We admit there are many reasons why the U.S. could enter into a "Lost Decade" similar to that experienced by Japan starting in the 1990s. Demographics, however, is not one of them. By studying the generational makeup and growth of the U.S. and Japanese consumer (ages 15 to 70) from 1970 to 2025, one can see it is like comparing apples with mangoes.
In the charts below we have taken a snapshot of consumers (both historical and estimated for future years) aged 15 to 70 every five years between 1970 to 2025 to illustrate the changing demand of the differing generations. For example, in Japan in 1990 (the key 40 year consumer cycle peak) the consumer makeup was:
- 9%: GI Generation (born 1905 to 1924)
- 38%: Silent Generation (born 1925 to 1944)
- 34%: Baby Boomers (born 1945 to 1964)
- 19%: Generation X (born 1965 to 1984)
The absence of a sizeable Generation X or Generation Y casued the number of Japanese consumers between 15- and 70-years-old to peak in 1990, and set to fall by about 30 percent by 2025. To make the Japanese situation worse the 40-year consumer spending cycle peak also occurred in 1990. Therefore, not only did the domestic Japanese economy have to cope with changing generational demand, but also with fewer consumers entering malls or shops in the high street.
The U.S. generational snapshot is quite different and does not support a Japanese-style "Lost Decade(s)” scenario. The U.S. consumer 40-year cycle peaked at around 2000 with a generational makeup of:
- 21%: Silent Generation (born 1925 to 1944)
- 41%: Baby Boomers (born 1945 to 1964)
- 36%: Generation X (born 1965 to 1984)
- 2%: Generation Y (born 1985 to 2004)
Although the generational makeups are different, the key difference is that in the U.S. the number of consumers will continue to grow until at least 2025 thanks to Generation Y (grey bars). We believe this supports our view that the U.S. economy is not ending, but changing. Companies that became fat and happy catering to Boomer demand from 1980 to 2000 need to understand that in many cases this demand is no longer there. Why? Because the generational landscape has changed and will continue to change between now and 2025.
In simple terms of supply and demand, from the period between 2000 and 2015, Boomer consumer potential demand will decline from 41% to 37% as a proportion of total U.S. consumer demand. Whereas the Generation Y proportion of potential demand share will increase during this time frame from 2% to 30%.
We strongly suspect that those companies that are aware of this shift in demand, and are catering to it, will become the next "Stock Market Darlings." As opposed to those whose executives are scratching their heads and wondering where their customers (the Boomers) have gone. Currently, for example, "Value" teenage retailers are enjoying the increasing demand of the price-conscious Generation Y, who are flocking to their stores, while car manufactures keep trying to design, or in most cases re-design, the perfect car for the disappearing Boomer.
The ripples of these generational changes are still being felt in the economy, and in our belief will continue to be felt until about 2015. At this point we believe the conditions will be right to a return to consistent GDP growth of above 3%. There any many hurdles to overcome between now and then, such as consumer debt and rising taxation; however, we continue to believe the March 2009 low to be a similar "Generational Opportunity" similar to 1940 and 1975.
A few companies we feel are aware of–and catering to–the shifting generational makeup of the U.S. consumer base include:
Apple Inc. (AAPL)
Best Buy Co. (BBY)
Boston Beer Co. (SAM)
Chipotle Mexican Grill (CMG)
McDonald's Corp. (MCD)
Pacific Sunwear of California (PSUN)
And among those which seem to be unaware of any generational shifting in the U.S. consumer base would have to include:
General Motors Inc.
Harley Davidson Motorcycles Inc. (HOG)
Wal Mart (WMT)
Wendys/Arby's Group Inc. (WEN)
Disclosure: No positions, but some of the named companies have been featured in our model portfolio.