FreightWaves has written extensively in recent months about the continued profound weakness in U.S. goods demand, which has been reflected in unusually weak truck, rail and corrugated box volumes, among other areas. Indeed, we just reported on continued historically weak box demand earlier this week.

In our coverage of the retail and consumer packaged goods industries, we’ve noted trade-down activity (to cheaper private-label items), increasingly fewer purchases of discretionary items in favor of essential items such as food and beverage, increasing promotional (price reduction) activity and elevated “shrink” (theft). The start of Q2 corporate earnings season has brought considerably more evidence of consumer spending weakness, and not just among lower- and middle-income Americans.

At the high end of the income spectrum, the French luxury goods conglomerate LVMH reported a slowdown in the U.S. luxury market in Q2, “a clear sign that the aspirational customer is not shopping as much as they used to.” The company noted that demand for Hennessy cognac in particular was adversely affected by the U.S. economic environment.

If not luxury goods, then what about french fries? Lamb Weston, one of the world’s largest producers and processors of that staple of many Americans’ diets, reported a substantial 10% volume decline (compared to flat volume in the previous quarter, and its steepest quarterly decline outside of COVID) and said that U.S. restaurant traffic decelerated sequentially each month in its just-reported quarter ending May “as QSR traffic growth slowed and as traffic declines at casual dining and full-service restaurants softened further.” In June, total restaurant traffic picked up thanks to strength in QSRs, but traffic at casual dining and full-service restaurants remained weak. Why is this happening? The company attributed the slowdown to continued economic pressures on Americans (“challenging macro headwinds”).

What about packaged food and beverage products? We recently reported on unusually steep volume declines among some of the largest U.S. packaged food companies, including General Mills and Conagra. General Mills noted ongoing U.S. retailer inventory reductions and increasing price sensitivity among consumers, and Conagra observed unusual demand weakness since just after the Easter holiday and noted an “overall category slowdown.”

On Wednesday, the largest U.S. food can manufacturer, Silgan Holdings, said that it’s beginning to see an adverse impact from inflation on consumer buying habits, including on “core” food and beverage products. The company noted that its customers (CPG companies) are reducing their inventories, as a result of which Silgan is focusing on “aligning our cost structures with the anticipated second half volumes and driving costs out of each of our businesses.”

When asked what distinguishes this period of customer inventory destocking from the previous one Silgan observed a year ago, the company responded that this one is much more broad-based. And what’s driving it? Silgan believes its customers are carrying a similar number of units of finished goods as before, but that the dollar value of their inventory is much higher than it’s been in the recent past owing to the dramatic inflation that originated during the pandemic. 

“And you take into account the interest rates that we’re now paying collectively … the interest expense of holding that inventory is really what I think is driving our customers to make a broader based decision on how they’re thinking about working capital and inventory management,” Silgan said.

Translating Silgan’s response, because the cost of carrying inventory is so high, CPG companies have made the decision to carry increasingly less of it, which is adversely affecting their suppliers such as Silgan and leading those suppliers to undertake cost reductions. Of course, the more companies that cut costs, the weaker that consumer demand will likely be.

All this is happening before student loan payments resume in October and before the impact of regional banks cutting back on lending has been felt. So what’s the reason for optimism entering the second half of the year? We’re hard-pressed to come up with any.

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