Why retailers and restaurants can expect a 'good' holiday season

Sarah Wyeth, S&P Global Ratings Retail Sector Lead, joins Yahoo Finance to discuss the affects of supply chain constraints and inflation for restaurants and retailers.

Video transcript

JARED BLIKRE: And for that, we are going to bring in Sarah Wyeth, S&P Global Ratings Retail Sector Lead. Thank you for joining us, Sarah. Great to have you here. Let's begin with McDonald's-- some pretty positive price movement for them today, beating a raise. What are you looking at inside the report today?

SARAH WYETH: Well, we're focused on-- in terms of restaurants in general, we're really focused on the challenges that the industry is facing along with retail, which is in the supply chain and inflation. McDonald's, like most restaurants, faces inflation in terms of commodity and labor right now.

I think they mention a couple of numbers about their expectations for commodities to increase 3.5% to 4%, and then that to continue into 2022. And so that's where we're focused on in terms of risk for restaurants and retailers are those two areas-- supply chain constraints and inflation.

- And, Sarah, what sort of trends-- you see Coca-Cola also reporting its revenue was stronger based on more people going out to events and drinking their products outside of the home. Is that a trend you see continuing?

SARAH WYETH: Absolutely. We cover casual diners and restaurants. So this is really people getting back to normal-- wanting to get back to normal. There's a lot of pent-up demand. So even though there might be some challenges, the demand is there, people are going out, they're dining, and they're refreshing their wardrobes in conjunction with getting back to normalcy and continuing to go out. And that supports the credit quality of the restaurant industry.

JARED BLIKRE: Well, and the holidays are upon us-- not too early to be thinking about that. Getting back to the supply chain, that's being exacerbated. And we got UPS earnings the other day saying that customers are pulling forward their shopping for the holidays. How is this playing out in the restaurant industry?

SARAH WYETH: Well, we've heard that as well. I mean, in the restaurant industry, you know, you can't really pull forward a dining out, but we do expect it to be a good holiday season for most restaurants and retailers broadly.

- But what do you see as far as inventory for things like seasonal items and hot ticket items? Do people have to go out and buy them super early? Will there be enough? And what are we thinking about when it comes to seeing how much consumers are having to pay for it? Because we've seen reports from Unilever, from McDonald's-- all of them-- Kraft Heinz, even-- passing on the prices to the consumer. So what sort of prices are we looking at?

SARAH WYETH: Absolutely. I think we should expect price increases. In fact, in the recent consumer sentiment, there was a very high expectation of price increases. So consumers are-- they know it, they expect it, and they have a nice financial situation right now with over $2 trillion in excess cash savings that enables them to continue to be less price-sensitive to those increases that we are to expect in retail and restaurants. And a comment on your inventory question-- it's a real challenge, I think, for retailers right now and restaurants as well to have the product, to have the offerings that consumers want.

JARED BLIKRE: Well, and just kind of talking about those price increases, the consumer is able to tolerate them now, where is potentially the breaking point? How does this become a headwind to markets and to earnings in the future?

SARAH WYETH: Yeah, I think that that's really what we're focused on. I mean, as I was saying, the consumer is very financially healthy right now with all the excess savings. Pent-up demand, that gives retailers and restaurants-- leaves them in a good position and better able to withstand some of the headwinds in their own costs and the supply chain constraints.

But really, the big question is, just as you say, how long does that last? When does that excess savings run out? And when do consumers become more price sensitive? We think through 2022, that financially healthy consumer will be there well into 2022. But it's a big question, and it's something that we're focused on.

- And does that apply across different sort of sectors? Are people willing to pay more for everything? Or are there are certain products that you think sort of stand out and people will shell out more for them, where there are others they'll say, you know, we need to cut back now?

SARAH WYETH: I think it can vary. For instance, the housing market recent numbers of sales of existing homes being up, that supports household furniture, white goods, durables. That supports that area. But then apparel-- apparel is always risky. And to the extent that it can't reach the shelves or reach the customer in time, because it tends to be seasonal, there could be a risk there.