Millennials represent the largest demographic group in the US and are forecast to be the biggest spenders by 2030. With US consumers responsible for more than three quarters of US GDP growth since 2001, the challenges faced by millennials and the subsequent stagnation of retail sales have been a significant headwind on the path to a rejuvenated economy. While partly attributable to this widespread deleveraging, there are also other drivers at work.
This well informed “smarter consumer” has again been in the spotlight following the poor results of retailers Gap, Macy’s and Nordstrom in the US. The new generation of consumers are forsaking traditional department stores in favour of fast fashion retailers, which are able to quickly supply the latest trends, manufactured cheaply and offer convenience through strong online channels and smart logistics. This fact is not lost on Amazon; the retail giant can claim a large responsibility for the continued disinflationary trend of durable goods (see chart below) - the vast economies of scale it enjoys allows it to sell goods at razor thin margins.
Amazon’s apparel sector is among its fastest-growing categories and in 2017 it is expected to debut its own fast fashion line, supported by a 46,000ft2 photography studio in Shoreditch, London. As Amazon takes aim at another industry saddled with overcapacity, today’s shop assistants may soon find themselves tomorrow’s stock pickers.
Service sectors and the sharing economy
It is not only the apparel and durable goods industries that are under threat. Segments of the service sector have also felt the impact of the sharing economy, which we have published on previously
. Given that users of services such as Uber and Airbnb typically belong to the higher income strata (see chart below), the rise of these services is disproportionately hitting spending on higher cost alternatives.
Moreover, when focusing on the supply side of these labour platforms (such as Uber) it is apparent that the lack of strong employer contracts enables an almost endless supply of jobs with no fixed hours. This may serve as a great tool for people to supplement their income, or as some would argue, may only serve to continue to suppress wages in their respective sectors as cheaper foreign workers are able to meet the increasing demand at lower prices.
US adults (at different income ranges) using the sharing economy
Source: Pew Research Center, survey conducted 24 November to 21 December 2015, May 2016
Given all of the above, it is difficult to forecast a meaningful pickup in inflation sufficient to stimulate wage growth. The economies of scale enjoyed by firms such as Amazon and Alibaba mean traditional retailers with their costly overheads are unlikely to be able to wrest back market share. Technological disruption is threatening to change the face of more and more industries, from banking to telecoms to manufacturing, mostly to make them cheaper and more accessible. To add further pressure, the rise of autonomous vehicles and 3D printing are also projected to threaten jobs in other sectors. And this importantly comes at a time when consumers are increasing their savings for the longest sustained period in four decades.
It is not, however, all bad news. As wider engagement with these new connected platforms takes hold, spending on them should continue to increase. This should provide more primary and secondary job opportunities for society, albeit at lower wages for now. These opportunities have mostly presented themselves at the lower end of the skill spectrum, but we may see them proliferate in other areas as people try and leverage their skillsets to maximize their earnings (or convenience), such as doctors providing ad-hoc online consultations.
Another factor to consider is the rapidly growing “experience economy”. 78% of all millennials would rather spend money on a desirable experience or event rather than a “thing”3
. Perhaps this is why the services price level has remained robust as this group of consumers favours spending money on these rather than durable goods. Travel among this demographic has also increased at more than twice the rate of retail sales, as these consumers are travelling further and spending more than their predecessors.
All of these trends might persist and become permanent structural changes and attitudinal shifts. Or, in conjunction with advances in healthcare and longer life expectancies, millennials may simply be responding to the current uncertain economic climate by shifting consumption to later in life.
In our view, the result is likely to be somewhere in the middle. The trend of increasing disruption is not a new phenomenon; the average age of a firm in the S&P has fallen from over 60 years in 1958 to just 12 years in 20154. Creative destruction is truly alive but the difficulty lies in anticipating these changes while remaining cognisant of timing and the surrounding regulatory environment. Our approach to these structural uncertainties is to remain cautious if a firm is exposed to a pro-consumer cycle, preferring to invest in sensible large cap companies with a reason to exist and reliable revenue streams.
Source: McKinsey, 2009, “The economic impact of increased US savings”2
Source: Bloomberg data, US Bureau of Labour Statistics3
Source: FT.com, 12 February 2016, Eventbrite 2014 Survey4
AEI & Credit Suisse Research, "The Sharing Economy", 18 September 2015