Bill Simon is worried about consumer spending. Once the CEO of Walmart's U.S. business, Simon currently sits on the board of directors for HanesBrands and Darden Restaurants, giving him high-level insights into grocery, retail, apparel, and dining.
In a recent interview with CNBC, he said U.S. consumers are reaching a breaking point for the first time in over a decade. And if he's right, popular companies, including Walt Disney (DIS -0.04%) and Chipotle Mexican Grill (CMG 2.41%), could be making a big mistake with their ongoing prices increases. Here's why.
Here's the potential mistake
All across the country, businesses are raising prices. And it may be too much.
Last December, for example, Disney raised the price of its streaming service Disney+ from $7.99 per month to $10.99 per month -- a substantial 38% increase. And apparently, it was insufficient. Less than a year later, Disney has already announced another price hike to $13.99 per month. In short, the price has nearly doubled in a single year.
I'm singling out Disney+ because it's the company's largest streaming service with over 100 million paying subscribers. But the company is raising prices for its other streaming properties as well, and it's also hiking admission prices for its parks.
Disney's higher park admission prices could be problematic. Consider that there is apparently a limit to what Disney can charge. For evidence, look no further than its failed Star Wars hotel -- a $250 million flop. Granted, at $4,800 for a weekend for two people, the pricing was extreme. But Disney thought it had enough support to fill 100 rooms at these prices, and it was wrong.
During Disney's fiscal 2023 third quarter, management reported modest attendance growth at its parks. But Q3 only covers the period through July 1. Third-party research suggests attendance at parks was subsequently down in July as it is, and its new price increase could further impact ticket sales.
Similarly, Chipotle may be taking a risk by upping its menu prices once more. In October, the company reportedly said inflation was causing it to increase prices -- the fourth time in only two years.
Why it could be a mistake
As Bill Simon says, the U.S. consumer is really starting to feel the pressure from the economy. Prices in non-discretionary categories continue to rise at an uncomfortable pace. For example, prices for shelter were up 7% year over year, according to the Consumer Price Index report for September. Food and energy were also up.
Certain metrics support Simon's point regarding stressed-out consumers. The balance in savings accounts is down, credit card debt is hitting an all-time high (and rising), and massive student loan debt payments are restarting.
Data by YCharts.
In short, it looks like U.S. consumers are spending more on the essentials. This is draining their finances, and they're turning to credit cards to make up the difference. And the problem could be exacerbated by student loan debt payments.
Of course, all businesses are raising prices, and it's justifiable to a point. For example, Shopify increased its subscription prices in April -- its first major pricing modification in 12 years. This seems reasonable.
With Disney and Chipotle, however, it feels different. Both companies have been raising prices quite frequently.
Now, if Disney and Chipotle were struggling to make ends meet, perhaps recent price moves would be more understandable, but that's not the case. For Disney, it notched a substantial 29% operating margin for its parks and experiences division in the fiscal third quarter.
Chipotle's restaurant-level operating margin was 27.5% in the second quarter of 2023. This was its highest profitability in at least eight years and one of the best results in the entire restaurant industry.
Disney's direct-to-consumer streaming business is admittedly losing money, so price increases there do make sense, but you have to wonder if it's too much, too fast.
By contrast, neither Disney's parks nor Chipotle's restaurants are hurting at all when it comes to the bottom line. Therefore, raising prices now feels excessive, and it risks pushing away consumers who just can't afford it anymore.
With Disney and Chipotle stocks, I have other reasons to question whether they have market-beating upside. But I also believe, for all of the reasons discussed here, that each company is making the wrong move by raising prices in this environment. That's why I'm personally avoiding both stocks for now.
That said, if I'm wrong, Disney and Chipotle will pad their bottom lines, even against these economic headwinds, which would be great for each stock. And for shareholders, that's the ideal outcome.
