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Trends to befriend

Megan Boxall and the IC companies team explain how to tap into the trends that will create and shape the next generation of corporate giants
October 12, 2018 and the IC companies team

Whatever happened to Blockbuster? Once an internationally renowned entertainment giant and a hugely cash-generative membership organisation, the company was a universal symbol of a quiet evening in. In 2000, just as Blockbuster was approaching the peak of its dominance, Reed Hastings, founder of a fledging video company called Netflix (US:NFLX) met with John Antioco, Blockbuster’s chief executive, to discuss a potential collaboration. The idea was that Netflix would run Blockbuster’s brand online in exchange for in-store promotion. Mr Hastings got laughed out of the room.

Less than two decades on, Netflix boasts a market capitalisation of $158bn (£121bn) and has 118m subscribers across the globe. Blockbuster no longer exists – its management failed to take heed of Bill Gates’ warning: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10.”

Failing to mould to the trends of the future is a constant danger for companies. Just ask BHS, Toys R Us or Maplin, all of which recently disappeared from UK high streets after failing to update their business models for the digital age. But new trends are not always destructive. True, the rise of technology (far and away the biggest global change of the past decade) has disturbed several industries, but it has also bred a wave of corporate giants that have changed the world and made billions for their investors along the way. Tapping into the trends that will shape the next generation of business behemoths could prove incredibly lucrative. 

 

 

1. Going green

Surely and steadily, the world is switching to clean energy. Between 2018 and 2050, Bloomberg New Energy Finance (BNEF) predicts that $8.4 trillion will be invested in wind and solar power generation capacity and a further $1.5 trillion will be “zero-carbon” spent on hydro and nuclear. That’s roughly 86 per cent of total predicted spend. In short, the carbon-emitting fuels that are causing global warming have ceased to be our go-to source for new energy.

The notion of ‘going green’ isn’t just about greater use of renewables. Globally, we are tuning in to the fact that we need to use energy more efficiently in everything we do. That means goodbye to the wasteful internal combustion engine and welcome to electric and autonomous vehicles. In the agricultural sector, it means greater use of genetics and precision technologies to increase the productivity of crops and livestock. And it means consumer goods companies having to clamp down on overexuberant use of plastic packaging. 

But the observation that we are getting greener requires several footnotes. The first is that while the growth in demand for renewables eclipses all other energy sources, demand for oil and gas is still rising, at least for the next few years. Ask Tullow Oil (TLW) why it continues to spend millions drilling for new sources of hydrocarbons and the FTSE 250 company will point to the International Energy Agency’s demand forecast for 105m barrels of oil a day by 2040. Sectors including aviation, shipping and chemicals will prove resistant to displacement, and prop up demand – or so the predictions assume.

One might conclude from the tectonic shifts in energy investment that consumer behaviour is turning, but there’s no real conclusive evidence for this – in fact the case could be the reverse. In a 2014 study, academics at the Universities of Bern and Hanover found that German adults who identified more strongly with the phrases “I think of myself as a consumer who cares about saving natural resources” and “a resource-saving lifestyle is an important part of who I am” tended to have higher carbon footprints (see chart).

What’s more, the researchers found that green intentions played “an ambiguous role in explaining the environmental impact of a person”. In fact, the most reliable predictor of energy use and carbon footprint was income, as it is between nations’ carbon emissions.

It’s important not to extrapolate too much from one localised study. Nonetheless, the findings could point to a feasible insight into consumer behaviour: that it is easier to live with cognitive dissonance than it is to shake ingrained patterns. From this perspective, one might conclude that energy consumption is ultimately about price and convenience. Short of the introduction of a carbon tax, airlines and oil producers may have less to fear after all.

It also helps to explain another trend: that renewables are starting to displace fossil fuels not because of an altruistic, wholesale switch to green electricity providers such as Aim minnow Good Energy Group (GOOD), but because renewables are cheaper. Indeed, BNEF forecasts that average global costs of running solar photovoltaic cells and wind farms will fall to $50 per megawatt hour by 2020, enough to outcompete the cheapest fossil fuel power. Once governments and citizens tune into this reality, and the gains still yet to come, the threat to traditional energy investments may really start to swell. AN

 

 

2. PropTech 

The estate agency world is often seen as one of the last remaining bastions of all that is traditional. The trouble is that while the operating model used to buy, sell and rent houses has worked reasonably well, it is a known fact that moving house can be very stressful, while estate agents share in the negative sentiment usually reserved for traffic wardens. The system has not evolved in the same way as the people using it.

‘PropTech’ is starting to drag the sector into a new era of technological innovation. Portals such as Zoopla, Rightmove (RMV) and OnTheMarket have already upended the traditional operating model, while online agents such as Purplebricks (PURP) and eMoov are taking away business from traditional estate agents. With these websites, the principle is the same as buying a pair of shoes: you look at 50 pairs online before trying on the pair you like the best. 

But unlike shoe shopping, buying a house is far more complex than a one-time payment. Now every step of the process is under pressure to change, whether it is the way that you arrange a mortgage, organise a conveyancing solicitor, obtain a building survey, or even finding out about the facilities in the area where your new house is. A typical example is Trussle, which became the UK’s first online mortgage broker, tracking all the latest offers and giving you the opportunity to secure the best deals. Another innovative line is offered by ULS Technology (ULS), which runs a platform available to major banks, giving them the chance to choose from a list of conveyancing solicitors, thus saving the potential buyer a lot of legwork. And crowdfunding platforms are emerging that allow investors to become landlords and share in rental income without the hassle of direct property ownership.

Where does this leave the traditional estate agent? Think Kodak and digital photography, then think adapt or die. Estate agents of the future should make use of all the new technology and offer what many see as the comfort of a face-to-face relationship with their customers – some people don’t like talking to computers about one of the biggest investment decisions of their life. The big problem is that traditional estate agents have a relatively high fixed cost base, employing lots of people and having to service a chain of branches. It’s great when business is booming because overheads remain relatively stable, but when transactional volume slows, which it has been doing for some time, overheads don’t show a corresponding decline. True, the technical revolution will take time to achieve a bigger share than the traditional methods (online estate agents are taking just 5 per cent of the market), but their overheads are a fraction of that of the estate agent chains. Small wonder that shares in estate agency chain Countrywide (CWD) have fallen by 96 per cent in the past three years. JC

 

3. Workforce robots

For decades, artificial intelligence (AI) was hailed as the technological revolution that would transform the way we live our lives. Yet for all its real-world promise, AI was long confined to the realms of futuristic sci-fi films. But now AI and its associated phenomena – robotics and automation – finally appear to be taking off thanks largely to huge advancements in computer processing power. 

Indeed, with its connotations of efficiency, quality control and productivity, one can understand why everyone – from tech behemoths such as Alphabet (US:GOOGL) and Apple (US:APPL) to much smaller businesses – is getting involved. The McKinsey Global Institute (MGI) has estimated that tech giants spent between $20bn and $30bn on AI in 2016 and Stanford University’s 2017 ‘AI Index’ found that the number of active US start-ups developing AI systems had soared by 14 times since 2000. 

On the face of it, the companies supplying workforce robots are among the best placed to gain from AI’s new dawn. Blue Prism (PRSM) is a prominent London-listed example. The robotic process automation specialist offers a digital workforce of software robots and its shares have risen more than 2,000 per cent since flotation in March 2016. Ocado (OCD) also provides automation technology via customer fulfilment centres, using robots to pick groceries, while e-commerce companies Asos (ASOS) and Boohoo (BOO) utilise automated warehouses. The economic benefits gained from these novel workforces could be enormous: PwC expects AI to add up to $15 trillion to global GDP by 2030.

But automation isn’t a universally revered concept, in fact, the ‘rise of the robots’ has fomented concerns about technological unemployment – the idea that humans will be replaced by machines. And this isn’t so far-fetched. Another report from the MGI estimated that up to 800m jobs could be displaced by automation by 2030. And that begs the question: will the recruitment sector become obsolete as AI proliferates?

For now, it seems unlikely. Arguably, despite job losses, new roles will be created to function alongside modern technologies. This is already happening; Stanford’s report found that the share of US-based jobs requiring AI skills had grown by 4.5 times since 2013 alone. Moreover, recruiters could themselves benefit from AI assistance and screening. Companies including Unilever (ULVR) and Vodafone (VOD) are customers of Hirevue, a business that uses video interviewing software and AI to facilitate the hiring process.

Offline, physical supermarkets are also automating via the medium of touch-screen kiosks – potentially usurping the roles of check-out workers. But these stores now face the threat of Amazon (US:AZN), the seemingly omnipotent tech power, which recently launched its own check-out-free grocery store. Competition is growing, even in these emergent stages of automation – which means danger and opportunities lie ahead in equal measure. HC 

 

4. Everyone is famous

This year, for the first time, a YouTuber is a contestant on Strictly Come Dancing. That’s significant for two reasons: a) if Joe Sugg manages to persuade his 8.2m YouTube subscribers to vote for him, this year’s competition only has one possible winner, and b) it means that individuals who create and distribute content via free digital platforms have risen to the ranks of ‘celebrity’. Not to say Strictly has a history of attracting A-listers, but Joe’s fame is illustrative of a remarkable new feature of the media industry: entertainment can come from anywhere. 

It’s a trend that has been driven by the rising capabilities of the mobile phone. Today, almost everyone in the western world carries in their pocket a device to film, edit and broadcast content, which can in turn be viewed instantly by millions of individuals. Social media platforms including Alphabet’s YouTube, Facebook’s (US:FB.) Instagram and Snap’s (US:SNAP) Snapchat are being used every day to promote new entertainment and 60 per cent of young people now use their mobile phones as their primary source of TV. Mobile video streaming rose 71 per cent between 2016 and 2017, according to research from AT&T Foundry. 

The rise of mobile streaming has already disrupted large parts of the media industry: more content creators with easy-to-use, direct-to-consumer platforms means more competition for producers and distributors, which has sparked massive consolidation in the entertainment market. Meanwhile, broadcasting is beginning to fall foul of the rising popularity of podcasts, while print journalism is being overwhelmed by social media. 

But digitisation of the media also offers opportunities. According to Deloitte’s recent Home Entertainment report, “today’s data and tools can enable media and entertainment companies to segment audiences into the smallest groups imaginable – and then precisely deliver targeted content and advertisements to those groups”. For example, Netflix recommends films based on its users’ previous choices and Google ads can promote products to people who have already shown an interest in them. 

So while dinosaurs of the media market panic that free content will be the death of their industry, innovative players have the potential to reach new heights. David Kershaw, chief executive of marketing group M&C Saatchi (SAA), points out that advertising is more ubiquitous than ever before thanks to the rise of social influencers (who get paid to promote products to their massive online followings), podcasts (where ads are often recorded by the hosts themselves) and free platforms such as YouTube (which make money through ads rather than subscriptions). For the marketing companies that can shake off the burden of decades of overenthusiastic consolidation, there could be big opportunities for growth. 

Entertainment may appear a frivolous addition to a feature on the megatrends shaping the future of the world, but it shouldn’t be overlooked. After all, two of the world’s biggest companies (Alphabet and Facebook) rely on human interaction with the media, while some of the biggest corporate growth stories of the past decade have been driven by the evolution of entertainment. MB

 

5. Hot on health 

The global population is ageing, while decades of indulgence and inactivity have pushed up levels of obesity and sparked epidemics in heart disease, diabetes and cancer. According to the Nielson Global Health and Wellness Survey, the number of overweight or obese adults globally has increased by nearly a third over the past decade. But the good news is that people are trying to be healthier by making better food choices and being more active, while biotechnology and healthcare specialists are on a quest to cure disease and increase the efficiency of medicine. 

That has implications for many industries. In the UK, the pub groups and tobacco companies are already feeling the strain of shifting behaviours – in 2017, the Office for National Statistics (ONS) found that only about half of 18- to 24-year-olds surveyed had drunk alcohol during the previous week, compared with around two-thirds of that age range in 2005, while 18 per cent of young adults identified as smokers compared with 35 per cent in 2000. Spirits companies such as Diageo (DGE) and tobacco giants such as Imperial Brands (IMB) and British American Tobacco (BATS) will have to diversify to keep on top of the trends. Regulation is also playing a role in getting Britain fitter. The recently introduced sugar tax on drinks in the UK prompted reformulations at Nichols (NICL), Britvic (BVIC) and Fevertree (FEVR), alongside heightened demand for healthier sugar substitutes such as those made by PureCircle (PURE) or Treatt (TET). Further policy changes to reduce the burden of poor health are worth keeping an eye on. 

But while companies that have grown alongside the unhealthy spending habits of western consumers may struggle with the shift in demand, plenty of industries will benefit from a healthier society. For example, healthcare spending in the US alone is set to rise by 8 per cent of GDP every year between now and 2040 and medical companies are likely to be the beneficiaries. Exercise is also on the rise. Gym Group (GYM) reported a 42 per cent increase in members to 720,000 during the first half of the year across its 147 sites. The group reckons it can hit 200 locations by 2020. If the trend towards a healthy lifestyle continues, then this goal looks attainable.

But it is impossible to speculate on the changing dynamics of health without addressing the wealth gap. There is huge disparity between the health of populations both within countries and globally, and it’s not a trend that looks to be slowing down. A recent article in The Economist describes it plainly: “as rich children slim down, poor ones are getting fatter”. Healthcare companies are tapping into that trend by attempting to increase medical provision in poorer parts of the world – if policy changes can address the imbalance, there could be a big opportunity for growth. JF

 

6. Banking on digital

Like their high-street retail neighbours, changing behaviour among UK banking customers and the need to bring down costs has forced banks to invest more heavily in digital services. For the country’s largest lenders, that’s also meant downsizing their branch networks. Most recently Royal Bank of Scotland (RBS) said it would close 54 more branches in England and Wales, cutting 258 jobs, since customers have been spurning branches – where transactions are down almost 30 per cent since 2014 – in favour of banking online. Meanwhile, in April, Lloyds (LLOY) announced plans to cut a further 1,230 jobs and close 49 branches, as part of a three-year plan to improve digital services and cut costs. HSBC (HSBA) has been one of the most advanced in terms of enhancing its digital services, launching its ‘Connected Money’ app in May. The app includes a personal spending analysis and purchase round-ups, which transfer a small amount of money to a savings account when customers make purchases. 

Research consultancy CACI predicts that banking app transactions will more than double by 2022, while desktop and laptop interactions will decline by almost two-thirds. Taking advantage of that appetite, several digital banks have been granted banking licences by the Bank of England over the past three years. They include app-based bank Monzo, current and business account provider Starling and small and medium-sized enterprises (SME)-focused OakNorth.

These online-only start-ups have the agility their established counterparts lack – without the legacy IT systems and costs associated with branch networks, they can more easily adapt to customers’ needs. Monzo – one of the most prolific newcomers – gained 240,000 pre-paid customer accounts in the year since the product was launched in March 2016. 

However, there are limitations to the competitive threat posed by some of the online-only upstarts. Customer inertia has historically suited the major high-street lenders very well – the Competition and Markets Authority’s retail banking investigation in 2016 found that just 3 per cent of retail customers had switched their current accounts within the past year. And serious website problems at several lenders may have discouraged people from relying entirely on online banking – and why Metro Bank (MTRO) continues to attract legions of new customers with an old-fashioned model. What’s more, retail banking is a scale game – large high-street banks have the advantage of access to large amounts of cheap customer deposits for funding. Monzo’s losses more than quadrupled during the year to February, its first year with a full banking licence, despite having cut the costs associated with running each account by 80 per cent since last September. While the bank expects to reach 1m current accounts by October this year, 80 per cent of customers do not deposit their salaries with it, with deposits equivalent to just £150 per account last year. EP

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