The changing consumer

Jack Neele and Richard Speetjens, managers of Robeco Global Consumer Trends Equities, examine the structural changes taking place in the consumer market.
The changing consumer
At first glance, a US bookstore chain’s filing for bankruptcy protection, a Peruvian opting to buy an iPhone rather than installing hot water at home, and a Spanish retailer’s $300 million acquisition of a shop in Manhattan’s poshest shopping street are just three intriguing but random retailing events in 2011.

In fact, they reflect three long-term secular themes in the consumer space that Jack Neele and Richard Speetjens have identified: the rise of the digital consumer, the advance of the emerging markets consumer and changes in consumer behaviour reflecting megatrends such as global aging and increasing awareness of environmental issues. All three developments offer exciting investment opportunities.

Richard Speetjens

1. The digital consumer
The most important of the three themes is the rise of the digital consumer. Users are increasingly turning their backs on old-school products such as newspapers and the radio and embracing their new-technology replacements, both in terms of new bits of hardware (iPads) and new ways of doing things (blogs and social media). And consumers are also doing things differently.

Take, for instance, the inexorable rise of online shopping. “Internet retailing is still growing at the expense of bricks and mortar retailers,” says Neele. What’s more, it is a story that has really only just begun. According to International Strategy & Investment (ISI), eCommerce is set to advance from 5.9% of US retail sales at present to more than 7% by 2012.

Meanwhile, investment bank Goldman Sachs has forecast that online retailing will grow at five times the rate of its traditional counterpart. At such a pace, online retailing would overtake traditional retailing in less than a decade, even though the latter is 20 times the size of online retailing at present.

Booksellers are under pressure…
Some industries are already suffering badly. Look at the book trade, where bricks and mortar booksellers are coming under severe pressure. On the one hand, ebooks have taken off. In the US, they have already overtaken trade paperbacks as the industry’s largest category, according to the Association of American Publishers.

That is a shift that is only going to become more pronounced. Forrester Research forecasts that by 2015, US sales of ebooks are expected to triple from current levels to nearly $3 billion.

On the other hand, even when people buy real books, they are doing so in different ways. Not only do readers stock up on deeply discounted copies at the supermarket, but they also order from online suppliers such as ISI has reported that online penetration of book sales has now reached 24%.

In such an environment, it was no surprise that that Borders, the US’s second-largest chain of bookstores, was forced to file for bankruptcy protection earlier this year. are other bricks & mortar retailers
And it isn’t just publishing that is being affected; the disruptive nature of the internet has implications for many industries. The online segment continues to gain market share in industries including travel, music and DVD rental, causing many high-street retailers to feel a chill wind. UK music retailer HMV, for instance, has already issued three profit warnings so far in 2011.

Neele points to three main factors behind the relentless rise of internet retailing: “Ease of use, price and breadth of assortment.” It is a compelling combination. “The internet puts weaker performers out of business,” he adds.

The proliferation of digital gadgets
A second trend within the wider digital consumer theme is the proliferation of digital gadgets, such as smart phones, which shows no sign of abating. “The faster-than-expected uptake of tablet computers – such as Apple's iPad – highlights just how powerful this trend is,” says Neele.

Just what is behind the rapid growth of tablet computers? One factor is the unstoppable rise of the mobile internet user, a relative newcomer who is changing the technological landscape. People are no longer satisfied with being tethered to a desk to read their emails or download music: they want immediate access, wherever they are.

Out-of-home advertising
Not unnaturally, the shift to digital media is also leading to a secular shift in advertising away from newspapers, magazines and other traditional media outlets to the benefit of internet advertising related companies such as Google or its Chinese counterpart, Sina.

But there is one area that remains relatively unaffected: outdoor advertising. “It is one of the few areas of advertising not fragmented by the internet,” notes Neele. “People waiting at the airport or the bus terminal are a captive audience for advertisers.”

In fact, so-called out-of-home advertising is seeing healthy growth: media researcher MagnaGlobal has forecast an 8.3% global increase in 2011. That would make it the second-fastest growing type of advertising after the internet.

2. The emerging markets consumer
The second main trend is the emerging markets consumer. This is based on an important demographic change: the rise of the global middle class. Across the world there are increasing numbers of middle-class people who can afford to buy consumer goods.

“In emerging markets, there is an annual income threshold of around $6,000 where consumption explodes. Discretionary spending becomes possible, including travel and holidays,” explains Neele. And the number of people with this level of income is rising. The UN’s Population Division expects the number to rise from 2.5 billion now to more than 5 billion by 2030.

This is being driven by the tremendous economic growth in emerging markets. Emerging market economies have generally emerged from the financial crisis pretty much unscathed and, in contrast to the sluggish recovery in most developed markets, are reporting strong growth.

That looks set to continue. In its World Economic Outlook from April 2011, the IMF forecast GDP growth of 6.5% for emerging and developing markets in both 2011 and 2012. That’s well ahead of its forecasts for advanced markets, where the IMF expects growth of only 2.4% in 2011 and 2.6% in 2012. “The best growth is in emerging markets,” confirms Neele.

Capturing the opportunity via local consumer plays...
What’s the best way to capture the opportunities provided by the increase in consumer spending in emerging markets? Neele & Speetjens believe there are two key options. “The first and most logical is to invest in local consumer companies,” says Speetjens.

...and developed-world companies whose products are liked in emerging markets
The second way to benefit from the increase in emerging-markets consumer spending is via developed-world companies that offer products in high demand with the emerging markets consumer, and for which there are few – if any – local alternatives.

After all, says Speetjens, “emerging markets consumers want what Western consumers have.” He points to anecdotal evidence of emerging markets consumers who prefer to buy an iPhone rather than installing hot water at home.

3. Changing consumer behaviour
The third theme is the change in consumer behaviour, often as a result of demographic shifts or developments linked to other megatrends. The increase in environmental awareness, for example, is resulting in a change in consumer preferences towards organic foods, natural products and recyclable packaging.

Capturing the opportunities from consumer behavior due to global aging
But one of the most important changes that is having an effect is the aging of the population. In the US, for example, people now live on average to 77. In 1940, by comparison, the average was under 65. People who make it to 65 now typically have 18 years of retirement. Those aged 65 or over currently make up around 20% of the population in G7 countries. But by 2050, that is set to have risen to over 30%, according to the UN.

How is this change playing out in consumer spending? “The aging of the population is reflected in people’s different spending habits as they get older, with more spent on travel and leisure, and less on children’s clothing and education,” explains Neele.

A split in consumer spending habits
But that isn’t the only change in consumption patterns that is occurring. A final trend is a bifurcation in consumer spending habits. While there is increased demand for luxury goods, consumers are also trading down to cheaper alternatives for other products. It is called high-low shopping.

That’s where the Spanish retailer mentioned in the opening paragraph comes in. Inditex, the owner of the Zara clothing chain, has spent $324 million on a building on Fifth Avenue, historically the New York home of the most up-market luxury brands, including – famously – Tiffany, as well as newcomers such as Prada. Japan’s Uniqlo is also opening a branch there. As Neele puts it: “Consumers want to save on the basics so they can splurge on luxuries.”

Robeco at a glance
Founded in Rotterdam in 1929, Robeco is a pure-play asset manager. Utilising an active investment style, it offers a full range of products in both traditional asset classes (equity, fixed income, money markets) and alternatives (private equity, hedge funds, managed futures) for a balanced mix of institutional and retail clients in selected markets across the globe. The company’s core investment capabilities are complemented by a ring of specialist investment boutiques.

A global leader in responsible investing, Robeco has assets under management of €150 billion ($201 billion) as of December 31, 2010. Robeco is 100%-owned by AAA rated Rabobank.

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