High Inflation's Impact on Consumer Spending in Experience-Based Sectors

Current Spending Trends in Experience-Based Sectors

Experience-based sectors are seeing a rebound in operating income and strong demand trends, as evidenced by Disney's expected income growth and Carnival's increased full-year expectations. Marriott noted a 6% RevPAR increase in Greater China, while Live Nation remains optimistic due to a robust show pipeline despite reduced stadium activity.

"While pressures from wages, reopening costs and demand impacts are expected to persist in Q4, we do expect year-over-year Experiences operating income growth to rebound significantly in the fourth quarter due to fewer comparability or timing factors." --- (DIS, earning call, 2024/Q2)

"Based on continued strong demand trends, we are also taking up our expectations for the full year by $275 million driven by double-digit yield growth." --- (CCL, earning call, 2024/Q2)

"Greater China experienced a 6% increase in RevPAR. While growth was strong in January and February, rising 10% for those two months, demand weakened a bit after the Chinese New Year, with slower macroeconomic growth and more outbound travel, especially from high-income travelers." --- (MAR, earning call, 2024/Q1)

"The decrease in operating income was $166.4 million at constant currency. Based on our strong pipeline of arena, amphitheater and theater and club shows for the remainder of the year, coupled with our current deferred revenue balance of $5.0 billion as of March 31, 2024, we are optimistic for continued success in the remainder of the year even with reduced stadium activity relative to the prior year." --- (LYV, sec filing, 2024/Q1)

"Volume growth benefitted from additional days of operations in the current quarter as well as the opening of World of Frozen in November 2023 Increased costs driven by inflation and new guest offerings Consumer Products The increase in consumer products operating results was driven by higher games licensing revenue." --- (DIS, press release, 2024/05/07)

Inflation's Effect on Discretionary Income

Inflationary pressures have significantly impacted consumer discretionary income, leading to altered spending habits. While some companies like Costco observe a return to discretionary spending as inflation levels off, others like Walmart and McDonald's report continued softness in discretionary categories due to prolonged inflation, budget management, and economic uncertainties.

"Our results of operations are substantially affected by economic conditions, including inflationary pressures, which can vary significantly by market and can impact consumer disposable income levels and spending habits." --- (MCD, sec filing, 2024/Q1)

"As inflation has leveled off, our members are returning to purchasing more discretionary items." --- (COST, earning call, 2024/Q3)

"And even as inflation moderates and we see sequential improvement in discretionary category trends, higher interest rates, uncertainty around the future of the economy, continued social and political divisiveness and the upcoming election cycle have consumers concerned about what lies ahead." --- (TGT, earning call, 2025/Q1)

"So Walmart U. S. Continues to see strong top line results in traffic. However, discretionary has remained relatively soft in recent quarters as consumers manage budgets in the face of multiple quarters of inflationary pressures and our protection is still lapping pandemic buying." --- (WMT, conference, 2024/06/11)

"Obviously, they're getting hit. I think across their full basket of goods and services by all the inflationary impacts, I think importantly, we've got a really long and strong history of being a leader in both value for money and affordability." --- (MCD, earning call, 2024/Q1)

Company Strategies to Combat Inflation

McDonald's is focusing on value and leveraging its brand power to adapt to inflation, while Starbucks is investing in product innovation, technology, and store expansion to enhance value and efficiency. Both companies are strategically using their resources to maintain stability and growth amid inflationary pressures.

"I recently spent time with our market team in Poland and experienced firsthand their renewed focus on value in an environment where significant inflation has created challenging consumer dynamics. In light of these challenges, I was impressed by the" --- (MCD, earning call, 2024/Q1)

"We continue to execute on the three key elements of our China strategy, offering more coffee forward, locally relevant product innovations, making significant investments in technology to increase omnichannel capability and digitize our stores and increase the percentage of new store openings in lower-tier markets and new county cities where we see stronger new store economics." --- (SBUX, earning call, 2024/Q2)

"The Company believes the Strategy builds on its inherent strengths by harnessing its competitive advantages while leveraging its size, scale, agility and the power of the McDonald's brand to adapt and adjust to an uncertain macroenvironment to meet customer demands." --- (MCD, sec filing, 2024/Q1)

"Use of Cash We expect to use our available cash and investments, including, but not limited to, additional potential future borrowings under the credit facilities, commercial paper program, and the issuance of debt to support and invest in our core businesses, including investing in new ways to serve our customers and supporting our store partners, repaying maturing debts, returning cash to shareholders through common stock cash dividend payments and discretionary share repurchases, and investing in new business opportunities related to our core and developing businesses." --- (SBUX, sec filing, 2024/Q2)

"and experienced firsthand their renewed focus on value in an environment where significant inflation has created challenging consumer dynamics." --- (MCD, earning call, 2024/Q1)

Consumer Sentiment and Behavioral Shifts

High inflation has led to a noticeable shift in consumer behavior, with spending moving from general merchandise to essential items like food (WMT). Consumers are increasingly seeking affordability and value (MCD), and while sentiment is softening globally (SBUX), some expected cautious spending behaviors are not materializing (SBUX).

"Well, as a percentage of the basket consumers are buying, we've certainly seen a shift from general merchandise to food." --- (WMT, conference, 2024/06/25)

"Starbucks results for the second quarter of fiscal 2024 reflect a complex operating environment globally, including softening consumer sentiment, a pervasive inflationary environment, and disruptions due to multiple international conflicts." --- (SBUX, sec filing, 2024/Q2)

"So I think we feel really good about the vast majority of our business. We just know the consumer is looking for more on affordability and value, and we're going to lean in and make sure we can meet those needs." --- (MCD, earning call, 2024/Q1)

"So I'm going to maybe start going to John David and saying, everybody always wants to know how our consumers feeling generally out there, Any changes in behavior?" --- (WMT, conference, 2024/06/25)

"That's the first part. And the second is just, in terms of the cautious consumer, typically I think what we'd see is check management, and you don't seem to be seeing that." --- (SBUX, earning call, 2024/Q2)

Policy Responses and Economic Measures

Economic conditions and policymaking actions, including interest rate changes, government incentives, and tariffs, significantly impact consumer spending and cost structures in experience-based sectors. Inflationary pressures, rising energy prices, and regulatory uncertainties further compound these effects, influencing both market volatility and competitive landscapes.

"In addition, economic conditions and actions by policymaking bodies are contributing to changing interest rates and significant capital market volatility, which, along with any increases in our borrowing levels, could increase our future borrowing costs." --- (AMZN, sec filing, 2024/Q1)

"At the same time, changes in government and economic incentives or tariffs may also impact our sales, cost structure and the competitive landscape. Cash Flow and Capital Expenditure Trends" --- (TSLA, sec filing, 2024/Q2)

"Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic and geopolitical conditions and customer demand and spending, including the impact of recessionary fears, inflation, interest rates, regional labor market constraints, world events, the rate of growth of the Internet, online commerce, cloud services and new and emerging technologies, and the various factors detailed in our filings with the SEC." --- (AMZN, earning call, 2024/Q1)

"Changes in government and economic incentives or tariffs may also impact our sales, cost structure and the competitive landscape." --- (TSLA, sec filing, 2024/Q2)

"However, we operate in a cyclical industry that is sensitive to political and regulatory uncertainty, including with respect to trade and the environment, all of which can be compounded by inflationary pressures, rising energy prices, interest rate fluctuations and the liquidity of enterprise customers." --- (TSLA, sec filing, 2024/Q1)

Long-Term Outlook and Predictions

Companies in the experience-based sector, such as Carnival, Starbucks, Disney, McDonald's, and Netflix, are focusing on strategic positioning, value programs, and durable revenue foundations to navigate long-term market conditions. Despite high inflation, they aim for sustainable growth and differentiation, leveraging premium offerings, marketing initiatives, and scalable business models.

"Also, our consistent track record, our book position, our focus on commercial activity improvement, our portfolio management and the yet to be realized future benefits we'll receive from our Celebration Key destination development builds increased confidence in achieving the low to mid-single-digit yield growth set out in our long-term targets." --- (CCL, earning call, 2024/Q2)

"And so I think as long as we continue to focus on that elevated positioning, which we will do, particularly as we play in the premium, I think there's opportunity for us to continue to differentiate ourselves even over the long term as the market continues to evolve." --- (SBUX, conference, 2024/06/05)

"We ended Q2 with 22.5 million ad tier subscribers globally. We are pleased with the progress we're making in streaming although, as we said before, the path to long-term profitability is not a linear one." --- (DIS, earning call, 2024/Q2)

"Chris Kempczinski: Sure. Well, I think what we've seen, if I turn to France, as an example, France, I was talking about last quarter as having a number of areas of opportunity and in my prepared remarks, I noted that, that system in France came together very quickly around a national value program that they then put significant marketing support against and they got to north of 80% awareness in a very short period of time, that's starting to drive encouraging trends in their business results." --- (MCD, earning call, 2024/Q1)

"But again, the key there is that this is all we're kind of managing this business transition in a way that's really healthy for overall revenue growth as you see with 15% reported revenue growth in the quarter, strong outlook for the year and we're building into a much more kind of durable and healthy foundation for revenue growth going forward across a larger base of paid members and a really kind of strong and scaled highly engaged audience to build into our advertising over time and a strong paid sharing solution and also to kind of penetrate into those households." --- (NFLX, earning call, 2024/Q1)