Inflation Rise Tightens U.S. Food Spending

June 17, 2011, 1:38 PM EDT By Anna-Louise Jackson and Anthony Feld

June 17 (Bloomberg) -- McDonald’s Corp. and Wal-Mart Stores Inc. are getting a boost from value-minded consumers as rising commodity costs constrain discretionary income and confidence in the economy wanes.

Energy and food costs have risen 19 percent and 4 percent since December, according to the Labor Department. That caused real disposable income, or the money left over after taxes and adjusted for inflation, to remain unchanged. The confluence of higher prices and unemployment at 9.1 percent has become especially acute for households making less than $75,000 a year, according to David Schick, an analyst at Stifel Nicolaus & Co. in Baltimore.

“More-persistent inflation is affecting consumer confidence,” Schick said. “This may cause low-to-middle income consumers to trade down when shopping at retailers.”

The shift is similar to 2008, when commodity prices also soared, according to Christopher Low, chief economist at First Horizon National Corp.’s FTN Financial in New York.

“Real consumer spending began slowing gradually in November of last year and has now slowed to a standstill in the second quarter,” Low said.

Shoppers at BJ’s Wholesale Club Inc. are changing behavior, such as making different food choices to stay within their budget, Chief Executive Officer Laura Sen said on a May 18 conference call.

The Westborough, Massachusetts-based company’s members “will routinely shift their purchase patterns from item to item and even within categories,” Sen said. “They might trade down from beef to chicken or ground meats.”

Discount Prices

Wal-Mart’s discount prices are “getting more customers to show up” and buy more while in the stores, Wal-Mart West President Raul Vazquez said at the June 3 annual meeting.

Expectations about the outlook for the economy fell this month to the lowest level since March 2009, according to the Bloomberg Consumer Comfort survey. Concerns about jobs, as well as inflation, may influence where low-to-middle income consumers dine out, according to a monthly survey conducted by RBC Capital Markets.

For the first time in three quarters, spending plans at quick-service eateries, including McDonald’s, were stronger in May than at full-service restaurants such as P.F. Chang’s China Bistro Inc., according to Larry Miller, an RBC analyst in Atlanta. The number of consumers who said they won’t eat out as often in the next 90 days rose 25 percent, primarily because of higher energy costs, the survey showed.

This could result in a spending shift that is more concentrated in value-oriented restaurants, Miller said.

‘Most to Lose’

“It appears that the full-service dining industry has the most to lose from rising energy and food costs, while quick- service chains have the most to gain,” Miller said.

The number of people eating at McDonald’s, the world’s largest fast-food chain, is growing, helping to keep sales for the Oak Brook, Illinois, company at pre-recession levels, Chief Executive Officer James Skinner said at a June 1 conference hosted by Sanford C. Bernstein & Co.

The Bloomberg Quick Service Restaurant Index has risen 5 percent since March 31, while the Bloomberg Full Service Restaurant Index has declined 2 percent, Bloomberg data show. The outperformance reflects “the mindset of professional investors” and their reaction to high commodity prices, slow income growth and weak household wealth, according to Doug Cliggott, U.S. equity strategist at Credit Suisse Group AG.

Similarly, the Standard & Poor’s Supercomposite Hypermarkets & Supercenters Index, comprising BJ’s, Wal-Mart and Costco Wholesale Corp., has risen 3 percent since March 31, while the S&P 500 has declined 4 percent, according to Bloomberg data. Cliggott maintains an overweight rating on the Supercenters Index.

‘Longer Duration’

While these trends began in March 2010 before reversing in September, this year the relative performance “might be of a longer duration,” he said.

Foot traffic was up 5 percent in the quarter ended April 30 at Dollar Tree Inc., which operates more than 4,100 discount variety stores in the U.S. and Canada, Chief Executive Officer Bob Sasser said on a May 19 conference call.

“We are seeing ‘‘a flight to value,’’ Sasser said. ‘‘Not only are we getting new customers, we’re getting more repeat business because of the consumer products that we have.’’

A record high share of consumers -- 62 percent -- said in early June that low prices are the primary consideration when they select a retailer, according to a survey by Stifel Nicolaus. This could bode well for discounters, Schick said.

Wal-Mart may see positive U.S. comparable store sales as more people shop for discount-priced basics at the world’s largest retailer, having already delayed plans for discretionary items such as televisions, Schick said.

Five-Month High

The Wal-Mart Amalgamated Leading Economic Indicator, or Walei, which Schick developed in December 2009, rose to 5 in April, a five-month high -- a level consistent with outperformance for Wal-Mart relative to the S&P 500 stock index, Schick said.

Composed of eight macroeconomic indicators, Walei increases when economic conditions worsen or when inflation accelerates. April’s reading was driven by higher gasoline prices, up 36 percent from a year ago, and deteriorating home sales, down 12 percent, Schick said. It has ranged from minus 16 to plus 10 since 2002.

Any sales boost discounters are getting from more-frugal customers may fade when the economy improves, FTN’s Low said.

‘‘If we get relief from falling commodity prices, then that has an equal and opposite effect for consumers,” he said. “It frees up money to be spent on other things again.”

Cheaper Patio Set

Even so, companies may find it difficult to raise prices if people become accustomed to discounts. Costco eliminated the cheaper of two patio sets in 2010, even though the lower-cost option outsold the more-expensive one, as the Issaquah, Washington-based wholesaler “tried to trade the customer up,” Chief Financial Officer Richard Galanti said on a May 25 conference call.

“If you’re trading the customer down, it’s darned tough to get them back,” he said.

--Editors: Melinda Grenier, Daniel Moss

To contact the reporters on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net; Anthony Feld in New York at afeld2@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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