Burgers, botox and birkins: Consumer pullback in China and US hits broadly

From McDonald’s to Mercedes-Benz, executives are saying that many consumers in China and the U.S. are pulling back on spending. The reasons are different. In China, demand is being drained by a broken housing market, wage pressures and worries about a darkening economic storm.

In the U.S., some households, especially those with lower incomes, are feeling pinched after a run of high inflation. The Labor Department reported that hiring slowed in July and the U.S. unemployment rate ticked up to 4.3%.

“With a large chunk of world consumer spending under pressure, companies now need to be more creative about avenues to generate revenue growth," said Gregory Daco, chief economist at Ernst & Young.

If consumers in the U.S. do falter, it would mean a double whammy for multinational companies, which have been confronting weak demand in China for several quarters. As they report second-quarter results, a parade of companies have warned of softening sales and lowered their earnings forecasts, citing troubles in both countries.

So far, corporate profits have held up, propped up in part by stock buybacks. Overall, year-over-year growth in second-quarter earnings per share for the S&P 500 is on track for 12.4% on revenue growth of 4.9%, according to estimates from financial-data provider LSEG.

Appetites wane

PepsiCo sounded an early alarm on consumer spending in both the U.S. and China. For the past few years as prices soared, many consumers kept buying Doritos and Lay’s while forgoing bigger splurges like restaurant meals or travel. Now they are giving up potato chips, too, PepsiCo said. The company’s Frito-Lay North America business reported a 4% drop in sales volume in the latest quarter.

In China, meanwhile, people are becoming increasingly wary about spending money, said Ramon Laguarta, PepsiCo’s chief executive. “The consumer is clearly saving—saving more than spending," he said on a July 11 call with analysts.

Shares in Heineken sank 10% July 29 after the Dutch brewer reported weaker-than-expected earnings and wrote down the value of a big investment in China. Shares fell for Procter & Gamble the following day, after the maker of Tide detergent and Charmin toilet paper reported an unexpected 7% decline in earnings.

P&G said price hikes had slowed to just 1% globally, while sales from China’s recent 618 shopping festival, an annual online shopping event, suggested that consumers there were spending less even with significant discounts from retailers.

“I’ve said many times: This will not be a straight line," P&G CEO Jon Moeller said. “There’s still more work to do to continue improving areas in our control, which will be needed to offset the headwinds that are largely not in our control."

Although inflation measures are moderating in the U.S., many consumers are feeling the cumulative impact of years of rising prices for essentials like groceries and menstrual products. High borrowing costs and sharp increases in insurance costs are putting further pressure on household budgets.

McDonald’s reported a slowdown in visits by lower-income consumers, a trend that the company said began last year and has deepened across the U.S. The burger giant reported a nearly 1% drop in same-store sales in the June quarter, the first such decline since 2020.

China’s doldrums

Inflation isn’t a problem in China, where companies have struggled to raise prices for several years due to weak demand. Instead, economists said, Chinese spending is slowing because people are saving income to protect themselves in case of future hardship as they face a profound property slump and worries about where the economy is headed.

“U.S. households can look forward to lower interest rates in future," said Mark Williams, chief Asia economist at Capital Economics. “China’s government has promised to do more to support consumers but there’s nothing in the pipeline suggesting that much of a turnaround is likely."

China’s retail sales growth, a gauge of consumption, slowed to 2% year over year in June from 3.7% in May. Chinese leaders said July 30 they would take more aggressive steps to boost consumer spending.

Botox maker AbbVie said headwinds in China hurt sales for its aesthetic pharmaceuticals division in the June quarter, and lowered its outlook for those products in both the U.S. and in China. Starbucks said that its U.S. same-store sales declined 2% in its June quarter, the second consecutive decline. And in China, its same-store sales fell 14% as the coffee chain faced heightened competition from lower-cost rivals.

General Motors said strength in the U.S. market was offset by further erosion in China, where it lost money for the second straight quarter amid stiff competition from homegrown brands. Mercedes-Benz and Porsche both flagged a tougher environment and fiercer competition, in China.

Apple, too, is facing inroads from a Chinese champion, smartphone maker Huawei. The iPhone maker said revenue in the greater China region, its third-biggest market, fell more than 6% in the June quarter from the prior year.

But not all Western companies are reporting a slowdown in the country. Domino’s Pizza says it still sees the country as an opportunity; its Chinese franchisee plans to open its 1,000th store there this year.

“The China stores, they’ve actually put out releases talking about their new store openings and the kind of record sales they’re generating over there," Sandeep Reddy, the restaurant chain’s chief financial officer, said on an earnings call. “So, very exciting to see the growth coming from China."

Luxury loses some luster

China has propelled the growth of some of the world’s most upscale labels. Now their prospects are tied to China’s.

Richemont, the owner of Cartier, reported a 27% drop in sales in China, Hong Kong and Macau. Birkin handbag maker Hermès said sales growth momentum continued across all regions except for Asia.

In the U.S.—a market that was once a driver of its postpandemic boom—sales rose just 2%. LVMH said inflation and higher interest rates have eaten into the purchasing power of its aspirational customers in the U.S.

“This is not nice," Jean-Jacques Guiony, LVMH’s finance chief, said on a call with analysts. “Some brands, particularly in the U.S., are paying the price for this situation."

Write to Natasha Khan at natasha.khan@wsj.com and Theo Francis at theo.francis@wsj.com