Bengaluru/New York — Lower-income US households are cutting back on eating out, travel and pantry staples such as nappies, soft drinks and beer, as US tariffs on imports are set to push prices even higher, said executives from Procter & Gamble, Coca-Cola and Chipotle Mexican Grill.
Consumers are increasingly seeking bargains, according to earnings reports and executive commentary from the past two weeks. Industry experts expect profit margins to shrink as companies find they can no longer rely on price hikes to boost revenue. US President Donald Trump’s tariffs have already pushed up prices on some of P&G products, the company has said.
The tariffs, which importers are tending to pass on to consumers, are most likely to hit the poorest Americans worst, said policy researchers at the Budget Lab at Yale and the Foundation for Research on Equal Opportunity.
What is lower income?
“It does feel like there are certain cohorts of the consumer, definitely on the lower-income side, that are feeling pressure right now,” Chipotle Mexican Grill CFO Adam Rymer said.
Definitions of “low income” can vary widely, and depend on the number of dependents or children in a household and where consumers live.
Bank of America, the second biggest US consumer-facing bank, in research notes has described earners of $50,000 or less as “lower income”, and more likely to be living pay cheque to pay cheque. However, Chipotle, with its $10 burritos, has a benchmark of $75,000 or less. Coke has previously said “low-income” is less than $40,000 per year, while P&G did not immediately respond to questions about its definition.
Chipotle will consider the financial burdens on its lower-income consumers when weighing future price hikes, Rymer said.
Consumer products bellwether P&G struck a cautious tone in its forecast for its upcoming fiscal year, saying shoppers across incomes were reining in spending due to Trump’s tariffs and immigration crackdown, along with rising interest rates and inflation.
Coca-Cola is marketing more affordable sodas to lower-income consumers, CEO James Quincey said, and brewer Molson Coors added that such buyers are looking for smaller pack sizes.
Re-engaging the low-income consumer
Consumers have been tightening their wallets as inflation ticks up and companies raise prices on everyday purchases such as Hershey chocolate and Tide laundry detergent. Cuts to federal food assistance programmes are also looming. Savings consumers might have managed to sock away during the pandemic are now long gone.
“Re-engaging the low-income consumer is critical as they typically visit our restaurants more frequently than middle- and high-income consumers,” said McDonald’s CEO Chris Kempczinski. Visits from lower-earners across the fast food industry declined by a double-digit percentage from last year, and weaker jobs growth in July made them even more anxious, he noted.
Consumer caution is also reflected in big spending events such as back-to-school shopping, which is now under way, said Dana Telsey, analyst at Telsey Advisory Group.
Lower-income household credit card spending declined in the three months to June from the year-ago period, even as middle- and upper-income spending rose, Bank of America data showed. One of the few positives is a steady labour market. That has helped keep the worst of the impact at bay, analysts and executives have said.
To attract consumers with tight budgets, fast-food chains are bundling select menu items at about $5, but lower-income households seek even better deals. McDonald’s said sales of its reintroduced $2.99 snack wrap were “encouraging”.
Taco Bell introduced $1 to $3 items such as fountain sodas and burritos this year, helping demand at the Tex-Mex chain remain robust, but sales for pricier pizzas and fried chicken buckets at Pizza Hut and KFC were weak, according to Yum Brands’ earnings report this week.
Packaged foods maker Kraft Heinz said it did not expect an improvement this year, and was working to keep prices lower, including introducing value-sized packages.
“We also have a consumer who, unlike a few years ago when inflation was peaking, doesn’t have savings built up in the same way that they did in 2022 and 2023,” said Katherine Cullen, vice-president of industry and consumer insights at trade group NRF. “We see that particularly among lower-income consumers.”
German shoemaker Adidas said it would have to consider the sales effect of higher prices, aimed at offsetting tariffs, on its sneakers.
“We do anticipate further consumer [spending] cooling in the second half as ... tariff effects play through,” Citigroup CFO Mark Mason said in a call with reporters.
Reuters
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