After two years of staying at home and saving up during the pandemic, Americans are now turning their attention back to service-based businesses like travel, restaurants, hotels, and movie theatres. Brian Ehrig, a retail analyst at management consulting firm Kearney, joined Cheddar to discuss the state of the consumer on the heels of the latest earnings reports from retail giants like Walmart and Target, a summer travel boom, and record-high gas prices. "We already see it with travel happening again, and I think that consumers are getting back out there," he said. "We're going to see them spending very strongly and hopefully on a lot of these non-discretionary items that are more exciting than paying extra for gas and food."

Opening Bell

Consumers Shift Focus to Services Rather Than Goods

here was more insight on the state of the consumer is brian eric retail analyst at kearney brian the ship that we're seeing in consumer behavior is that good news for the economy, especially when we hear about rumblings around the recession and that continuing to grow louder. I think there are some positive signals in this because the consumer is getting out there and even with the high food and gas prices, we still saw them taking a lot of vacations including this weekend with a real surge in uh Memorial Day travel. You know, you look at last week, right, and we got many of the big name retailers reporting you think of target and walmart and they really show that the consumer is seeing this trend is moving from goods to services and really, even on those lower angles, I think of groceries being a little more picky and changing their habits. What does this tell you about how people are spending their money right now, especially when it comes to goods? Well, it's really interesting because it depends a little bit on who the consumer is. So if you're talking about the walmart or the target chopper because of the increase in inflation that we've been seeing, they've been having to spend a greater share of their wallet on that before much of the rest of the economy, people are still living their best lives and have saved a lot of money and so they're able to spend it on highly expensive plane tickets. Uh, and you know, we're back in full swing on concert season and people are buying outfits for the office. Again, you know, things are very different now than they were even just a few months ago. Speaking of things being very different now than they were a few months ago. You look at earnings from Dollar General and dollar tree that starts to show this bifurcation in the consumer, right? Those on the lower end spectrum seems to now be kind of surging and looking for for better prices and really hit, you know, being hit by inflation more significantly to the tune that they're turning to a dollar general. They're turning to a dollar tree at a more robust pace and they were, you know, say a year ago or so, what does it say about the economy or how does the economy operate and function? Well, when there is this drastic bifurcation of those either like, you know, Nordstrom consumer spending way more and those who are on the lower end of the spectrum really feeling the pain. Yeah, Well right now it consumers tell us that they're most concerned about the price of food and the price of gas. And when you're on a very low income, it really hurts those consumers more than, than the rest of the economy and they are trading down significantly to places like dollar tree and dollar general. And that's also why you see reports from companies like walmart and target talking about how they have too much inventory because even a place like that is more expensive than a dollar general or a dollar tree, I wonder if that elevated inventory picture does help with the inflation picture. Right, Because a part of the inflation pressures that we have seen have really been on the, on the supply side, if there is now over supply, so to speak in some areas, maybe that does help bring inflation down a bit. Yes, I think so. And actually what we're seeing broadly across the industry right now is that there's a significant rebuilding of inventory across all the segments that we're talking about. If you go and walk the uh, you know, the almost any mass merchandisers grocery today, you're gonna see a lot of empty shelves, it's actually significantly historic lows right now. So as those uh, shelves get rebuilt with stock, I think we're going to start to see uh inflation start to come down a little bit, which would be great news for the consumer again though, especially on the lower end of the income spectrum, they need that relief more desperately. When I look at other retailers, especially this week, obviously earnings are not over. We've got names like lululemon, Capri, Michael, Kors versace, jimmy choo pvh, these are kind of your higher end retailers, these luxury brands. Again, we were speaking of that bifurcation that has been happening here, the higher income, those on the higher income spectrum seem to be spending more when you look at these companies expected to report, what are you expecting from them or you could expect that trend to continue that they're seeing a surge in kind of, you know, people going out for events. It's the week, the summer of weddings, right, buying some of these items for those events. Yes, I do. I think the state of these businesses is going to be very strong. The consumer that's buying more premium goods, more luxury goods is really out there, living their best life. And they have a lot of disposable income to use on products like these. You know, what I found interesting over the course of the last year is we keep getting these consumer sentiment reads right, and I think the latest one in may showed that it dropped to its lowest level in terms of consumer sentiment, um, since 2011. What are your thoughts around consumer sentiment and actually impacting consumer decisions? Because those haven't correlated for quite some time now? Mhm. Yeah. I think there is something strange going on here and that consumer sentiment is often tied to things like gas prices and the cost of groceries. And that's really where we see the bulk when we do our consumer research, that's where we see the bulk of the issues as in those two categories. Whereas you don't see it as much in things like apparel in electronics, um, and and things of that nature. So, you know, it's it's really, uh, you know, maybe some of the old rules aren't holding up right now. Yeah, it'll be interesting to see when they come back into effect because to your point, they haven't held up for quite some time before I have to let you go. Here I go again like 30 seconds. But I'm interested, um, what consumer trends are you expecting to see over the next couple of weeks? Yeah. Over the next couple of weeks. I think that we're going to see a really strong start to the summer and uh, you know, we already see it with travel happening again and I think that consumers are getting back out there and we're going to see them spending very strongly and hopefully on a lot of these non discretionary items that are more exciting than paying extra for gas and food. Yeah, I'd rather spend more for fun experience than for my, you know, commute to work every day brian, really appreciate your time and your insight brian eric, retail and analyst at kearney