The Changing Demographics of Retail
We have long believed that consumers would move towards brands and retailers that focus on discounted inventories. As the economy slows long-term because of changing demographics, we believe this trend will continue. Our focus on retail names reflects our view on the long-term growth prospects for the US economy as well as changing preferences of consumers.
I happened to visit an outlet mall recently where everything was 50% off. It was crowded. It’s as if the entire mall was celebrating Black Friday. Not just on the day after Thanksgiving; every day. Recently I also visited a standard shopping mall not focused on discount pricing. The 20% off signs did not seem to be drawing much attention from shoppers nor was the mall crowded.
We believe this trend towards discounted shopping choices will continue regardless of the income bracket of the consumer. Costco recently reported during their last earnings call someone had bought a $400,000 diamond ring which positively affected earnings. This alone suggests the changing retail landscape; even someone willing to spend $400,000 for a diamond bought it at Costco! :)
Remember that the US economy is 70% consumption. Though the US is attempting to rebalance its economy more towards manufacturing, internal consumption will likely be the key stimulus for economic growth.
Consumers are spending money. They are just being more careful how they spend and are focused on trying to find lower prices. Think about your own shopping habits. Have you noticed any increased inclination towards finding items that are priced with discounts? That’s how I think as a purchaser and maybe this might resonate with you as well.
A recent CNBC article highlighted the changing landscape. In that article they stated the following:
Retailers should take note that the spending power of sticker-conscious shoppers is on the rise. Bank of America Merrill Lynch in a new research report said purchases made by low-income consumers (U.S. households making less than $50,000 per year) grew 6% this past April from a year ago, outpacing both middle- and upper-income consumers' spending growth across the country.
Consumer confidence remains high despite an ongoing trade war between the U.S. and China, and unemployment levels remain low. And so many low-income shoppers have been encouraged at the start of the year to spend a little more. But they’re not going to Tiffany or Nordstrom to do that. They’re just spending more at places like Walmart and Dollar Tree.
Lower income consumer spending growth continues to outpace other groups.
Chart Source: Bank of America
Source: June 5, 2019; CNBC.com article by Lauren Thomas
If you have any questions about this information, please let us know. We are happy to go into detail about how we make investment decisions and develop investment rationales for positions that we buy in portfolios.