Thinking about where consumers are going to spend their money over the next five or ten years can indicate potential growth industries.
Did you ever wonder how some people become very wealthy even though they don't seem to be particularly bright or talented? In a few cases, it's just a matter of luck or being in the right place at the right time. But most just used common sense.
They didn't waste time on get-rich-quick schemes or waste money on expensive cars or trying to win the lottery. Instead, many people who later became affluent, spent their time thinking about the best way to invest what personal resources they had â€” however meager â€” for steady, long-term growth.
Millions of Americans have become wealthy, for example, by starting a business and working long hours taking care of their customers. But millions more, ordinary people with regular jobs, carefully invested their small retirement contributions or other savings in their spare time. Running a successful business or finding an investment with superior growth potential both depend to a great extent on the same thing: learning what customers are buying and how that behavior is changing.
With that in mind, the central purpose of this column is to provide information on demographic trends and patterns of consumer behavior that may impact the future success of an industry or business. This and future columns will offer the results of my research and my personal views as to business opportunities that are emerging because of changes in consumer buying behavior.
This column will not offer advice to buy or sell any type of stock, bond or make any other investment. We also make no guarantees of great wealth to anyone. But we do believe that thinking about where consumers are going to spend their money over the next five or 10 years can indicate potential growth industries and reveal marketing and investment opportunities.
There are a few big demographic themes, such as aging Baby Boomers, that will almost always have a huge impact. But there are also dozens of other demographic segments â€” some big, like Hispanics, and some small, like single dads. And there are also hundreds of lifestyle niches, such as parents who school their children at home or â€œsnowbirds,â€? who move to warmer places when it gets cold.
Each of these segments can be considered a target market in need of special products or services. Of course, every demographic group doesn't present new business opportunities. Some segments are incredibly small, but very vocal, like the homeschoolers. While others, like the snowbirds, offer business opportunities only in the places where they flock to each winter.
My rule of thumb regarding segments or niches is 5 percent. If a demographic segment or lifestyle niche is or soon will be 5 percent of the nation's population or households, then it's worth a look. Otherwise, it may be an interesting story, but it's probably not going to impact market trends.
There will be exceptions, of course. The most obvious is the Asian population: It's less than 4 percent of the United States, but more than 10 percent of California's population, and it has almost doubled in size over the past 10 years. Another exception is people with a great deal of money. It only takes a few wealthy people spending freely to create business opportunities.
One way to gain insight into potential consumer trends is to focus on business sectors or industries that are likely to benefit from shifting consumer preferences or demographic changes. An example of a shifting consumer preference is the demand for bigger homes. An example of two important demographic trends is the extremely high growth of the Hispanic population as well as the senior population, ages 55 to 64.
The tricky part is to distinguish potential trends from real trends. Just because some futurist says that â€œeveryoneâ€? will soon be wearing clothing embedded with a location device does not make that a trend. There must be some underlying reason, such as the shift to casual office attire, for a change in dress behavior by a few people to become a widespread trend.
Consumers generally spend money for a purpose, not because some forecaster says they will. The demand for bigger homes, for example, is fueled in large part by the increase in well-paid professional, executive and managerial occupations where a big home is both a status symbol and a place to entertain colleagues or clients.
The trend toward bigger homes is not just important for homebuilders. It's also beneficial to building supply firms as well as home furnishings, landscaping and interior design companies. But as the population nearing retirement age grows ever larger, we may see a counter trend that will favor smaller, but custom-built homes.
One way to uncover a new trend is to think about how people, wealthy or otherwise, spend the trillions of dollars that power the gigantic U.S. economy. Even a slight shift can mean a huge difference in demand for certain products or services. Just a small $20 a year drop in household spending on clothing, for example, can mean over $2 billion less to apparel companies and drive the most highly leveraged corporation into bankruptcy.
Demand shifts when demographics change either in numbers of people or in the amount of funds available. For example, the demographic segment of Hispanics is growing in numbers, while another segment, senior citizens, is growing in terms of affluence. In both cases, it's important to know that these populations are often geographically concentrated.
The increasing Hispanic community will mean a lot to businesses in states such as California, Texas, Florida and New York, where there are large numbers of this ethnic group. But that trend may not be of much significance to local businesses in northern New England where few Hispanics reside.
In the case of seniors, or any other age group that's growing in numbers or wealth, it's necessary to think about what they spend more money on than other households. For people ages 65 to 74, that includes travel, reading and medical care. They are an important segment of the travel market so if they have more cash, chances are they will spend more of it on leisure travel.
Whether the segment is Hispanics, seniors or another group, the point is they are all potential customers who want or need an array of consumer goods and services. How well their most pressing wants or needs are served is how fortunes are made.
The accompanying chart shows the trends in numbers of households and household income over the past five years for three important age groups. The chart also lists several areas where their spending is well above average. If their high rate of income growth continues and population growth accelerates, the top spending categories may present some fresh investment opportunities.
Peter Francese is the founder of American Demographics. He can be reached at [email protected].
CONSUMER TRENDS FOR INVESTORS
Over the next five years the growth rate of 55- to 64-year-old households is expected to increase substantially, but growth among 45- to 54-year-olds will be slower.
|CONSUMER SEGMENT||CHANGE 1995 TO 2000||TOP SPENDING CATEGORIES|
|AGES 45 TO 54:|
|21 million households||up 19%||Higher education, apparel,|
|Average income: $72,000||up 22%||home furnishings, pets|
|AGES 55 TO 64:|
|14 million households||up 11%||Vacations, second homes,|
|Average income: $61,000||up 28%||insurance, security systems|
|AGES 65 TO 74:|
|11 million households||no change||Travel, reading, medical care,|
|Average income: $41,000||up 33%||housekeeping services|
|Note: Income change is 1994 to 1999.|
|Source: U.S. Census Bureau & Bureau of Labor Statistics surveys|