Changing consumer-spending habits produce opportunity

In recent years, consumer shopping preferences have undergone considerable changes. While we can all see the changes in ecommerce resulting from the Amazon effect, for investors it’s important to understand both what’s driving trends, and how multiple shifts are taking place in consumer spending.

These shifts can offer investment opportunity because they often represent major secular trends in consumers’ habits. Such trends are frequently either misidentified, or not completely understood. Let’s discuss three major developments we see currently in US consumer spending: online shopping and ecommerce; experience shopping (such as entertainment and gaming, hotels, and restaurants); and spending on big-ticket items like home-related purchases and leisure spending.

The secular shift to ecommerce

Amazon, with its business model that includes low prices, large assortment, and Prime membership, has led consumers to expect free and fast delivery, making it more difficult for traditional retailers to compete online. Amazon is the most cited leader in a general trend toward ecommerce. A greater availability of online shopping options in general is driving this spending shift, but so is the rise and increasing importance of the millennial consumer, aged 18-34.

Millennials, who grew up in a technology age, are now the largest population cohort the United States has ever seen. At more than 75 million people, millennials have surpassed baby boomers in size, comprising 25% of the US population and accounting for more than 20% of consumer spending (source: Wells Fargo Securities).

Another factor in consumer spending, regardless of generation, is that US consumers have become increasingly “channel agnostic.” They make purchases when and where they want, 24/7, and have come to expect the convenience of not only simplified shopping online but expedited, inexpensive delivery.

Growth of online shopping

According to the US Department of Commerce and Wells Fargo Securities, US ecommerce grew 15% to $390 billion in 2016 (on top of 14% growth in 2015), accounting for 8% of total retail sales in 2016, compared to just 4.9% in 2011. However, US ecommerce reached 12.5% of total retail sales in 2016 within our addressable markets, using the same government economic data.

Online penetration in the US has accelerated from a 10-year average of 40-50 basis points per year to 76 basis points per year in 2015 and 84 basis points per year in 2016 (see Chart 1), and continues to rise. (One basis point equals one-hundredth of a percentage point.)

While the Amazon story bears watching, we believe the trend toward ecommerce continues to evolve and can potentially affect a growing number of industries. A critical factor, in our view, is for investors to anticipate the needs and wants of the millennial consumer. Millennials’ influence as an economic force can only be expected to grow in coming years as this cohort moves into peak spending years.

We think consumer-based companies that can adapt their models to capitalize on consumers' shifting preference for “digital” consumption, or that can offer products, services, and experiences that cannot be replicated well online, will be the ones likely to succeed and take market share.

Chart 1: The rate of ecommerce penetration growth is accelerating

Source: US Department of Commerce, Bureau of Economic Analysis.
Charts shown throughout are for illustrative purposes only.

Consumer experiences

With spending on in-store apparel and footwear out of favor (see Chart 2), consumers have shown an increasing desire to spend their discretionary income on “experiences,” such as recreational activities, travel and leisure, and restaurants rather than on wearable goods.

This shift has been quite profound. According to the US Bureau of Economic Analysis and Wells Fargo Securities, after stripping out all nondiscretionary categories (housing, healthcare, gasoline, household goods, and so forth), consumers are now spending roughly 65% of their discretionary income on experiences, up from 40% to 50% in the 1960s. Meanwhile, the clothing and footwear category has declined to 11% of discretionary spending from 26% (see Chart 2). This multidecade shift, while perhaps less discussed than ecommerce, is dramatic for both its degree, and its persistence over time.

Chart 2: The trend toward “experience” shopping continues

Source: US Bureau of Economic Analysis and Wells Fargo Securities, LLC.

More spending on big-ticket items

Consumers currently are also spending more of their income on big-ticket items. Following the housing market collapse in 2008, consumers deferred spending on home renovation and non-essential home repair projects, as many homeowners were underwater, and therefore often couldn’t afford it or didn’t view it as a good investment to pour more money into their homes when home values were declining. With home prices now back on the rise and more than a decade of home improvement spending postponed, consumers are investing again in home improvements including kitchens, baths, floors, and decks, a trend that benefits home repair and remodeling companies. We also project home builders will benefit, especially those with exposure to first-time buyers.

Big-ticket leisure activities such as cruising, boating, and purchases of recreational vehicles (RVs), are also on the rise after a cutback in spending during the recession. This secular movement in spending toward “experiences” benefits manufacturers of RVs and pleasure craft (and related component suppliers), as well as cruise lines.

Clearly, consumer tastes and spending habits continue to shift. As experienced investors in small and mid-sized growth companies, we seek to identify competitive, highly profitable companies on the receiving end of these major demand trends. Consumer spending is a major part of the economy that is creating opportunity through secular change.

Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies.

The views expressed represent the Manager's assessment of the market environment as of November 2017, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.

Holdings discussed (held in certain portfolios managed by the team, in amounts up to: Amazon 3.0%) are for informational purposes only and are subject to change at any time. They are not a recommendation to buy, sell, or hold any security.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.


Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.


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