Tuesday, August 27, 2019

Investment Insights

Flights not Ferraris

By Amy Chamberlain/Newton Investment Management

One of the most distinct aspects of current consumer trends is the growing move by millennials to spend money on experiences, rather than things. This spending shift has a host of implications for companies and investors.

In the past, social status was driven far more by the ownership of impressive or expensive items. If you wanted to make your wealth known, you would buy a big house, a fancy new car or expensive clothes. However, the general social climate is changing for young people, with material possessions no longer conveying the social currency they once did. Now, experiences are the focus of millennial spending, with the ability to share experiences on social media amplifying this trend.

This change in consumer preferences will affect a number of different industries, most notably travel, restaurants, entertainment and companies in the wellness and fitness space.

In the US, all industries within the travel sector have exhibited strong growth this cycle. The standout performer has been the hotel industry, which has grown at 6% annually, while the cruise, car rental and airline industries are not far behind.[1] As flights around the world become cheaper and more accessible to many, the travel sector is likely to benefit from a greater emphasis on experiential spending. 

The Eating-Out Experience

Of course, international travel is still out of reach for the majority of the world’s citizens, and even domestic travel remains too expensive for many people around the globe. However, there are plenty of cheaper experiences that people are also spending money on at home. In the US, 49% of millennials are spending more on eating out each month than they are saving for retirement.[2]

Another well-publicized new trend is that young people are more interested in fitness. In the UK, the value of the fitness market is up 6.3% year on year, considerably exceeding overall economic growth.[3] There are also a host of other consumer sectors profiting alongside gyms and fitness equipment, with sales of athletic wear, health-conscious foods and sports nutrition products on the up.

Finally, entertainment is also benefiting from this consumer trend. Spending is rising across both the sports and audio-visual entertainment sectors, with the fastest growth rate of all being seen in eSports (competitions involving video games), a combination of the two. This market is predicted to grow at a 22% compound annual growth rate until 2022.[4] Music is also positively affected by these tailwinds. 

Click to enlarge chart. Source: Cashing in on the US Experience Economy, McKinsey, Dec 2017.

Keep It Social

With Facebook boasting 2.3 billion users and Instagram now having a billion active users every month, social media underpins the increased spending in all of these experience-related industries. In aggregate, Instagram users like 4.2 billion posts every day, with many of those posts sharing beautiful brunches, far-flung destinations, the latest workout or a weekend at a music festival.[5] The social sharing of purchases makes even the act of buying a tangible item more of an experience, by arguably merging the material and experiential world.

Of course, it is always important to be mindful of the risks that accompany any economic trend. So far, many of these spending preferences appear to be concentrated with millennials, so as Gen Z (those born between the mid-1990s and mid-2000s) become the bulk of the younger demographic, there is no guarantee they will spend in the same way. It is also possible that the shift from buying material things to preferring experiences is cyclical, and we may see a resurgence of spending on tangible items in the future.

While we always keep potential shifts in mind, for now it seems probable to us that greater spending on experiences is a trend that will continue to develop over the long term. We think this is likely to offer investment opportunities in the travel, fitness, entertainment and restaurants industries, and will be bolstered by increased usage of social media. Technology and millennials have united to drive a wallet share shift away from material possessions to experiences, and the consumer sectors – and investors – will, we believe, need to adjust accordingly.

The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of Newton Investment Management nor TEXPERS, and are subject to revision over time.

[1] https://marketrealist.com/2017/03/what-you-need-to-know-about-the-us-hotel-industry-performance/

[2] https://www.cnbc.com/2018/08/20/how-much-millennials-spend-at-restaurants-each-month.html
[3] http://www.leisuredb.com/blog/2017/5/5/2017-state-of-the-uk-fitness-industry-report-out-now
[4] https://blog.usejournal.com/esports-has-grown-up-fast-but-this-is-just-the-beginning-da5a45c59ed3
[5] https://blog.hootsuite.com/instagram-statistics/

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