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Generation Z

The lifestyle and consumption patterns of younger generations, particularly those born after the Millennial Generation, have massive implications for investors. Steven Wilmot, Theron Mohamed, Harriet Russell and Jonas Crosland report
September 24, 2015, Theron Mohamed, Harriet Russell & Jonas Crosland

Every morning, after breakfast, my retired father lies down to listen to one of the 100 or so vinyl records he bought during the 1960s. He remembers paying 39 shillings and sixpence (£1.98) for most of them, which is about £35 in today's money. Adjusting for rising real wages, the relative income value of £1.98 then works out at about £65 today. These were the golden days of record stores and EMI.

I spent my late-teenage years building a CD collection to rival my father's record collection, but it is now gathering dust in the loft. For the past five years, I have instead paid £10 a month to the Swedish music-streaming company Spotify, which offers ready access to the contents of all my old CDs as well as most of the rest of recorded music.

Many families will have similar stories to tell. The way Britons in their teens, 20s and early 30s - a cohort sometimes referred to as millennials or generation Y, and Generation Z for those born in the 2000s - listen to music tends to be different from the way postwar baby boomers listen to it. And this generational divide in the consumer economy, which has drawn most attention in the US, extends beyond music to films, electrical products - most smartphones are 'purchased' via ongoing mobile-phone contracts - and even cars.

"The younger generation don't put as much emphasis on owning stuff," says Neil Saunders, managing director at retail research outfit Conlumino. "When you get to about 40, people find it quite important - they like to have bought or downloaded the product. But the younger generation sees subscription services as much more important."

Changing patterns of consumption as these groups become society's biggest spenders have big implications for investors. Record stores have already all but disappeared: HMV, the retail chain that demerged from EMI in 1998, called in the administrators in 2013, although the brand has since re-emerged in a slimmed-down form. Spotting losers and winners in advance is much harder than relating history. But our sector specialists have nonetheless made an effort to do just that, focusing on three key areas of the stock market.

The most obvious beneficiary of current trends is the technology sector. Defining the distinctive traits of these younger generations is in some respects controversial, but one feature everyone can agree on is the importance of digital technology. The smartphone in particular has become to them what the car was to baby boomers: an expression of freedom or, as a recent note from Bank of America Merrill Lynch puts it, the "gateway Millennial device".

According to Pew Research, 63 per cent of 18-34-year-old Americans use their smartphone to access the internet, compared with just 15 per cent of older baby boomers (57-65-year-olds). Similarly, the younger cohort is more than five times more likely to play games and six times more likely to play music on their device than older boomers.

This brings us to the second broad area of the stock market we explore: retail and leisure. Because of its combination of European population density and Anglo-Saxon affinity for technology, the UK leads the world in e-commerce. The disruptive impact of this trend on the retail sector is still not well understood. Chains continue to seek the holy grail of 'multichannel' retailing - a single, seamless view of the consumer - without taking an unnecessary hit to their margins. And the boundary between leisure businesses and physical retail gets blurrier by the year as the new generations of consumers seek experiences rather than products on the high street.

Finally, we consider the property market. Homes may be the exception to the rule that the younger generation would rather rent than buy: surveys show that millennials certainly are as attached to the notion of home ownership as their parents were. However, whether because of high house prices, more mobile lifestyles or faster-moving jobs markets, people are deferring the decision to buy property until later in life. The result is that buy-to-let landlords have in recent years found a new, more affluent client base. SW

 

A new era

Millennials and the generation Z after them have ushered in a new era for media, technology and telecoms companies. They have been quick to adopt mobile devices and embrace innovative ways of consuming and sharing information. These generations thirst for control and freedom: they want to be connected, engaged and entertained at all times rather than rooted to sofas and constrained by television schedules.

The advent of high-speed internet and the sheer variety of available content has fuelled impatience and entitlement; millennials and Zs are eager to get what they want, when they want, with minimal effort. And with so many options on the table, they face an enormous opportunity cost if they misplace their money. That may explain the rise of transient ownership - millions pay just to access platforms such as music-streaming site Spotify and Amazon Instant Video - and sharing services such as Uber and Airbnb. Thriftiness has also made them diligent researchers - enabled by online services such as Google search and Wikipedia - who will scroll through hundreds of TripAdvisor and Amazon reviews to ensure they receive maximum pleasure for their pounds.

Netflix (US:NFLX) is arguably the defining service of the new paradigm. The on-demand TV and film service releases all the episodes of TV shows at once - freeing viewers from the tyranny of weekly schedules - and sparing them advertisements.

 

New blood: The spread of mobile devices is forcing telecom companies to invest in content

 

Moreover, it not only makes tailored recommendations to users based on what they watch, consider and reject; it uses the gathered data to inform the type of content it invests in. For example, Netflix's data scientists found a distinct crossover between fans of actor Kevin Spacey, director David Fincher and the original BBC show House of Cards, and an award-winning original series was born.

Entertainment and advertising companies have raced to follow Ys and Zs on to mobile devices and social media and lured them with greater freedom and control. For example, ITV (ITV) is betting that ITV Player and other digital services will offset any future declines in TV advertising revenue. Acquisitions have also been a popular solution: publishing giant Daily Mail and General Trust (DMGT) acquired Elite Daily largely because 70 per cent of the news and entertainment website's 4m daily browsers are aged between 18 and 34. Similarly, advertising titan WPP (WPP) has taken a stake in Refinery 29, a fashion and lifestyle media platform that reaches one in every four millennial women, and invested in Vice Media, an irreverent news and entertainment company with a youthful following.

Meanwhile, telecom companies have strained to cope amid soaring usage of mobile devices and high-speed wireless internet and surging demand for streaming video. The spread of mobile devices has depressed landline revenue, prompting the likes of Sky (SKY), BT (BT), TalkTalk (TALK) and Vodafone (VOD) to invest in TV content and on-demand video.

"In the next five years, as the internet babies become the mainstream, all businesses will need to deliver personalised experiences to global markets." That's according to the directors of SDL (SDL), a specialist in 'customer experience management' that tailors and localises clients' websites to draw and engage visitors. We agree that as millennials come of age, the technology, media and telecom companies that cater to their specific needs are likely to lead the pack. TM

 

Satisfying demanding customers

Originally typecast as financially dependent teens, today's millennials include young adults in their 20s and 30s. Many have careers, are raising children and live in their own homes. Millennials currently account for $1.3 trillion in direct annual consumer spending in the US alone (source: BCG). This gives them a certain amount of purchasing power to dictate the shape of retail. But it's too simplistic to dub them the 'digital generation' or credit them with the rise of online shopping. Sure, millennials more than any other social group have demanded complete convenience from the retail sector. But operating a successful retail company today means fighting on multiple fronts to satisfy a demanding customer base.

In a study conducted by Accenture, in which the company surveyed the shopping behaviours of 6,000 consumers (of which 1,707 were millennials), nearly 41 per cent said they engaged in 'showrooming'. This involves scoping out products at bricks-and-mortar locations before shopping for them online at the cheapest price. But the researchers found that young shoppers still go to physical retail locations. In fact, Accenture found that of the people it surveyed, many claimed to be part of the 'digital generation' but said they actually prefer shopping in person. That makes online channels simply complementary: many said they use mobile and online sites and apps to research products before picking them up in store. In fact, some retailers complain of a rather frustrating online trend: shop-til-you-drop... but never buy.

In short, it's never been more important for retailers to succeed on and off the web. Looking at the most successful stocks in the sector, high-street chains Next (NXT) and Ted Baker (TED) come top of the crop. The former had a strong catalogue business in place before the advent of online shopping and has leveraged existing logistics networks, warehouses and sales systems to get one step ahead in serving online consumers. Similarly, Ted Baker has stayed true to its products, and has viewed the web as an effective tool to engage with foreign customers. Where it sees international demand for its products online, it has followed up with new overseas locations.

But one can't ignore the success of the pure online retailers, either. The millennials and Zs have given rise to 'etailers' such as Asos (ASC) and, more recently, Boohoo (BOO). The former is possibly the most successful Aim stock to date, having floated its equity at around 20p a share to reach a peak of nearly £70 a share in early 2014. These online retailers are up against some significant challenges, though. International demand for access to these sites is fierce and Asos, in particular, has found it expensive and logistically difficult to maintain similar service standards across borders. Similarly, Boohoo was forced to issue a profit warning just months after debuting as a public company after spending too much money on marketing and failing to keep up with discounting pressures on the high street. The valuation of these two stocks also indicates the structural shift young consumers have affected within the retail sector. Asos's shares trade on a whopping 84 times forward earnings, while Boohoo's trade on 35 times.

 

 

But shopping isn't the only leisure activity changed by the young. The fact that roughly 28 pubs close per week on average in the UK can no longer be put down to the recession. In fact, according to The Campaign for Real Ale, new research shows that closures increased by two pubs a week between 2013 and 2014 - even though consumer spending showed signs of recovery.

It's no secret at this point that millennials are incredibly discerning about where and how they spend their money. Yes, external factors such as higher beer taxes and price wars between pubs and supermarkets play their part, but millennials have also had their say. Instead of hanging out at pubs and making them the life force of a community, millennials tend to be obsessed with health in a way their predecessors weren't. They also grew up in an age of 'pre-drinking', where it's cheaper to buy alcohol, consume it at home and then move on to nightclubs. There's also more demand from this generation for a 'premium experience' - and often one that's accompanied by food. Ralph Findlay, chief executive of Marston's (MARS), has dubbed it the 'F-Plan': focusing on families, females, 40-somethings and - most importantly - food. It also accounts for the rising popularity of craft beers and beer festivals.

The online strategy also applies to the restaurants and the pub sector. Expectations from millennials are exceptionally high: they want brands to surprise them and entertain them online, before they get to the bar and even throughout the week. And with the UK's ever-changing demographics, it's clear alcohol is not the sole reason to visit these establishments any more - the quicker pub operators realise that the better. HR