Lower-income consumers will start tightening their belts by trading down to private label goods in 2022, analysts say

Inflation is quickly taking a toll on lower-income American consumers, while higher-income shoppers will continue to spend on premium items

RBC Capital Markets analysts say they are already seeing a growing split between how lower-income and higher-income American shoppers spend on consumer goods in 2022 as inflation and gas prices take a toll.

“We are seeing early evidence of lower-income consumer weakness with trade-down in the cigarette category (which skews to lower-income households) and some early signs of trade-down in beer from mainstream domestic beer to value brands,” analysts wrote in a report that examines the personal care, beverage, tobacco, and packaged goods categories.

Analysts expect lower-income consumers, those making $40,000 or less, to start trading down to private labels and value brands across other products as well, and steer increasingly to at-home consumption in areas like dining, entertainment, and travel. Those making $125,000 with higher savings will continue to purchase premium items.

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RBC upgraded winemakers Duckhorn Portfolio Inc. NAPA, -0.08% to outperform sector performance due to the company’s exposure to high-income consumers. Duckhorn went public last year.

On the other hand, RBC downgraded Campbell Soup Co. CPB, 0.62% to sector perform from outperform because analysts “prefer names with more exposure to away-from-home with the expected recovery [and] increased mobility, and as we are worried cost inflation will linger into FY’23 with favorable hedges rolling off.”

Altria Inc. MO, 0.48%, which sells tobacco products, was also downgraded to sector perform from outperform based on its exposure to low-income customers.

The report looks broadly at how volatility across the globe, from the war in Ukraine and beyond, is impacting spending habits. For example, RBC took Estee Lauder Cos. EL, -1.21% off of its focus list because of the near-term risks in China related to COVID and the country’s policies to combat the illness.

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“We believe names that will outperform in the balance of the year will be companies with limited exposure to Europe/China and manageable cost inflation and FX risks, and with greater exposure to higher-income consumers and to the economic reopening, mainly in Western countries,” wrote RBC in its report.

To be sure, there are companies on the luxury end of the spectrum that are also seeing spending shifts. RH RH, -2.26% said this week that its business was hurt by the Russia-Ukraine war. However, some analysts say that change could also be a result of consumers moving their dollars to other things like travel.

JPMorgan also took a look at the beverage and personal care categories this week, forecasting persistent inflation pressure through the year.

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And McCormick & Co. Inc. MKC, 2.06%, which is also watching for shoppers who are trading down, said its spices and sauces provide a culinary solution to customers who are dining at home and are purchasing lesser cuts of meat to save money.

The Consumer Staples Select Sector SPDR Fund XLP, 0.07% is up 11.2% over the past year, though it has slipped 1.5% for the year to date. The benchmark S&P 500 index has gained 15.6% over the past 12 months.

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