The Future of U.S. Consumer Spending: It's a Generational Thing

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:

Aeropostale (ARO)

Amazon.com (AMZN)

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.

Comments

[User 353732]

The Japanese had( still have) bad government, bad demographics(worse now) and good global competitiveness during the lost decade......which,inci... is now becoming the lost 2 decades.

The US has bad government, good demographics and bad global competitiveness.

Bad Government trumps everything else. Having an expanding labor force with relatively poor skills amongst the bottom third, high unemployment and underemployment , high debts and no credit does not lead to sustainable good quality growth.

Demographics matter, of course, and matter hugely in the long term, but National policy, priorities and will matter even more in the near and medium terms.

In America the tremendous liability of Bad Government overwhelms the great assets of good demographics, astonishingly good endowment of natural and technological resources and the entrepreneurial drive of small and new businesses

2009 Oct 22 06:11 PM

[Tony Petroski]

At last, someone broke the mold:

"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."

I prefer mangoes.

This was printed for the Japanese:

9%: GI Generation (born 1905 to 1924)
39%: Silent Generation (born 1925 to 1944)
35%: Baby Boomers (born 1945 to 1964)
19%: Generatiosn X (born 1965 to 1984)

I don't know if it was an American or a Japanese national, but I know it was a young one. Most of the Japanese "GI's" didn't make it. A number of the American GI's didn't make it either.

2009 Oct 22 06:27 PM

[Steve Pasq]

How does it go..There are lies, damn lies and statistics? Sure chasing the age group with the most money is smart but it will be a group with less and less buying power relatively speaking. Maybe McDonald's will be able to sell a bowl of rice for $.12/each and make a profit but I'll bet it will be a smaller profit than the one they made on selling the Big Mac to the Baby Boomers.

2009 Oct 22 06:57 PM

[mallarde]

Living in Southern California, I would say that Japan has "good" demographics and the U.S. has "bad" demographics. If millions of poor and uneducated people fuel population growth in the U.S. -- as they decidedly do in CA -- then this is "bad."

True, Americans might consume more in aggregate, but so what? It's an economic sinkhole. We can always export like the Chinese, correct?


On Oct 22 06:11 PM User 353732 wrote:

> The Japanese had( still have) bad government, bad demographics(worse
> now) and good global competitiveness during the lost decade......which,inci...
> is now becoming the lost 2 decades.
>
> The US has bad government, good demographics and bad global competitiveness.
>
>
> Bad Government trumps everything else. Having an expanding labor
> force with relatively poor skills amongst the bottom third, high
> unemployment and underemployment , high debts and no credit does
> not lead to sustainable good quality growth.
>
> Demographics matter, of course, and matter hugely in the long term,
> but National policy, priorities and will matter even more in the
> near and medium terms.
>
> In America the tremendous liability of Bad Government overwhelms
> the great assets of good demographics, astonishingly good endowment
> of natural and technological resources and the entrepreneurial drive
> of small and new businesses

2009 Oct 22 07:39 PM

[LilBob]

I agree with you wholeheartedly that one needs to examine one's primary demographic group and aim advertising and product lines accordingly, but I question your list of businesses as you appear to have half of the list spot on and the other half dead wrong.

4 of the 8 businesses you mention are purveyors of goods and or services that are either of poor quality, or in outrageously competitive markets. Aeropostale doesn't have a chance in an age when more consumers are looking for the "Made in America" tag and quality of products is a growing issue. Chipotle Mexican Grill-that's just a big loser right there, the food in their stores is just plain awful (and I do know food, I was a prep cook in some pretty nice restaurants during my college years). Boston Beer Company-a lot of people do like Sam Addams but there's tremendous competition in Micro-Brews and Sam Addams has lost some of it's microbrew credibility by becoming too omnipresent. Pac Sun-they had stores in the malls near where I live, both of those stores are closed now. The items they carried were very highly priced, and suited to the fashion sense of a suburbanite hip-hop fan with significantly less than average intelligence.

After trashing half of your list I'll do a mitzvah by naming a sector to watch: craft goods suppliers. Gen-Y-for some strange reason I don't really understand-seems to be full of young people who love to do crafts: knitting, scrap-booking, watercolors, etc. Stores like Michael's and Joann Fabrics are likely to enjoy growing sales as the buying power of Gen-Y increases.

2009 Oct 22 11:36 PM

[buoy]

Whenever people fixate on comparisons between Japan and US, I'm always reminded of the fact that Japan is only about the size of CA.

2009 Oct 23 08:49 AM

[athena]

Somehow I doubt these young people will be eating at McDonalds and shopping at Walmart

2009 Oct 23 09:11 AM

[David Van Knapp]

My observations are quite different. Lots of young people at McDonalds and Wal-Mart. Some companies manage to stay ahead of the curve for generations (like J&J, PG, and the like). If you were to ask me to name a restaurant and retailer that are likely to be able to do that, I would have named McDonald's and Wal-Mart.

2009 Oct 23 10:34 AM

[ed233]

The future of consumer spending in the US today is not in any way dependent upon demographics. Demographics can have a play in the economic activity in normal situations. But we are not in normal situations. At the present time consumer spending is dominated by the amount of payroll available for consumer spending. And to that you have to add the general state of sentiment. Sentiment is affected by stagnant unemployment. This environment of high unemployment and negative sentiment combined create special situations affecting economic consumer activity. Sentiment is toward saving not spending given the alternative. Unemployment is running between 16-18% and rising. This special phenomena of negative environment alone trumps everything else. Combine the effects of the present unemployment and expectations concerning spending habits and you'll have a better guide to determine which companies benefit from this potentially disastrous situation. LOL Looking after your money.

2009 Oct 25 12:47 PM