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Inflation is rising, yet consumer demand remains strong.
That was the early message delivered by retail sales data recapping March 2022.
With more data now available from additional metrics and earnings reports from public companies, that conclusion appears to be playing out around the economic landscape.
Here’s a look at the latest data:
The Fed's favorite inflation measure
The Personal Consumption Expenditure (PCE) rose 6.6% in March over the year period that ended in March, according to data released April 29 by the Bureau of Economic Analysis. This was the highest rate increase since the period ended January 1982, topping February’s uptick of 6.4%, CNN reported.
When removing food and energy costs, the increase for March 5.3%, which is down slightly from 5.2% in February.
The PCE, which is a measure of the value of goods and services purchased in the United States, is one of the tools used by the federal government to gauge inflation. It is watched closely by the Federal Reserve as it sets monetary policy.
CPGs say Q1 demand is strong
With retail sales up 6.9% year-over-year in March, however, there were signs that price increases weren’t leading shoppers to immediately pull back. Recent earnings reports from some of the largest CPG companies confirmed this.
Procter & Gamble reported its highest sales growth in 15 years, per Reuters. Its fabric and home care unit was up 7%, while sales in its healthcare business grew 13%.
Unilever, which makes grocery and personal care items, reported that sales were up 7.3% in the first quarter. This came as it raised prices by over 8% as it offset supply chain and energy costs.
Nestlé, the food and beverage giant, reported a 5.4% increase in total sales. This came after it raised prices by 5%, and said more hikes were likely to come.
“We stepped up pricing in a responsible manner and saw sustained consumer demand,” CEO Mark Schneider said in a statement. “Cost inflation continues to increase sharply, which will require further pricing and mitigating actions over the course of the year.”
At confectionary maker Hershey, sales were up 16.1% in the first quarter, according to its earnings report. CEO Michele Buck said Easter season was especially strong for the company.
“Consumer demand for our products has remained resilient across categories and markets, despite rising inflation,” Buck told investors.
Even for Amazon, which reported its first quarterly loss since 2015 while detailing a number of cost challenges, there were no signs of consumer "softness," CFO Brian Olsavsky said on a conference call with analysts. He added that Amazon believes its selection and convenience stands out, and it will continue to work on shopper experience as it tracks how the inflationary environment influences available household income.
Consumer sentiment ticks up
In one sign of optimism for the near future, The University of Michigan Index of Consumer Sentiment recorded a month-over-month increase of 9.8% in April.
This was mainly the result of optimism for the near future. There was a 21.6% increase in a measure of the year-ahead outlook of the economy.
While there was an improvement over the last month, the University of Michigan points out that the sentiment over the last two months was still lower than any other month in the last decade.
Even with the sales growth in the first quarter, it remains a volatile economic environment. Longtime University of Michigan Surveys of Consumers Director Richard Curtin offered the following analysis:
“The downward slide in confidence represents the impact of uncertainty, which began with the pandemic and was reinforced by cross-currents, including the negative impact of inflation and higher interest rates, and the positive impact of a persistently strong labor market and rising wages. The global economy has added even more uncertainties about prospects for the U.S. economy, including the growing involvement in the military support for Ukraine, and renewed supply line disruptions from the covid crisis in China. Who would not be apprehensive about future conditions, even if on balance they anticipated a continued expansion?”
Whether that leads to what Curtin calls a “tipping point” for consumers, including a pullback in spending, remains to be seen. Leaders of consumer goods companies are watching closely.
Trending in Economy
The company is pulling back after breakneck pandemic expansion. Will it sacrifice the shopping experience along the way?
Amazon is in a period of rebalancing.
The company has long scaled at a relentless pace as it sought to not only provide a marketplace for commerce, but the infrastructure that enabled it, as well. Amazon found another level of overdrive over the last two years, as demand spiked to unseen heights during the pandemic and the company tried to build to keep up.
This wasn’t necessarily a period that saw the kind of invention that Jeff Bezos made an existential tenet of the company, but it nonetheless seems to be shaking out as a cycle that included risk and fallout.
In this case, the risk was not a new device like a smartphone or a move to bend the future to Amazon's will like drone delivery. Rather, it was an expansion that took its already-vast operations to new heights.
Nowhere was this more evident than the company’s logistics network. As CEO Andy Jassy described it to analysts Thursday on an earnings call, the company doubled the size of a fulfillment network it took a quarter-century to build in two years. It also built out a last-mile delivery network that was the size of UPS, which is one of the top two carriers in the U.S.
In 2022, all of that expansion ran into 40-year-high inflation, war in Ukraine and a pullback in demand for goods amid reopening. The company first admitted the problem: It had overbuilt.
But the solution is not to tear down. It had to keep expanding as only Amazon does, while still cutting back in a period of “belt-tightening,” as executives have put it.
That’s evident in watching developments out of the logistics network alone. Amazon pulled out of some areas, and canceled plans to expand into some new warehouses. Yet, as Business Insider reported, it still added 79 million square feet – a footprint that is equal to half of next-closest competitor Walmart’s entire distribution network. It is also expanding Buy with Prime, a new program that will allow direct-to-consumer brands to offer Prime benefits, and, by extension, access to Amazon’s logistics network. Another service, called Amazon Warehousing and Delivery, is designed for upstream storage, necessitating more space to be made available in the network.
At the same time, it will seek to keep doing more for consumers.
Jassy indicated as much when he was prompted to outline his priority areas. Beyond cost-cutting, he said speed is the second highest priority for Amazon. As if to conform this, he said later in the call that one-day shipping is getting off the ground in North America.
Selection is another priority area. At Amazon, that phrase translates to a few things, but top of mind is “expanding the third-party seller marketplace.” Third-party sellers accounted for 59% of sales in Q4. Beyond sales, Amazon’s work with the sellers who post their products on the marketplace is also lucrative for the company. Amazon allows these sellers to tap its logistics network to offer Prime through the Fulfillment by Amazon program. Its business segment called third-party seller services grew 20% year-over-year in the fourth quarter, right in line with the massively profitable cloud computing division Amazon Web Services.
Price, Jassy said, is another area of importance, especially with the consumer pullback on discretionary purchases being observed amid inflation.
“I think pricing being sharp is always important,” Jassy said. “But particularly in this type of uncertain economy, where customers are very conscious about how much they're spending, having the millions of deals that we put together with our selling partners in the fourth quarter was an important part of the demand that you saw.”
Finally, Jassy cited a priority of improving the customer experience. He said Buy with Prime would give subscribers the ability to use their benefits across the web, and noted that virtual try-on for shoes brings change to the shopping experience.
But it’s in this area that the tradeoffs that may be happening under the surface may rear their head again. GlobalData Managing Director Neil Saunders noted that online shopping generally is becoming “more difficult" on Amazon.
“While the Amazon marketplace is far from a terrible place to shop, it has become more complex and cluttered with a multitude of products, delivery options, and prices levels for shoppers to sift through,” Saunders wrote in note released at the time of the earnings call. “The result is that impulse buying has dropped and that more people are migrating away to other retailers. This is not yet a serious problem as erosion has only happened at the margins, but it is something Amazon will need to address and arrest to prevent further decline.”
Taking a rhetorical step further, the journalist John Hermann wrote this week that a “junkification” of Amazon is taking place, while arguing that “everything is going according to plan" for the company.
He placed the growth of the third-party seller marketplace at the center of this trend. But it also comes as Amazon grows its advertising business, with many taking note of a growing number of ads on the platform. The company also wants to keep growing Prime, and is now using content such as Lord of the Rings and NFL’s Thursday Night Football as key acquisition channels. Both had “record” signups of new Prime members, CFO Brian Olsavsky said.
“We see a direct link between that type of engagement and higher purchases of everyday products on our Amazon website,” he said.
It will have to do each of these things at once, while entering a period that will require it to be “more targeted with its growth ambitions,” as Saunders put it.
"Since its inception, Amazon has had a culture of throwing dollars at many different things to see where they led and what they could learn," Saunders said. "That approach worked well for a younger, fast-growth business. It works far less successfully for a more mature entity. In our view, management deserves credit for recognizing this and quickly responding. However, the shift requires a lot of care because Amazon needs to find a new balance between being ambitious and innovative and being more frugal with its spending – which will be very challenging."
Jassy said the changes of the pandemic made its logistics a "different network." That may be true of the whole company. Rather than an isolated cycle of overbuilding and pulling back, this may prove to be a period that changes Amazon altogether. The bets will still be there, but the risk will be magnified with fewer dollars that don't pay off to go around. As hinted by the logistics buildout of the pandemic and even Buy with Prime, they also may look more operational.
Less delivery robot, more delivery optimization.
As Jassy put it: “We're going to be very thoughtful about how we streamline our costs, and I think you see a lot of that, but we're also going to continue to invest for the long term.”
The recipients of those investments will say a lot about where it wants to head in this next year.