Consumer spending accounts for about 70% of economic activity, so any weakness drags down growth, employment, wage gains and stock prices—the biggest engines of prosperity. During the year through July, retail sales increased only 2.4% even though the job market strengthened and aggregate personal income rose 4.1%. Economists say consumers are holding back because of cyclical problems like slow wage growth, a lack of available credit and a focus by households on paying down debt and boosting savings. They also cite the collapse of U.S. home prices last decade for jolting households into a mindset of frugality.
But we think far-reaching shifts in consumer behavior driven by digital technology are partly responsible for the slow growth in standard measures for consumption. Well-informed digital consumers expect a lot more for a lot less and, through Amazon.com, for example, can find bargains with quick delivery in an increasing array of goods. Consumers are also prompting the sharing, rather than buying, of myriad products and services—from vacation homes and bicycles to parking spaces and cars. The boom in companies that are harnessing these behavioral changes underscores how growth and profits will probably spring increasingly from consumption done with mobile devices.
Uber Disruption
The success of car-sharing services like Uber underscores how digital technology will disrupt traditional industries along with the standard measures for consumption. Each shared auto used by such services could displace nine traditional vehicles, according to a Barclays Capital report dated July 9, 2015. Auto sharing in the U.S. could push down demand for vehicles by 40%, reducing revenues for auto makers by about $200 billion.
While digital technology makes sharing much easier for consumers, two financial busts in the past 20 years have made it more attractive. Since the burst of the bubbles in dot-com stocks and U.S. home prices, consumers have questioned the satisfaction from purchasing material goods. They increasingly prefer to pay for access rather than ownership, for renting rather than buying.
Changing consumer behavior is a main theme for our analysis of individual companies and has already created stark winners and losers.
Guests who pay
HomeAway is the largest company in the vacation rental industry, featuring an inventory of more than 1.1 million homes worldwide. With nearly 100 million travelers visiting its online marketplace every month, HomeAway is capitalizing on the willingness of consumers to shun name-brand hotels in favor of accommodations more tailored to their needs.
HomeAway seeks to beat hotels by offering more space and a lower price. Increasing consumer trust in online services like HomeAway is competing with the trust traditionally placed in brand-name hotels. The company, with a market capitalization of $3 billion, builds confidence among customers with guarantees and website reviews.
Digital technology influences not just where consumers spend their disposable income, but how they shop. Smartphones enable consumers to efficiently compare the features of a product, read reviews from users and find the lowest price.
Intensified pricing pressure means that producers of many types of goods have lost pricing power. The explosion in free consumer reviews of products (think TripAdvisor) is allowing smaller producers to unseat big brands in many categories of goods.
E-commerce is especially threatening to retailers, where digital sales totaled $300 billion last year with annual growth of about 15%. In one measure of the challenge to traditional stores and clothing makers, online sale of used clothes offers a $34 billion market opportunity, according to Barclays.
Our equity research team believes that future winners will leverage digital technology to offer transparency on pricing and rival-crushing bargains. We currently own several companies across our portfolios that align with this paradigm, including Costco, TripAdvisor and Priceline.
