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When Wall Street traders decide they’ve maximized the value they can get from a certain sector of the market — technology, say — they’ll often cash out and shift their profits to another area. It’s called a sector rotation, and it happens all the time as part of the natural flow of a business cycle.
When CUSTOMERS decide they have maximized the value they can get from the things they usually buy, business leaders tend to view it with alarm—a sign that people don’t have money to spend and therefore a recession must be on the horizon.
But what if these consumers simply behave like marketers and find value elsewhere?
In earnings calls in recent weeks, executives have bemoaned customer “retraction.” McDonald’s and Starbucks sales fell, so there needs to be some serious belt-tightening. Additionally, fewer people are booking Airbnbs and families are skipping trips to Disneyland.
The horror! Everyone is selling, we must be heading for an economic cliff!
Of course, that’s not what’s actually happening.
The US economy is still quite strong, growing at an annual rate close to 3% in the last quarter. The rate of job creation is slowing and unemployment rose in July faster than expected. However, there are 6 million more Americans working now than before the pandemic, and wages are outpacing inflation.
While any pullback in spending can be a worrisome sign for the U.S. economy — a machine fueled largely by people buying things — it’s important to taper before you pull back.
Yes, we’re buying fewer Big Macs and $7 lattes. But it’s not like Americans have stopped going to restaurants — they’re just being a little more discerning when they do.
In fact, as I wrote last month, many Americans are still eager to spend, they just aren’t willing to pay Texas Roadhouse prices for McDonald’s meals they call up by pressing buttons at a kiosk and eat in their car .
Instead, they will go to Texas Roadhouse, where they can sit down and have a service with their meal. Or they’re going through Chipotle, which saw sales rise 11% last quarter at stores open at least a year.
The travel industry is also seeing demand soften, but it’s softening compared to the big growth it got in the months after the Covid restrictions were lifted. In those days, Americans were flush with savings and making up for a year of lost adventures.
These days, pandemic-era savings are largely gone, as is the pent-up desire to get out of the house at all costs.
This partly explains some of the gloom in the travel industry.
Airbnb shares fell more than 13% on Wednesday after it reported second-quarter earnings that missed expectations and warned of more pain to come.
Yes, we are booking fewer Airbnbs. And that could reflect real customer appeal, especially among lower-income travelers who may decide to stay at home. At the same time, travelers who remember a time when Airbnbs were much cheaper than hotels are put off by the home rental site’s cleaning and service fees.
Hotel chains are not seeing the same gloom.
“While we expect year-over-year growth rates to moderate, we are well above pre-pandemic levels and are seeing no signs of consumers reducing their leisure travel,” Hyatt CEO Mark Hoplamazian told investors on a call earnings this week.
Marriott’s second quarter beat expectations, and its CEO said the company expects strong demand to continue.
Disney also surprised investors when it revealed unexpected weakness in its theme parks business – a key revenue driver for the company – citing “moderation in consumer demand”.
“The lower-income consumer is feeling a bit of stress. The high-income consumer is traveling internationally,” Disney Chief Financial Officer Hugh Johnston said on an earnings call.
Visitors and travel agents say the country that calls itself the “happiest place on Earth” has become harder than ever to navigate due to the dizzying number of packages on offer.
“You need a PhD to plan a Disney World vacation anymore — they’ve made it so, so complicated,” Pete Werner, who runs Dreams Unlimited Travel, told me last year.
Disney’s park woes aren’t new. For years, fans complained about exorbitant admission prices and getting nickeled and dimed on food and drink (and countless other perks) once in the park. But it’s not just the price that has people upset at Disney — it’s the experience.
“The magic is gone,” a CNN reader recently commented. “They’ve monetized every experience and everyone’s walking around anxiously looking at their phones so they can plan every adventure… We’re done for those reasons, not because we don’t travel or can’t afford it.”
All the extras, according to Bloomberg, have pushed the cost of a typical weeklong trip for a family of four to $25,000, or up to $40,000 for a high-end experience.
At those prices, you can take the kids … almost anywhere.
A Disney spokesman declined to comment beyond the earnings call.
Bottom line: When CEOs complain about churning customers, beware the messenger. Executives don’t want to publicly admit that their customers simply don’t like their products anymore, which have become more expensive and have virtually no added value in recent years. They certainly wouldn’t want to tell shareholders that the reason demand is soft is because even the entry-level version of what they’re selling doesn’t seem worth our time.