penetration of white brands has also increased," he explained. But in addition, there has been more spending on food and less on appliances, clothing and other discretionary items. That has forced the company to liquidate stocks at deep discounts: “We have removed most of the summer seasonal inventory, but remain focused on reducing exposure to other areas such as electronics, home and sporting goods. We have also canceled billions of dollars in orders to help bring inventory levels in line with anticipated demand.

Another trend is for richer people to buy food at Walmart. Pressed by inflation, middle and high income customers move from more select supermarkets to the establishments of the chain, which is very competitive in prices. “We have seen that middle and upper income customers come to Walmart looking for good value for money. Food and consumables is where they're looking to save some money," said CEO Doug McMillon.

Taken together, those changes have hurt his bottom line, because food leaves lower margins than other products, but he has at least been able to make up for it a bit with higher food prices and new customers.

It has been worse for Target, another distribution giant that sells less food. Its operating margin on sales has fallen from 9.8% to 1.2% due to the liquidation of surplus stock. "An operating margin of just over 1% is far below anything I've seen in my career and it's something I don't expect to see again," said its chief financial officer, Michael Fiddelke. "We announced that our team would undertake a bold effort to adjust our inventory position in categories whose demand patterns have radically changed," said CEO Brian Cornell. Still, stocks have grown 36% in a year.

Excess merchandise

Food has held up somewhat better at Target as well. The one who does not sell food is Kohl's, the largest department store chain in the United States focused on fashion and accessories, which has fully felt this change in consumption habits. “High inflation and declining consumer spending are having wide-ranging repercussions across much of retail, especially in discretionary categories like apparel. Given our penetration in these categories, this is disproportionately affecting Kohl's," Michelle Gass, its CEO, said last week after lowering sales and profit forecasts. “Middle income customers have become more cost conscious and feel more pressure on their budgets. They make fewer purchases, spend less per transaction and opt for our own savings-oriented brands”, he added.