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Betting on the boomers

Betting on the boomers
April 27, 2016
Betting on the boomers

As a result, more than half the Americans riding Harley-Davidsons are baby boomers. For the company that makes the iconic bikes, Harley-Davidson (NYSE:HOG), this presents a dilemma. It's good to the extent that baby boomers are often affluent, so they can shell out $40,000-plus for the top-of-the-range Road Glide Ultra; bad to the extent that they're getting too infirm even to be strapped aboard their Hog. So what's the company to do - how can it maximise the take from its core customers?

Many companies - come to that, investors, too - share Harley-Davidson's predicament. How can they capture the benefits of baby boomers' spending power? The question demands an answer because the generation that thought itself born to be wild was really born to be - and remains, even in its decline - the world's dominant consumer group. This message was underlined by the research arm of management consultant McKinsey & Co in a detailed piece of work - Urban World: The global consumers to watch - published earlier this month.

Until the turn of the century, growing numbers of consumers worldwide drove the rise in consumer spending. Since the millennium, the demographics have shifted, says McKinsey. In the coming years, population growth will fuel just a quarter of the increase in spending, while the purchasing power of particular consumer groups will propel the remainder. Of these groups, two stand out - working age adults in China and those aged over 60 in the developed world. China's working-age adults will account for 18 per cent of the global growth in consumer spending from 2015 to 2030; but the developed world's 'grey' spending will beat that, notching up 19 per cent. Putting these proportions into context, on McKinsey's best guess, global consumer spending will grow by $23 trillion (£15 trillion) in that period. That means each of these consumer groups will add around $4.3 trillion, equivalent to about 1.5 times the UK's current annual output.

Still, as I said, how to tap that growth? Both for companies and investors, that's easier said than done. Harley-Davidson's response has been to become a brand as well as a manufacturer and its four motorcycle museums attract big visitor numbers. Harley's fairly fat numbers for profit margins and return on equity indicate it's doing something right, though making motorbikes in the US is tough and its share price - currently $48.58 - is 34 per cent off its 2006 all-time high.

Yet Harley-Davidson is just one company, so an investment in its shares hardly constitutes a balanced portfolio. Besides, it's impossible to tap burgeoning grey spending power without tackling healthcare. The sad fact is that the remorselessness of ageing means that as the numbers of the developed-world elderly rise - from 164m to 222m by 2030, according to McKinsey - outlays on healthcare will absorb a third of the group's extra spending. The importance of healthcare is underlined by the point that spending by those aged over 75 will rise the fastest. That's entirely driven by healthcare; after all, average annual spending on healthcare for a 60-year-old is $8,200, but the figure shoots to $35,000 for a 90-year-old.

The glib response may be for investors to load up with shares in Smith & Nephew (SN.) and Stryker (NYSE:SYK). Yet it's not that simple because, as McKinsey says, "the expanding number of retiring and elderly consumers across the developed world is an example of a growing segment that is often talked about but seldom fully incorporated into strategic priorities". It's a complication that, as McKinsey adds, there is no such thing as the average consumer. In the market for the elderly, difficulties are exacerbated because that's the segment where wealth inequality is the widest.

As a result, companies struggle to find the right services - and successfully addressing the grey market is more about delivering services than products. McKinsey does not offer clear-cut solutions. Its main message is that companies must try harder. That means, for instance, identifying segments within consumer groups; tailoring services to local areas; having both premium and discount offerings; deciding whether or not a company should grow old with its customers or should run brands that cater for different demographic segments, as does clothing retailer The Gap (NYSE:GPS), which was founded in the year of Easy Rider's release.

But if it's difficult for companies to find the right strategy, it must be doubly tough for investors to pick the winners. Nor, in this instance, do exchange-traded funds (ETFs) help much. On London's market there is a fund from iShares that tracks the healthcare sub-sector of the S&P 500 index of leading US shares - its epic code is IUHC. Yet even this is more about pharmaceuticals and biotech than healthcare. Meanwhile, a quartet comprising shares in Harley-Davidson, Smith & Nephew, The Gap, plus - of course - Saga (SAGA) might be interesting. Mull that over as you listen to Bob Dylan singing "he not busy being born is busy dying" on the soundtrack to Easy Rider.