Video transcript
Sharon Zackfia: Inflation is top of mind for investors across virtually every sector, and the consumer space is certainly no exception. With inflationary pressure and labor, commodity and raw material costs and freight, many consumer companies are taking unusually frequent price increases to help protect margins, and to a large extent so far with little customer resistance. That said, with basics such as gasoline and groceries skyrocketing, more recent consumer trends do appear mixed with signs of a slowdown in durables while experiential categories like restaurants, travel and out of home entertainment continue to accelerate on pent up demand as pandemic related restrictions have largely ended, and that gets to the root of pricing power in these unusual times.
While experiential categories inherently have more pricing power as the pandemic ebbs and consumers return to their decade's long pattern of skewing spending to experiences, consumer surveys from our consumer equity research team at William Blair, which we have been doing at least monthly since the start of the pandemic, suggests a likely swing in spending toward experiences over the next year versus 2021 with higher income households actually expecting to spend more on experiences than in 2019 the year before the pandemic.
Our surveys also indicate higher income households are the least worried about inflation, the least impacted by higher gasoline prices, and have seen the most improvement in both income levels and savings levels over the past year suggesting some level of inflation buffer and pricing power for companies offering experiences that skew to higher household income brackets. On the other end of the spectrum, our research suggests that consumers with household incomes under $100,000 are more at risk with signs of savings drain over the past year and an almost linear relationship in the strength of consumer's balance sheets to income levels.
Overall, we see categories such as restaurants as more favorably positioned as price increases at restaurants have actually materially lagged increases in the grocery aisle since last September, and that has narrowed the gap in affordability between restaurants and food prepared at home. Additionally, our survey suggests that consumers are noticing price increases less at restaurants than at grocery stores both for broader restaurants and even more so for away from home coffee retailers, which for the latter goes especially well on the potential for incremental price to bolster margin. And history bears out our thesis on restaurants weathering the inflationary storm fairly well with restaurant sales holding up during prior hyper inflationary periods in the mid-1970's and late seventies, early eighties, and that was without a return to normalcy and pent up demand after a pandemic.