With Wall Street fretting over interest rate hikes and monthly sales numbers this season, investors could benefit in the long run by stepping back and looking at consumer trends that are in the works for the years ahead.
If you missed out on the rise of the discount superstores in the 1990s, it's time to make sure you are well-positioned for the next retail revolution. And while nobody can predict exactly when and how that might unfold, analysts are convinced that it will be driven by the spending habits of the mass of baby boomers on the verge of retirement.
The Internet craze that gripped the financial markets at the end of the last decade proved to be a dangerous, speculative bubble, but the simultaneous rise of the discount superstores was the real deal. Between the years of 1995 and 2000,
shares rose more than 600%.
added over 1,000%,
gained more than 600% and
was up 550%.
While each of these stocks has leveled off in the post-bubble era, none has declined. Value was created thanks to a massive shift in consumer habits. There were winners and losers, and the winners got rich.
This chapter in the American retail saga was an extreme version of the recurring waves of innovation and wealth creation that ebb and flow with the tides of the economic cycle. Needless to say, we hope, investors should never bank on that kind of return. But with a major shift in demographics on the way, some basic observations about things to come can provide a few investment ideas for whatever is in store.
The first members of the baby-boomer generation, the population spurt of Americans born between 1946 and 1964, will approach 60 next year, raising the possibility of retirement and a shift in spending habits. With an average household income level of about $50,000 a year, according to government statistics, the boomers are a relatively wealthy group. Also, the labor force participation rate for older workers is starting to rise, suggesting that today's 60-year-olds are working longer, which can only boost their spending power.
Meanwhile, the National Research Bureau reports that the growth of retail space at shopping centers has outpaced population growth. Since 1986, retail square footage has increased 66.5%, while the population has grown at 21.6%. With the real estate consolidation seen in the sector this year, from the likes of
Toys R Us
, some observers have concluded that America is over-stored.
If that's the case, a raft of new retail players in the years ahead, like the one born from the discount boom, seems unlikely. Rather than search for hot new companies, investors can diversify in some well-known stocks that seem particularly attentive to the trends observed in upcoming retirees.
One salient quality of the baby-boomer generation is their domestic focus. Craig Johnson, president of Customer Growth Partners, has documented a recent shift from wasteful consumption of disposable goods toward more durable products that have immediate and sustained investment value, often tied to people's biggest investment: their home.
"The trend has been in place for a few years now, and we expect it will continue, and companies in the home-improvement space will continue to prosper," Johnson said, citing retailers like Home Depot,
and Best Buy.
Morningstar analyst Anthony Chukumba wrote in a recent research report that this trend may well pick up in the years ahead as baby-boomers start retiring and spending more time in their homes and possibly investing in second homes.
"Home Depot should benefit from the continuation of the 'cocooning effect,' as consumers spend more money on their homes," Chukumba wrote.
A byproduct of this trend could make the pets retailing space a fertile ground for investments, as baby-boomers are renowned for their love of animal companionship, often during an "empty nest" trauma. Stocks like
are potential winners in that vein.
Despite a common aversion to exercise, boomers are still an active bunch, willing to shell out for experiences as well as goods. In the retailing space, this has fostered a movement toward experiential selling strategies, in which marketers try to connect their products with a lifestyle or an event.
Specialty home furnishings retailers like
Pier 1 Imports
have capitalized on the trend, turning the shopping experience in their stores into a treasure hunt through knick-knacks that seem almost intentionally disorganized.
Also, the perceived holiday strength in high-end retailers like
is partly attributable to their ability to sell a glamorous lifestyle image.
One important element to shopping experience is service. While their parents were the quintessential "do-it-yourself" generation, baby-boomers are adopting a "do-it-for-me" attitude.
"The big thing when I was a kid was to get my father a Craftsman power saw for Christmas," said Edward Kerschner, chief investment officer with Citigroup Smith Barney. "If my kid got me a power saw, I'd show him where he could put it."
The change is inspiring retailers to differentiate their business by making things as simple and easy as possible for their customers.
guides shoppers with step-by-step fashion instructions, while Best Buy has assembled its Geek Squad business to help people set up their intricate home entertainment systems. Also, Home Depot has its home installation business.
Health-wise, companies selling products that can help aging consumers with their wrinkles, such as
, could also have good times in store.
As far as physical fitness, the baby-boomer generation is reputed for aspiring to be in good shape while refusing to exercise or eat well. In fact, while obesity rates in the U.S. have increased dramatically in the last 20 years, it's reported to be most prevalent in people aged 50 to 59, among whom one in four baby-boomers is considered overweight.
Kerschner said this dynamic has led to the "low-carb craze," as boomers have looked for easy fixes to their dietary issues.
"Low-carb is here to stay," he said. "When it comes to staying healthy, baby-boomers will talk the talk, but they don't walk the walk, and so they're always looking for the quick fix."
Food stores offering healthy alternatives at good prices, like
, could do well with baby-boomers, along with restaurant chains that offer affordable meals that aren't fast-food joints, like
is an obvious play for addressing the health concerns of baby-boomers, along with wine and spirits companies as opposed to beer brewers.