Investing in demographics: Trips, treats, and tools

On retirement, the dreaded alarm to begin the working day rings no more. In its place lies free time. What will people newly liberated from wage slavery do with it?
Investors in ‘consumer discretionary’ businesses, which sell products and experiences that are ‘nice-to-haves’ rather than essentials, are asking the same question. We can group the winners into three spending categories: ‘trips’, ‘treats’, and ‘tools’.

Travel businesses should benefit from the extra time freed up for trips. These include hotel chains that offer an enjoyable rather than merely functional experience, such as InterContinental Hotels Group, Marriott, and Hyatt. Online travel agencies such as Booking Holdings also stand to gain. Cruise operators including Carnival, and package holiday companies such as Jet2, can tap into the same trend.

‘Treats’ covers physical goods and experiences. Within the catch-all term of ‘luxury goods’, wealthy older consumers are likely to prize genuine luxury. That means favouring class and elegance – in other words, quality – over quantity. Think companies with quieter luxury appeal, supported by long-established heritage brands. Examples include French luxury goods maker Hermès, which avoids large, flashy logos, and some brands within the sprawling luxury group LVMH.

The wearable, usable, and available

Alongside the wearable are the usable, as newly available retirees seek new adventures. LVMH owns high-end yacht maker Royal Van Lent, for instance. Among listed companies, another option is Ferrari. Younger people drive, of course, and wealthy younger people can buy sports cars, but older people often have more time to enjoy them.

‘Tools’ are less glamorous, but they can help to make life that bit better. This includes home improvement retailers such as the US’s Home Depot and the UK’s Kingfisher, owner of B&Q. High home-equity balances – the value of homes after subtracting mortgages, which may well have been repaid by this stage – provide the financial means. Retirement also creates the time to undertake home renovations.

Cosmetics, toiletries, and beauty firms such as France’s L’Oréal are set to benefit from increased spending on skincare and wellness. We explored this theme in our May issue, which is available on our website.

Despite these opportunities, we should acknowledge that an ageing population is, overall, bad news for the consumer discretionary sector. Retired people tend to spend less money in general.

Losers from an ageing world

The categories at greatest risk are those most heavily geared towards younger consumers. Fast-fashion retailers such as the UK’s ASOS may struggle, as older consumers tend to favour clothes that last longer and are less driven by changing trends.

Lower household formation – people starting families and furnishing new homes – could also come under pressure. This affects companies such as the US’s Wayfair and the UK’s Dunelm. Falling birth rates are also likely to weigh on toy manufacturers such as Mattel and Hasbro.

In other words, an ageing world means fewer people shepherding grumpy children around furniture stores and more enjoying peaceful Caribbean cruises – a shift that investors would do well to consider.

The eight spending ages of man - and woman

Average annual US household spending rises throughout early adulthood and middle age to peak in the late 40s and early 50s, before falling in later life.