From soft-drink producers to theme- park companies and automakers to cable TV providers, corporations worldwide are seeing weak consumer demand.
PepsiCo Inc.’s chief executive officer said companies need more demand for their products before they will start using cash to expand. Walt Disney Co. (DIS) shares fell today on concern that lower consumer confidence may hurt its businesses, and Honda Motor Co. said the possibility of delayed car purchases may lead to a revised forecast. Cablevision Systems Corp. (CVC) said customers are dropping subscriptions.
“You’ve got to stimulate demand growth,” said Indra Nooyi, CEO of Purchase, New York-based PepsiCo, in an interview. “Until we stimulate primary consumption, the cash will continue to sit on the sidelines.”
The companies’ warnings follow a cut to the U.S. credit rating on Aug. 5 and a two-week rout in global equity markets as investors dumped stocks in favor of gold and Treasuries. With three European countries having required bailouts, concern over weakening demand and rising unemployment is spreading. A report yesterday said confidence among small businesses fell in July for the fifth consecutive month as the sales outlook dimmed.
The Standard & Poor’s 500 Index has dropped 17 percent since July 22, including a 6.7 percent plunge on Aug. 8, in the biggest slump since December 2008. The Stoxx Europe 600 Index fell 18 percent over that stretch and the MSCI World Index of shares lost 16 percent.
Honda and GM
The Aug. 8 decline came after S&P stripped the U.S. of its AAA rating, lowering it to AA+ for the first time. The Federal Reserve responded yesterday by vowing to keep interest rates near zero through mid-2013, sparking a rally that erased more than two-thirds of the S&P 500’s previous day loss.
For Honda, Japan’s third-largest automaker, and General Motors Co. (GM), the biggest in the U.S., the turmoil may be hurting their results. Honda said yesterday that a prolonged drop in U.S. stocks will lead to a decline in consumption, and GM said its forecast for 2011 U.S. vehicle sales may be in jeopardy.
“Consumer confidence is pretty fragile right now,” Don Johnson, GM’s vice president of U.S. sales, said in a presentation. “With the recent volatility in the stock market, we know that’s a concern we really have to watch closely.”
Automakers aren’t alone. Earnings and forecasts yesterday from watchmaker Fossil Inc. (FOSL), Cablevision and satellite- television provider Dish Network Corp. (DISH) trailed analysts’ estimates, sending their stocks lower even as the market rose. Cablevision and other cable providers are reporting subscriber losses amid a sluggish economy and online competition.
Disney plunged 9.1 percent, the most since December 2008, in today’s New York Stock Exchange trading. Wunderlich Securities cut its rating to “hold” from “buy” following the theme-park and media company’s earnings report. TV station advertising sales are down by a mid-single digit percentage this quarter, Disney said yesterday on a conference call after the market closed.
U.S. consumer spending from April through June showed the smallest gain since the second quarter of 2009, when the economy was in recession, according to a Commerce Department report on July 29. That contributed to second-quarter economic growth that trailed analysts’ estimates, as gross domestic product rose at a 1.3 percent annual rate in the period.
“What people shouldn’t be doing is shutting down because it sets up a vicious cycle,” said Elaine Eisenman, dean of executive and enterprise education at Babson College in Wellesley, Massachusetts, and a director at shoe retailer DSW Inc. (DSW) “That’s the biggest danger for companies right now, where people become paralyzed by fear, unable to do anything that can enable a company to grow in these very difficult times.”
Some private companies that were looking to tap the public markets amid a rise in share sales are delaying their offerings. Sunnyvale, California-based InvenSense Inc., a maker of software used in consumer electronics, postponed its initial public offering, as did Shanghai-based Cathay Industrial Biotech Ltd. and Seattle-based community lender HomeStreet Inc.
More than $1.5 billion of offerings have been pushed back in the past week, threatening to derail what was poised to be the best year for IPOs since 2007.
“There is definitely going to be a raising of the bar on the quality of companies that are going to be able to get public,” said Sunil Dhaliwal, a partner at Battery Ventures in Boston.
Even before the U.S. downgrade, Europe was experiencing a sovereign-debt crisis. Greece, Ireland and Portugal have been forced to seek aid from the European Union, and Italy and Spain saw borrowing costs soar last month.
The scarcity of jobs is contributing to the crisis. While unemployment in the U.S. has been above 9 percent for the past four months, Spain’s rate is more than double that at 20.9 percent. That presented a big enough challenge before the U.S. downgrade, said Millan Alvarez-Miranda, CEO of Unipapel SA (UPL), Spain’s largest maker and distributor of paper products.
“We were all worried about the so-called double-dip recession but thought Europe and the U.S. would be able to avoid it,” Alvarez-Miranda said in an interview. “Right now, no one knows what’s going to happen next.”
Not all corporate executives are so concerned. Some say the market drop presents a buying opportunity and are taking the opportunity to repurchase shares. Fluor Corp. (FLR), the largest publicly traded U.S. construction company, and Japan’s Softbank Corp. (9984) told investors they’re buying back stock.
The CEO of Constellation Brands Inc., the world’s second- largest wine seller after E.&J. Gallo Winery, said his customers tend to keep buying wine in a slump; what changes is that they may get it at a store as opposed to paying the markup at a restaurant.
“We’re very well-positioned for any kind of short-term economic blip,” CEO Rob Sands said in an interview. Victor, New York-based Constellation’s brands include Ravenswood and Robert Mondavi.
Companies that sell to businesses are also more optimistic than those that rely on consumers. Santa Clara, California-based Intel Corp. (INTC), which sells chips used in data centers in addition to personal computers, is benefiting as customers upgrade their infrastructure, Chief Financial Officer Stacy Smith said.
Rackspace Hosting Inc. (RAX), which provides web-based servers and storage space for other companies, is still growing as customers migrate to cloud computing, said Lew Moorman, head of strategy. And unlike three years ago, when some investment banks failed and others stopped lending, this market drop isn’t paralyzing the economy, he said.
Executives said they are seeking a resolution that will restore consumer demand and inspire businesses to spend, even as the U.S. government adjusts to the loss of its top-level rating.
As a result of the downgrade, “we could see interest rates going up, we could see higher cost of borrowing for businesses, which are all bad for economic growth and employment,” Nooyi said Aug. 6 in a Bloomberg Television interview with Willow Bay at the BlogHer conference in San Diego. “So, we have to address it.”
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