Marel

USA - Talking tax

27 Feb 2013

Wal-Mart Stores Inc. WMT +1.49% on Thursday joined a parade of retailers, restaurants and consumer-goods companies worried about the economic impact of the recently restored federal payroll tax that has left Americans with less money to spend.

 

The world's largest retailer, Burger King Worldwide Inc., BKW -0.34% Kraft Foods Group Inc. KRFT -0.80% and others are lowering forecasts and adjusting sales and marketing strategies, expecting consumers with smaller paychecks to dine out less and trade down to less expensive purchases.

 

The expiration of the payroll tax cuts that knocked 2% off consumers' take-home pay is having an impact, these companies say. It will ding a household with $65,000 in annual income $1,300 this year, and shift $110 billion overall out of consumers' hands, estimates Citigroup C -2.05% .

 

Now, Wal-Mart is stocking more of its shelves with cheaper products, and smaller-size packages of diapers, toilet paper and snacks. Burger King is cutting its Whopper Jr. sandwich to $1.29 from about $2, and focusing advertising on its value menu items rather than higher-price salads or smoothies.

 

Kraft and meat supplier Tyson Foods Inc. TSN -0.68% are introducing more lower-priced products to help restaurants and supermarkets adapt to the consumer spending downshift.

 

These companies say the changes could be long-lasting and are revamping operations to better cater to consumers pinched by higher taxes, stagnant wage growth and rising gasoline prices, which jumped nearly 50 cents a gallon in the past month alone.

 

Less take-home pay is causing 45.7% of consumers to curtail spending, according to a survey released on Thursday by the National Retail Federation, a trade group. A quarter of consumers are delaying big-ticket purchases, a third are reducing restaurant visits, and about a fifth of shoppers are spending less on groceries, it said.

 

U.S. retail sales in January rose at their smallest rate in three months, estimates the U.S. Commerce Department, a result said analysts of the effect the higher payroll tax was having on consumer spending.

 

Two years ago, when the payroll tax was reduced as a stimulus to a weak economy, restaurants reported that the extra cash in consumers' pockets was giving a boost to their business. Food chains now worry that the absence of that cash will halt those visits or encourage diners to spend less on every trip.

 

"When people look at their paycheck and see less money, it obviously impacts their mind-set about spending," Burger King Chief Financial Officer Dan Schwartz said in an interview. Burger King said last Friday its U.S. sales growth has slowed this year, in part due to less of an emphasis on low-price items.

 

Frank Janisch, a 27-year-old office assistant who was recently eating at a Chicago McDonald's, has been forgoing places like Chipotle Mexican Grill Inc. CMG -0.44% for less-expensive fare. When he goes to nicer restaurants for special occasions, he sometimes orders an appetizer, but said that the payroll tax "will put an ax on that for sure."

 

Chipotle this month said it has been considering raising menu prices to reflect ingredient costs, but that the economic uncertainty was making the move difficult.

 

Some of the slower spending this year is a result of bad weather and other temporary factors. Wal-Mart for example said its sales were hurt by a delay in tax refunds, a consequence of the fiscal cliff standoff in Washington, which caused the Internal Revenue Service to mail checks later than last year.

 

Wal-Mart expects its first-quarter sales in the U.S. to be flat with a year ago, compared with a 2.6% increase a year earlier. It blamed "the mounting economic concern from both small business and consumers" for much of the weakness.

 

The retailer has cashed $1.7 billion in tax refunds and cash anticipation checks so far this year compared with $3 billion at this time last year. That left some shoppers without a windfall before the Super Bowl, when some consumers splurge on new televisions and stock up on food and drinks.

 

While companies such as Wal-Mart that serve lower-income consumers will feel the initial brunt, since their shoppers are less likely to turn to credit cards or savings when money is tight, "what you see at Wal-Mart serves as a leading indicator," said Colin McGranahan, a retail analyst at Sanford C. Bernstein.

 

Tyson, meanwhile, is stocking up on lower-priced cuts of meat as people buy more chicken instead of beef. Its chicken sales jumped 10.6% in the last four weeks of January, compared with a year earlier.

 

"With all of these pressures on consumers today, maybe we are now seeing a legitimate shift from red meat proteins into chicken," Tyson Chief Executive Donnie Smith said earlier this month. "Consumers are shifting their patterns."

 

Other companies serving lower-income consumers anticipated the consumer mood and are profiting from the trading-down trend. McDonald's Corp. credited heavier advertising of its dollar-menu and a new inexpensive sandwich for a U.S. same-store sales increase.

 

Wal-Mart benefited initially from more affluent consumers trading down during the recession, but now faces a continued loss of its mainstay lower-income consumers to retailers such as Dollar General Corp. DG +3.90%

 

"During the recession, we saw people trading down from Wal-Mart to the dollar stores," said Edward Jones analyst Brian Yarbrough. "That hasn't reversed; people haven't traded back up and have stayed with the dollar stores."

 

Not everyone thinks the dour mood will last. Companies including supermarket Safeway Inc. SWY +12.36% and Hormel Foods Corp., HRL +1.08% played down the payroll tax's long-term impact...

 

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Source: Argentine Beef Packers S.A.

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