Will payroll tax hike hurt food-beverage spending?

Consumers start to feel the pinch of the 2% tax rise, along with higher gas and heating costs, delayed tax refunds, and other bumps.

February 20, 2013

Consumer spending, which showed promise in the latter stages of 2012, seems on shakier ground since Washington allowed a 2% rise in the payroll tax—which takes about $40 a week from a $100,000-a-year household.  It became effective Jan. 1, 2013.

“This can be the difference between shopping at a lower-cost dollar store vs. a mass merchandiser, increasing purchases of a store brand vs. a national brand, or suppressing an impulse to pick up a snack on the spur of the moment while shopping in the store,” says Symphony Consulting, a business unit of SymphonyIRI Group.

So will 2013 be a reprise of recent slow spending years?

Enough evidence isn’t in yet.   Data show little change in food-beverage spend, comparing the first four weeks of 2013 with the final four weeks of 2012, says Symphony Consulting:  Dollar sales growth was constant, inflation slid to 1.0% from 1.4%, and private-label sales rose slightly.  In some key categories, dollar sales fell by 230 basis points in snacks, and by 2 to 110 basis points in coffee and tea, yet cooking ingredients, juices and drinks were up.  Symphony anticipates a slowdown in out-of-home breakfast sales.

The tax hike became part of a money storm whipping at consumers through February: rising gasoline and heating oil prices, higher healthcare spending, delayed tax refunds because filers weren’t allowed to submit until Jan. 30, and in the Northeast slow distribution of disaster-recovery funds to families devastated by Hurricane Sandy.  Looking ahead, Citi Research analyst Deborah Weinswig expects “low-end consumers to be pressured and middle-income consumers to trade down.  This should ultimately benefit retailers that cater to these customers, such as Walmart and the dollar stores.”

There’s anxiety in the short term, however.  Bloomberg reported a Feb. 12 internal e-mail from Walmart’s vp-finance and logistics Jerry Murray that called February’s month-to-date sales “a total disaster.  The worst start to a month I have seen in my approximate 7 years with the company.”  The retail giant is due to report Q4 earnings tomorrow, Feb. 21.

The Lempert Report sees more stratified consumer spending ahead in 2013.  We believe higher-income households will feel buoyed by a “wealth effect” if the stock continues to rise and housing prices continue to recover.  According to Gallup, 87% of Americans earning $75,000+ annually own stocks vs. 54% of the population overall. They’ll likely feel less stung than lower-income households by the 2% payroll tax increase. 

Back to Top