Show Transcript
The COVID-19 crisis has had tremendous implications on how consumers spend their money. Anthony Okolie speaks with Juliana Faircloth, Global Consumer Staples Analyst, TD Asset Management, on the changing spending habits of baby boomers, millennials and Gen Z and the implications for investing.
Print Transcript
- The months of stay at home and staying apart have had tremendous implications on the way consumers spend their money today. And while economies have reopened up to varying degrees, are people spending more, and what are they spending on? Juliana Faircloth, Global Consumer Staples Analyst at TD Asset Management, joins me today. Juliana, where do we stand on the consumer today?
- Thanks, Anthony. So that's a great question and a very important question. And of course there's been some recovery on the consumer side since the pandemic really hit hard in North America back in March. So we've seen some improvements in unemployment data with some encouraging job data from both Canada and the US. Consumer sentiment has hit what seems to look like a bottom and has kind of turned the corner into a more encouraging direction, and we've also seen consumer spending recover quite well and is sort of hovering almost close to flat year over year.
That said, we're still a long way from being out of the woods. Unemployment is still at multidecade highs. Consumer sentiment, though it may have bottomed, is still very, very low, and consumers are saving a lot more than they typically would.
- And the pandemic has affected everyone in terms of spending, and you've brought a chart here that shows it's impacted some consumers more than others. In fact, spending for the 40 group-- under-40 group has fallen off a cliff.
JULIANA FAIRCLOTH: So it's been very interesting to watch the diverging impact across different consumer groups. So we know that urban consumers have been very impacted and have been a bit slower to get back to normal. We know that low-income consumers have been very impacted as well during this crisis.
But another angle to take is the generational lens. And from that perspective, what we've seen is kind of on the one hand we have the older generations, like baby boomers, for example, they've been much more impacted by the health risk that coronavirus presents, but their spending's been fairly resilient. And so what we've seen is it's really been younger consumers-- so millennials and the subsequent generation of Generation Z-- that have been quite impacted from an economic perspective. So they've lost a much higher share of jobs. They're much more concerned about their earnings potential going forward and being able to pay their upcoming bills.
And so that's resulted in, as you mentioned, the chart that I brought in today shows consumer spending for consumers under the age of 40 has really dropped off a cliff. And that's kind of contrasted by much more resilient spending amongst older consumers over 40 and especially over 60.
- So what does this distinction matter from an investment perspective?
- The generational lens is quite an interesting one to take. And baby boomers, millennials, and Generation Z, they've all received their sort of time in the spotlight amongst thematic investors, and that's because of the sheer size of these consumer groups. So collectively, they drive over 2/3 of total spending. And as we know from an economic context, consumer expenditure drives well over half of GDP. So understanding these changing dynamics by generation is quite important to understand as we think about consumer spending broadly but especially as we think about different consumer-facing industries.
- Can you give us some examples of how consumer behavior is changing as a result of these divergent impacts that you highlighted? Let's start with the baby boomers.
- Absolutely. So consumer habits are changing in a number of different ways. And I think if we focus in for a second on the baby boomers, the shift to digital is something that really stands out for this cohort specifically. So pre-COVID, we were at a point where about 85% to 90% of millennials shopped online, so really almost everyone. This was in contrast to about 60% for baby boomers, and it had sort of stalled around that level.
COVID has changed that really rapidly. So, on the one hand, these consumers are facing a greater risk from a health perspective, but they do have some financial flexibility to continue spending, and that's really funneled these consumers online. So what we've seen is a big increase in household penetration amongst older consumers, particularly relative to their younger counterparts.
So when we think about winners in that context, of course there's e-commerce players like Amazon and Shopify and Walmart that has a great e-commerce business. But we can also kind of think about the digitization of baby boomers as expanding the entire addressable market for digital consumer activities.
So digital media and advertising will benefit as well. Companies like Facebook and Google have kind of seen an expansion of their addressable market from this digitization of older consumers.
- And so what about millennials and Gen Z? How have their consumption habits changed?
- So I think when we think about investment thematics around millennials, one that comes to mind for me is the shift in consumption away from physical goods and more towards spending on experiences and services. So we've all probably heard about millennials spending their money on restaurants and vacations and avocado toast rather than buying a home and filling that home with furniture and putting a car in the driveway.
However, as we spoke about earlier, these consumers are now in a different financial situation, and their discretionary spending ability for those experiential types of categories is quite challenged. So that sort of necessitates some caution as we think about investing in industries like restaurants and travel and leisure where the millennial share of wallet towards those categories pre-COVID was quite high. So that will be impacted going forward from this financial crisis that they're now facing.
- So that's very interesting that millennials are spending more like baby boomers. Do you see this and the other change in spending patterns that you noted to last even after the COVID-19 crisis goes away?
- I do think that both of these trends have had some sustainability to them, and understanding these generational differences amongst consumers is really important as we evaluate changing consumer trends for the long term. So it's certainly something that we're paying attention to here at TDAM as we think about consumer sectors and the companies that we own within those spaces.
- Juliana, thank you very much for your insights and analysis.
- Thanks so much, Anthony.
[MUSIC PLAYING]
- Thanks, Anthony. So that's a great question and a very important question. And of course there's been some recovery on the consumer side since the pandemic really hit hard in North America back in March. So we've seen some improvements in unemployment data with some encouraging job data from both Canada and the US. Consumer sentiment has hit what seems to look like a bottom and has kind of turned the corner into a more encouraging direction, and we've also seen consumer spending recover quite well and is sort of hovering almost close to flat year over year.
That said, we're still a long way from being out of the woods. Unemployment is still at multidecade highs. Consumer sentiment, though it may have bottomed, is still very, very low, and consumers are saving a lot more than they typically would.
- And the pandemic has affected everyone in terms of spending, and you've brought a chart here that shows it's impacted some consumers more than others. In fact, spending for the 40 group-- under-40 group has fallen off a cliff.
JULIANA FAIRCLOTH: So it's been very interesting to watch the diverging impact across different consumer groups. So we know that urban consumers have been very impacted and have been a bit slower to get back to normal. We know that low-income consumers have been very impacted as well during this crisis.
But another angle to take is the generational lens. And from that perspective, what we've seen is kind of on the one hand we have the older generations, like baby boomers, for example, they've been much more impacted by the health risk that coronavirus presents, but their spending's been fairly resilient. And so what we've seen is it's really been younger consumers-- so millennials and the subsequent generation of Generation Z-- that have been quite impacted from an economic perspective. So they've lost a much higher share of jobs. They're much more concerned about their earnings potential going forward and being able to pay their upcoming bills.
And so that's resulted in, as you mentioned, the chart that I brought in today shows consumer spending for consumers under the age of 40 has really dropped off a cliff. And that's kind of contrasted by much more resilient spending amongst older consumers over 40 and especially over 60.
- So what does this distinction matter from an investment perspective?
- The generational lens is quite an interesting one to take. And baby boomers, millennials, and Generation Z, they've all received their sort of time in the spotlight amongst thematic investors, and that's because of the sheer size of these consumer groups. So collectively, they drive over 2/3 of total spending. And as we know from an economic context, consumer expenditure drives well over half of GDP. So understanding these changing dynamics by generation is quite important to understand as we think about consumer spending broadly but especially as we think about different consumer-facing industries.
- Can you give us some examples of how consumer behavior is changing as a result of these divergent impacts that you highlighted? Let's start with the baby boomers.
- Absolutely. So consumer habits are changing in a number of different ways. And I think if we focus in for a second on the baby boomers, the shift to digital is something that really stands out for this cohort specifically. So pre-COVID, we were at a point where about 85% to 90% of millennials shopped online, so really almost everyone. This was in contrast to about 60% for baby boomers, and it had sort of stalled around that level.
COVID has changed that really rapidly. So, on the one hand, these consumers are facing a greater risk from a health perspective, but they do have some financial flexibility to continue spending, and that's really funneled these consumers online. So what we've seen is a big increase in household penetration amongst older consumers, particularly relative to their younger counterparts.
So when we think about winners in that context, of course there's e-commerce players like Amazon and Shopify and Walmart that has a great e-commerce business. But we can also kind of think about the digitization of baby boomers as expanding the entire addressable market for digital consumer activities.
So digital media and advertising will benefit as well. Companies like Facebook and Google have kind of seen an expansion of their addressable market from this digitization of older consumers.
- And so what about millennials and Gen Z? How have their consumption habits changed?
- So I think when we think about investment thematics around millennials, one that comes to mind for me is the shift in consumption away from physical goods and more towards spending on experiences and services. So we've all probably heard about millennials spending their money on restaurants and vacations and avocado toast rather than buying a home and filling that home with furniture and putting a car in the driveway.
However, as we spoke about earlier, these consumers are now in a different financial situation, and their discretionary spending ability for those experiential types of categories is quite challenged. So that sort of necessitates some caution as we think about investing in industries like restaurants and travel and leisure where the millennial share of wallet towards those categories pre-COVID was quite high. So that will be impacted going forward from this financial crisis that they're now facing.
- So that's very interesting that millennials are spending more like baby boomers. Do you see this and the other change in spending patterns that you noted to last even after the COVID-19 crisis goes away?
- I do think that both of these trends have had some sustainability to them, and understanding these generational differences amongst consumers is really important as we evaluate changing consumer trends for the long term. So it's certainly something that we're paying attention to here at TDAM as we think about consumer sectors and the companies that we own within those spaces.
- Juliana, thank you very much for your insights and analysis.
- Thanks so much, Anthony.
[MUSIC PLAYING]
