Disney serves as a ‘consumer tracker’ amid recession watch, analyst explains

·Anchor
·4 min read

As investors and analysts watch to see if rising rates and rampant inflation dampens consumer spending, which could tip the U.S. into a recession at some point, the world of Disney (DIS) may prove to be a useful economic barometer.

"Disney really is in many ways a consumer tracker," Wells Fargo Securities Senior Analyst Steven Cahall told Yahoo Finance Live (video above). "If you think of someone who has kids and family, they’re probably spending some of their money on Disney every year. Folks who are into cruises or going to theme parks, they’ll probably have some money going to Disney every year. If you’re a sports fan, you probably engage with ESPN and have some money being spent every year."

"So when we see the markets going down on the risk of a recession, Disney is going to track some of that to a certain extent," Cahall added.

SHANGHAI, CHINA - FEBRUARY 27, 2022 - A view of The first Disney flagship store in China, and the largest in the world, in Shanghai, China, February 27, 2022. The products are mainly plush toys, anime game derivatives and fashion items. The store is divided into mickey and Minnie, Disney Princess, Pixar, Marvel and other areas, Mickey Mouse and Donald Duck. (Photo credit should read Costfoto/Future Publishing via Getty Images)
A view of The first Disney flagship store in China, and the largest in the world, in Shanghai, China, February 27, 2022. (Photo by Costfoto/Future Publishing via Getty Images)

As consumers and businesses face higher costs across the board, the Walt Disney Company is in the midst of negotiating where it can pass along expenses in its theme parks, merchandise, and content divisions before consumers push back.

Disney executives were pleased with the recovery of the parks and resorts business in the second quarter, despite the added pressure on margins from higher wages, supply chain constraints, and coronavirus capacity restrictions.

"We feel really good about the consumer demand and what we're seeing in the forward-looking bookings and everything else in the attendance levels," Disney Chief Financial Officer Christine McCarthy said during the earnings call. "We do pay close attention to all the recent inflationary pressures, and it covers everything from merchandise to food and beverage."

Visitors take photos at the Hong Kong Disneyland, Thursday, April 21, 2022. Hong Kong Disneyland reopened to the public after shutting down due to a surge in COVID-19 infections. (AP Photo/Kin Cheung)
Visitors take photos at the Hong Kong Disneyland, Thursday, April 21, 2022. (AP Photo/Kin Cheung)

Disney's value proposition for streaming subscribers

On the direct-to-consumer side, Disney's strategy was scrutinized this quarter as programming and production costs increased for streaming services like Disney+. Still, Disney managed to add nearly 8 million subscribers to its platform while Netflix took a hit.

On the earnings call, Disney CEO Bob Chapek highlighted that the company was introducing a new ad-supported tier for Disney+ at a lower price point in order to avoid churn from consumers looking to cut costs. (Chapek also hinted that it would raise the price of the primary Disney+ offering over time.)

"We've been very comfortable with the price-value relationship that we've offered," Chapek said during the fiscal second-quarter earnings webcast. "And as you know, as we increase our content investment, we believe that that's going to give us the ability to adjust our price, and still, at the same time, maintain that strong value proposition."

LONDON, ENGLAND - MAY 12: Stormtroopers at the photocall for the new Disney+ limited series
Stormtroopers at the photocall for the new Disney+ limited series "Obi Wan Kenobi" at the Corinthia Hotel on May 12, 2022 in London, England. (Photo by Gareth Cattermole/Getty Images for Disney)

According to data from Nielsen, 57% of streaming video on demand (SVOD) subscribers have at least three services, suggesting that some consumers may want to hit pause on some services if pricing becomes too egregious. And for the 17% subscribing to five or more services, those price increases can be felt much quicker.

Cahall pointed out that Hulu, which is currently owned by Disney, had success in offering different ad tiers to its subscription model

"I don't know if you'll see two-thirds of the subs go to an ad-supported model, but certainly, it's going to make it appealing to folks who might find the direct subscription fee a little too high," he said. "And from Disney's perspective, it's all kind of found money, you know? So this is just incremental subs without a lot of incremental cost for them, since they're already such a big advertising company."

Bradley Smith is an anchor at Yahoo Finance. Follow him on Twitter @thebradsmith.

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