Recently, there has been a major rotation in the U.S. stock market. From technology companies to pharmaceutical companies, the stock prices have gone up and down, but only the consumer goods industry has been sluggish. It is the US stock market earnings season, and consumer giants generally perform poorly. The downward pressure on the global economy has caused heavy losses to the consumer goods industry.

Major consumer giants report sluggish financial results

• McDonald’s revenue in the first half of the year was US$12.659 billion, an increase of 2% year-on-year. Revenue in the second quarter was US$6.490 billion, which was lower than analysts’ expectations of US$6.61 billion. Net profit was US$3.951 billion, a year-on-year decrease of 4%, of which net profit in the second quarter was US$2.022 billion, a decrease of 12% from the same period last year.
• Starbucks, as the world's largest coffee chain brand, saw its revenue drop by 1% year-on-year to US$9.11 billion, which was lower than the expected US$9.24 billion. Same-store sales fell by 3%, with same-store sales in the United States falling by 2% and same-store sales in China falling by 14%.
• L'Oreal, as the world's largest beauty brand, has achieved sales growth, but it is not as expected and its growth has slowed down. Same-store sales grew 5.3%, slower than expected in the first quarter of 9.4%.
• Nestle, the global food giant, had an organic revenue growth rate of 2.1% in the first half of the year, lower than the expected 2.52%. Among them, the organic revenue growth rate in the Chinese market was 1.6%, lower than the expected 3.51%, while the North American market even experienced a 0.1% growth rate. negative growth.
• P&G, organic sales grew by only 2%, far lower than market expectations of 3.4%, the slowest growth rate since 2018, and organic sales in Greater China fell by 9%.

Global consumer demand will show weakness in 2024

On July 26, the University of Michigan's consumer confidence index dropped to 66.4 in July, the lowest since November last year. Some analysts pointed out that high prices continue to weaken people's spending power, especially those with low incomes. Many consumer goods companies have said that they need to seek more preferential policies or price reduction policies that cater to consumers to encourage consumers to consume, which will increase the company's costs and squeeze the company's profit margins.

Max Gokhman, senior vice president of Franklin Templeton Investment, pointed out that the data shows that the number of low-income people is expanding, and low-income consumers are beginning to increase their loans and spend less. Goldman Sachs analyst Natasha Dragicevich also previously warned clients that the consumer earnings season has had a poor start. There have been few positive surprises so far, and high-end consumption and low-income consumption are both weak. In fact, this trend is irreversible due to the downward pressure on the global economy.

Dire situation for luxury goods stocks

The share price of LVMH, the world's largest luxury goods group, has fallen by 9% this year. Other luxury goods companies also generally underperformed in their share prices. LVMH's financial report showed that the company's revenue grew only 1% in the second quarter, reaching 20.98 billion euros. The growth rate was slower than in the first quarter and lower than the 3% growth expected by the market. Excluding the abnormal decline during the epidemic, this is the company's lowest growth level since 2009. Growth in LVMH's most watched fashion and leather unit, its largest by revenue and profit, slowed to 1% in the second quarter, while operating profit fell 6%. The group's operating profit in the first half of the year was 10.7 billion euros, still lower than analysts' expectations.

LVMH is considered a bellwether for the luxury goods industry due to its size and its more than 75 subsidiaries, which cover everything from watches and bags to travel. According to media reports, over the past year, as the industry has slowed down, LVMH has been in the middle, Kering Group and Burberry have been in trouble, while high-end brands such as Hermès have taken advantage, mainly benefiting from the higher net worth of their customer base.

In order to attract consumers to return, some luxury brands are secretly cutting prices. This kind of price reduction was once taboo in the luxury goods industry because it conveyed to the public the decline in brand value. However, Burberry recently cut the price of its medium-sized Knight bag by 22%, according to Bernstein data. All handbags designed by the brand's creative director Daniel Lee since 2022 have been reduced by an average of 5%.

Can consumer staples stocks still be defensive assets?

In this financial reporting season, Coca-Cola performed the best among consumer goods companies. In the second quarter, organic sales grew by 15%, and North American sales fell by only 1%. The company's product portfolio across regions increased prices by an average of 9%, higher than analysts' expectations of 8%, with prices in North America rising by 11%. This shows that the company is better able than its peers to push up prices amid consumer caution, reflecting the strength of its brand. However, PepsiCo previously reported a 3% decline in North American beverage sales, and the segment's revenue grew only 1%, indicating significantly weaker pricing power. Coca-Cola shares were little changed after Tuesday's earnings report, but have steadily risen this week, hitting a record high on Friday.

Overall, the pricing power of the U.S. consumer staples industry is uneven, especially among low-income U.S. consumer groups who are tired of high prices, which to some extent has weakened the sector's traditional defensive position in investment portfolios.