BofA Securities Senior Consumer Goods Analyst Bryan Spillane joins Market Domination to give insight into the health of the consumer and find investment opportunities in consumer staples (XLP) during this economic cycle.
Spillane lays out the current scenario with consumer behavior: “Elasticity hasn’t really come back right yet, right? Volumes haven’t come back yet. So we are seeing changes in consumer behavior, more economizing, and a lot of different ways. But with that pricing… volumes don’t come back, we’re going to start looking at, for some of these companies, organic sales begin to flirt with going negative and that’s going to be a very big storyline as we move through the back part of this year.”
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This post was written by Nicholas Jacobino
Video Transcript
The personal consumption expenditures Price Index P CE J Powell’s favoured inflation gauge revealing signs of consumer spending weakening.
It’s coming as the US economic growth in the first quarter was revised lower, primarily reflecting a downward revision to consumer spending, and shoppers flock to where they can find the most savings.
Which names in consumer staples can rise to the occasion.
We’re looking at how to navigate the big picture with the Yahoo finance playbook.
Brian Spillane, Bank of America Senior consum good analyst.
Joining us now to discuss Brian Great to have you on the show.
Let’s start like, uh, maybe big picture.
Brian.
Um, you’re covered.
A lot of names in your coverage universes.
You kind of made your way through his reports.
You listened to the conference calls, Brian, What was your takeaway?
I’m just curious about the consumer right now.
You know, you can certainly think there’s certain tail winds, low unemployment, decent wage gains.
On the other hand, we we were hearing a lot of talk about maybe a more cautious, prudent consumer.
Brian, what were your takeaways?
You know, the the the the high level takeaway is there seems to be a disconnect between what we’re you know, what we all see in the macro data and what we’re seeing in terms of the consumer staples companies and their and their performance.
And, you know, I’d see a key theme through earnings season, and I think we’ll we’ll hear more of this as we kind of move into, You know, conference season, if you will.
Is is just volume.
Growth or volumes are largely for for most of these companies, uh, declining in in the US.
And, uh, it’s more pronounced in in the packaged food companies.
Uh, kind of.
And then it is with with beverages and then household product and personal care.
But it’s been a really it’s been very surprising.
Um, I think the expectation as we we went into this year was was that, you know, consumption would would begin to make a turn as we as we moved into the spring and and so far it hasn’t really happened yet.
And, um, you know, you know, there’s a lot of, uh, many different reasons that that that have been given for it.
But I think at this point it doesn’t seem like there’s any one certain thing that that that you can point to that says, You know, it’s it’s, you know, the volumes are declining and we’ll get a turn.
Well, what’s so interesting, Brian is that for a while it was OK.
The volumes weren’t doing much because the companies were raising prices.
You had price over volume.
But if volumes are going down, are these companies still going to be able to make up for that with price?
It doesn’t feel like we’re there, does it?
No, not at all.
And And that’s gonna be a big story line for this group, really through the balance of this year because, uh, we are now anniversary.
Most of the price increases that were taken last year and, you know, for context you look at like food companies, for instance.
You know prices are up anywhere between 25 and 30% since 2019 20% or more in beverages, a little bit less so in in household product and personal care.
But we’ve rebased prices higher right in a way over the last five years that we haven’t seen since the 19 seventies, and right now consumers have the elasticity hasn’t really come back yet right volumes haven’t come back yet, so we are seeing changes in consumer behaviour, more economising and a lot of different ways.
But with with that, with that pricing anniversary volumes don’t come back.
We’re going to start looking at for some of these companies, you know, organic sales begin to, you know, flirt with with with going negative.
And that’s going to be a very big story line as we move through the back part of this year.
Well, and Brian, the conventional line during this period of inflation has been prices don’t go down, they just go up at a slower rate.
But in the case of some of these products, are we actually going to see some price cuts to get more volume through the door?
It would be historic anomaly.
I think we went back and looked at this over the course of the last 40 years or so, and there’s really been only one instance, and you have to go back way back, uh, to the sixties, where we had an instance where, um, inflation happened, and then prices dropped basically through, You know, the O over the last 40 years, through every every cycle of inflation.
You know, it’s as you said, it’s just, you know, the rate of inflation might moderate, but But we’ve never reversed.
Um, that said right, we we’ve got volume weakness.
Um, we have, uh, you know, retailers, you know, looking to offer value to consumers.
Um, we we know in the in the restaurant world, we’re beginning to see more, um, promotions in with with with quick serve restaurants.
Um, so I, I think the first step will be if we start to see companies, maybe increase promotional depth.
Does that drive lift?
If it doesn’t, then that might be the scenario where you know, companies will have to face either, you know, accepting that that volumes remain sluggish or acting on it.
But I think it would take a lot for that to happen.
Because the and implications of rolling back price is, is is, um, is going to be value would be value destructive.
Hey, Brian, we had a a headline dropped from the journal about how Boston beer and talks to sell itself to, uh, Santori not asking you to comment on that deal.
Those names, Brian, but I am interested just in the General trend of alcohol consumption.
What are you seeing, Brian?
Yeah.
So two things I would say in response to that one is in this volume conversation.
Alcohol across wine, beer and spirits in the US has softened.
Right?
You know, the beer industry in the US year to date is is declining at a 2 to 3% rate.
Spirits industry has has moved closer to flat and and the wine industry also down slightly.
So it it’s we we’ve seen that, you know, economising behaviour even occur within within beverage, alcohol.
And that trend, I think, is something that could precipitate more.
Um, transaction activity, right.
More self help type actions.
And, you know, if you think about a company like Boston beer, um you know, again, just thinking about this.
Theoretically, the beer industry isn’t growing.
We have this blurring of of beer and spirits with the right during cocktails, you start to think about does it make more sense than it ever has historically, for beer, beer companies and spirits companies to to somehow either merge or or work even more closely together than they are right now?
Brian, great to see you.
Thanks for being here.
As always.
Appreciate it.
Yeah, You’re welcome.
Have a great weekend.
You too.
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