Disconnect on 'What Consumers Say and What They Do' Has Long History

SPEAKER_1 (0:00)

Let's welcome in Sarah Henry, Managing Director and Portfolio Manager at Logan Capital Management. Sarah, thank you for being with us today. Now, we got the September Michigan Sentiment Reading coming in about 48.1. That's a four-month low. Also, the one-year inflation expectation jumping up to 4.6%.

What does that combination tell you about the consumer right now?

Sarah Henry (0:23)

Well, it's been a really interesting year from that perspective. It's been all about the gap between what consumers say and what they do. And what they say is, we have had enough of inflation. The backdrop of these record diesel and gasoline prices are setting consumers' expectations up with a lot of worry for further inflation. And consumers do expect prices to rise 4.6%, which is an increase from the previous month. And they also expect costs to rise at an annual rate of 3.4% for the next 5 to 10 years.

SPEAKER_1 (0:59)

And so as we look at that disconnect, it's not a new thing. It's something we've been observing. Sentiment has been weak, but we continue with every earnings report and every piece of data we get to see that people are still spending, maybe perhaps becoming pickier in that spend, but they are still spending. How long and how sustainable can this disconnect exist before we actually start to see a true pullback in consumer spending?

Sarah Henry (1:28)

So if you look back to 2019, we have seen massive inflation in almost everything. Since 2019, food away from home is up 42 percent, food at home is up 34 percent, and overall CPI is up 32 percent. So that's the question, when is this all going to come home to Bruce and recent data have been relatively supportive of continued spending. We saw retail sales data come in well above the survey median, particularly in components that feed GDP.

The labor market has beat estimates in terms of non-farm payrolls, unemployment is relatively full employment. So I think the complexion of what people are spending on has changed and you're hearing value, value, value from all these companies. In the last quarter, we saw heavy reinvestments of tariff refunds in order to bring down prices for many of these consumer companies. But consumers are willing to spend money and I think a lot of it has to do with the new levels of compute power both on the consumer side and on the retailer side.

SPEAKER_1 (2:37)

And you said value there. So I want to shift us over here to McValue and talk about McDonald's and what we're hearing from them. I know you attended the Investor Day and you called it a microcosm of what's happening more broadly across the consumer economy. While you were there and listening to their new strategy and seeing the presentation of how they plan to approach this different background with as you highlighted food away from home costs significantly higher than what they used to be even less than 10 years ago.

And the consumer becoming much more price sensitive. How are companies responding to this fundamentally changed consumer who's still spending dollars and are companies like McDonald's going to be best positioned or is the path just to maintain course?

Sarah Henry (3:24)

So it's a good question. McDonald's has had its share of issues over the last year, including cyclospora, everything that can replace restaurants and their pivot to value. And they unveiled this restaurant next format and the new mockups of these restaurants are absolutely beautiful. They're literally transparent. You can see into the kitchens. They're deploying all sorts of compute power across the spectrum of functions that they have. They have a multilingual AI ordering function that can get orders right at a 95% level the first time. This is all replacing the cost and the friction of employees saving hours of labor.

So this is real money that they are able to save and then reinvest into the experience and the value proposition for the consumer. And these are 46,000 restaurants that they have. So there's a level of confidence that a consumer can go into a restaurant anywhere in the world and know what they're getting with confidence. And they also have a dashboard now that has granular data that deploys Google Edge technology. And that can target within, you know, this is all expected to happen relatively quickly by 2027 But it basically enables real time AI inferencing at the point of service. So these restaurant owners, because McDonald's is a largely franchised business, are able to get real time data in terms of what they're offering and how they're pricing it. So all of this compute power against inertia, against friction, will be very powerful for scale players at bringing costs out and making revenue generation at the forefront.