PepsiCo Joins Honda in Bracing for Weakened Consumer Demand

Amid Credit Downgrade and Volatile Markets, Execs Across Industries Seek Solutions to Shore Up Consumer Confidence

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From soft-drink producers to theme-park companies and automakers to cable-TV providers, corporations worldwide are seeing weak consumer demand.

Pepsi CEO Indra Nooyi
Pepsi CEO Indra Nooyi

PepsiCo's CEO said companies need more demand for their products before they will start using cash to expand. Walt Disney Co. 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. said customers are dropping subscriptions.

"You've got to stimulate demand growth," Indra Nooyi, CEO of Purchase, New York-based PepsiCo, said 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 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.

The Standard & Poor's 500 Index has dropped 17% since July 22 , including a 6.7% plunge on Aug. 8, in the biggest slump since December 2008. The Stoxx Europe 600 Index fell 18% over that stretch and the MSCI World Index of shares lost 16%.

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., 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 VP-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, Cablevision and satellite-TV provider Dish Network Corp. 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%, 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% annual rate in the period.

Not all corporate executives are so concerned. The CEO of Constellation Brands, the world's 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. New York-based Constellation's brands include Ravenswood and Robert Mondavi.

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.

~Bloomberg News~

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