the holiday retail season: Millennials vs. Boomers

Conventional wisdom in the US has long been that 30-somethings want a house, a car and clothing suitable for work.  Fifty-somethings want a vacation home, jewelry and a cruise.

As the Baby Boom generation became more important, therefore, an investor wanting exposure to consumer spending should have shifted away from homebuilders and carmakers and toward high-end specialty retail, luxury goods and hotels and cruise lines.

Of course, there were other secular forces at work, as well–the move from the cities to the suburbs and the dismembering of the traditional department store by specialty retail, just to name two.

Today we’re in the early days of another significant demographic change.  Millennials now outnumber Boomers in the US.  Millennials only earn about half what Boomers do.  And they were hurt much more severely than the older generation by the recession.  But they’re on the up escalator, while Boomers as a group will see their economic power wane as they retire.

Playing the aging of the Boomer generation had two aspects to it, one positive and one negative.  The positive side was hard–finding the small, relatively obscure companies like the Limited or Toys R Us or Home Depot/Lowes or Target or (later on) Coach that would catch the fancy of the Baby Boom.  The negative side was easier–avoiding the losers who didn’t “get” what was going on.  These included American carmakers and the department stores.

In 3Q15 corporate results, we’re already beginning to see the new generational change begin to play out.  Home improvement stores are doing surprisingly well.  Large retail chains are reporting relatively weak results.  What strikes me about the latter is that the worst-affected seem to be the most heavily style-dependent and the firms that have put the least effort into their online presence.  In contrast, I’m struck by how many small online, even crowdsourcing, alternatives to bricks and mortar there now are to buy apparel.

How to play this emerging trend?

The negative side is easy– avoid the potential losers, that is, firms whose main appeal is to Boomers and companies with a weak online presence.

The positive side is, as usual, harder.  Arguably, many of the winners–Uber, and the sharing economy in general being an example–aren’t yet publicly traded.  Absent a pure play, my best idea is to invest in the winners’ onlineness.  The easiest, and safest, way to do so is through an internet or e-commerce ETF.

 

One other point:  for many years, economists have tracked the activity of Boomers as a way to estimate the health of the economy.  To the degree that they, too, fail to adjust quickly enough, their assessments, like department store sales, may understate growth momentum.

restaurants vs. supermarkets: reversal of form?

trend reversals

The government shutdown means that all the government databases are unavailable.  That’s good news for me   …and bad.  It means I can’t get precise data.  On the other hand, I feel justified in winging it.

I’ve been thinking a lot lately about Millennials vs. Baby Boomers, probably because I’m one and my kids are the other.  I’ve also been thinking about trend reversals, mostly because I believe we’re in a time when a lot of this is happening.  There are always to make money from recognizing trend reversals early.

restaurants vs. supermarkets

I remember seeing a piece of truly excellent sell-side research about ten years ago that documented the changes in American eating habits over a 30-40-year period.  The essence was that through good times and bad Americans were spending an ever-increasing proportion of their food budgets on meals away from home (eating in restaurants + take out).  Not only that, but the extra expense of restaurant meals vs. home cooking had been on a steady decline from, say, a 40% premium over cooking at home two decades earlier to 20% at the time of the report.

The conclusion:  a MEGATREND favoring restaurants over supermarkets (which were having competitive problems with Wal-Mart, anyway).  At that time, home cooking represented just over half of what consumers were spending on food.  The restaurant share was inching up by 0.5% – 1.0% annually.  NO END IN SIGHT!

Well, the Great Recession has changed that.  Over the past few years, eating out has been falling as a percentage of consumer spending on food.

Details:

–everyone outside the top 20% by income has cut back on restaurants a lot in order to save money– and by enough to derail the long-lasting pro-restaurant trend

–Millennials have not only cut back, but they’ve aggressively traded down to less expensive eateries

–seventy-somethings have changed their behavior the least

I think there are two related reasons for the cutback:

–what economists call a substitution effect, as consumers rejigger their spending to maintain, or enhance, their lifestyles in a world without pay increases and where interest rates are ultra-low, and

–workers realize they can’t get sick if they want to retain their jobs, so they’re eating healthier.

I’m not sure how much of this is already baked in the stock price cake, as it were.  But I think it’s worth taking a look at eat-at-home beneficiaries to check.