Why Companies Are Nervous About the Consumer

The “stretched” consumer

Better than expected quarterly earnings have helped propel the S&P 500 to within a whisker of a record high on Friday. But Wall Street and Washington are closely monitoring another worrying economic indicator: the struggling consumer.

The split-screen view of the economy is becoming clearer as earnings season draws to a close. Mass-market brands, like the fast-food companies McDonald’s, KFC and Starbucks, have reported that a lot of customers are pulling back on spending as high inflation bites. But less price-sensitive sectors, such as airlines and hospitality, say customers are still booking flights, hotel rooms and tables at pricier restaurants.

The starkly different snapshots may explain why voters give President Biden poor marks for economic management, even as jobs are plentiful and growth is resilient. This is “an economy of the haves and have-nots,” Michael Reid, an economist for RBC Capital Markets, told DealBook. “The haves just have so much more spending power.”

What’s making “the haves” so flush: They tend to have little to no mortgage debt or car or student loans, and their stock-market-tied retirement accounts have accumulated healthy gains to finance vacations or nights out.

But the less-affluent are feeling the pinch. They’ve blown through their pandemic savings, and they’re racking up credit card and other loan debt. One area to watch: A surge in “buy now, pay later” programs may be masking America’s “phantom” consumer debt problem.

Company executives are increasingly warning about this cohort. On earnings calls this quarter, we’ve seen an uptick in the number of times C.E.O.s and C.F.O.s cite “low-income consumers” to explain why sales are slipping or why they give lackluster guidance on profit.

Here’s what they’re saying:

• John Peyton, C.E.O. of Dine Brands Global, the parent of Applebee’s and IHOP restaurants, told analysts that lower-income consumers are “more aggressively managing their check, finding our value-oriented items.”

• Ramon Laguarta, PepsiCo’s C.E.O., was more blunt. “The lower-income consumer in the U.S. is stretched,” he said, adding that this type of customer “is strategizing a lot to make their budgets get to the end of the month.”

• Hal Lawton, C.E.O. of Tractor Supply Company, the farming retailer, sees something similar: “In the first quarter, our upper-income consumer over-indexed in big ticket categories and recreational purchases compared to our lower-income consumer, who is prioritizing their spend on needs.”

HERE’S WHAT’S HAPPENING

Israel hits out at President Biden’s threat to withhold more weapons. Prime Minister Benjamin Netanyahu said the country would “stand alone” if needed after the U.S. refused to send bombs that could be used in a major assault on the Gazan city of Rafah. The comments are the latest sign of a widening rift between Israel and the Biden administration over the war.

T-Mobile and Verizon are said to be in talks that would divvy up U.S. Cellular. The telecommunications giants are in discussions to split one of the country’s last big regional wireless carriers, with each getting a different part of the business, according to The Wall Street Journal. One scenario: T-Mobile’s U.S. arm would pay $2 billion for some operations and wireless spectrum licenses; Verizon is in talks on a separate deal with U.S. Cellular.

The White House is reportedly planning to impose tariffs on Chinese electric vehicles. The government could target some of China’s key strategic sectors including E.V., batteries and solar cell manufacturing as soon as next week, according to Bloomberg. Biden has called Chinese E.V.s a national security threat and has accused China of using unfair industrial policies to distort markets.

Apple apologizes for the iPad ad that spurred a big backlash. The tech giant said a 60-second spot that showed a giant machine crushing tools used by artists had “missed the mark” and that it would not run on TV. The ad was slammed by actors, artists and designers, who said it was a metaphor for Big Tech destroying or co-opting their work.

How Biden and Trump are wooing business

President Biden is on a West Coast fund-raising tour, looking to extend his money lead over Donald Trump. The trip caps a week during which the president pitched his economic policies to business leaders to gain their support and reports emerged of some of Donald Trump’s promises to C.E.O.s to win their backing and donations.

Biden is heading to Silicon Valley and Seattle. Vinod Khosla, the venture capital investor, and Marissa Mayer, the former Yahoo C.E.O., will host two separate events on Friday, as first reported by Puck. Biden will then head to Seattle for a fund-raiser tomorrow.

The trip follows a push to gain business leaders’ support. Biden hosted seven C.E.O.s at the White House on Tuesday, including Citi’s Jane Fraser, the Evercore founder Roger Altman and the United Airlines boss Scott Kirby to talk geopolitics and economics.

Biden administration officials are ramping up outreach. Jeff Zients, Biden’s chief of staff, and others drew up a list of more than 100 C.E.O.s to contact (the White House hasn’t disclosed their names). The group of officials charged with smoothing relations with boardrooms — dubbed “The Hub” — includes Janet Yellen, the Treasury secretary; Lael Brainard, the director of the National Economic Council; and Gina Raimondo, the commerce secretary. “At the president and Jeff’s request, we’re strategically engaging with business leaders,” Wally Adeyemo, the deputy Treasury secretary, told DealBook.

Biden wants the C.E.O.s to help make his case. The administration is asking executives, including the former PayPal C.E.O. Dan Schulman, to call other business leaders for feedback that they might not give the president directly, a senior official said.

Many in big business haven’t been happy with his first term. Some executives are frustrated by Biden’s plans to raise taxes on the wealthy and companies. Business groups have sued Lina Khan’s F.T.C. for banning noncompete agreements and banks say that the Consumer Financial Protection Bureau under Rohit Chopra has gone “rogue” in applying his pro-consumer agenda.

Trump is promising business that he’ll roll back Biden-era rules. The Republican candidate told Big Oil executives last month that they should give $1 billion to his campaign because he would kill environmental rules that have hit the industry. He also has promised to extend the tax cuts he passed as president and said he would slash further if re-elected.

Fast-food executive charged in “sham” loan case

Federal prosecutors on Friday have charged Andrew Wiederhorn, chairman of Fat Brands, the parent of the fast-food chains Fatburger, Johnny Rockets and Hot Dog on a Stick, with orchestrating a series of “sham” payments that netted him $47 million.

Federal prosecutors accused Wiederhorn of concealing payments from the company to him between 2010 and 2021. They were categorized as “shareholder loans,” and made directly from the board, according to a grand jury indictment released on Friday. Wiederhorn “had no intention of repaying these sham ‘loans’,” the filing says. The charges include tax evasion, filing false tax returns, wire fraud and certifying faulty financial reports.

Wiederhorn has had previous run-ins with the law. Twenty years ago, he served a federal prison sentence on filing a false tax return and other charges associated with his running of Fog Cutter Capital, a holding company. His case drew national media attention, including in The Times, as Fog Cutter continued to pay his salary, a bonus and “leave of absence pay” while he served his 18-month sentence.

Wiederhorn founded Fat Brands in 2017. . In February, the publicly listed company informed shareholders that the S.E.C. was investigating Wiederhorn and two other unidentified associates in a possible criminal matter, but did not disclose details. At the time, the company said it was cooperating with the authorities.

The case was filed in the U.S. District Court for the Central District of California. The other defendants named in Friday’s indictment are William Amon, Rebecca Hershinger and the Fat Brands company.

“There is no law that says that the Fed moves first.”

— Andrew Bailey, the Bank of England governor, has signaled that the central bank could cut interest rates as soon as this summer — potentially ahead of the Fed. Meanwhile, first-quarter G.D.P. data released on Friday showed the British economy had emerged from recession.

Cocoa prices have been on a roller-coaster ride this year, leaving some of the biggest food companies in the world unsure of how to price their chocolate. The market volatility began with a disappointing 2023 cocoa crop. The commodity price more than tripled in a matter of months, reaching a record of more than $11,000 per ton in mid-April.

What will this mean for chocolate lovers? Mondelez, the makers of Chips Ahoy cookies and Cadbury chocolates, raised prices by about 6 percent in the first quarter, and Hershey did so by about 5 percent. Both companies said they wouldn’t rule out further price increases if cocoa prices stay high.

THE SPEED READ

Deals

Policy

• A federal jury found a finance executive guilty of securities fraud in an insider trading case involving Donald Trump’s social media company. (NYT)

• How Eric Schmidt, Google’s former C.E.O., has emerged as a top A.I. matchmaker in Washington. (Politico)

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