Investing successfully often involves choosing companies poised to benefit from demographic shifts. Over the next decade, several trends are likely to impact consumer spending and, by extension, the value of certain firms.
Among the important demographic changes looming on the horizon are the decrease in the number of consumers ages 35 to 44 and the likely increase in those ages 20 to 34. This younger cohort should not only grow in size but also in wealth, creating opportunities for a wide range of industries, from the rental housing market to companies that manufacture infant wear and toys.
An increase in spending by an important consumer segment can cause the value of a stock to boom. Other factors — such as economic conditions, management skills or corporate profits — also affect stock valuations. For example, the valuations of health-care stocks, which are supposed to be buoyed by our rapidly aging population, are probably affected to a much greater extent by Medicare or Medicaid reimbursement rates. Some drug stocks have high valuations not because the population is aging, but because those firms are extremely profitable due to their patent protection capabilities and their success in marketing prescription drugs to doctors and to consumers.
Of course, it's impossible to ascribe a change in a stock or a sector's value to a specific consumer or demographic movement. Nevertheless, those who consider demographic trends to be a useful tool for screening investments often try to determine which industries stand to benefit from such shifts. With these investors in mind, here are several developments to watch for in the next decade.
A Loss of 35- to 44-Year-Olds
The youngest Baby Boomers, who were born in 1964, will turn 40 in 2004. The smaller cohort of babies that followed the Boomers means that the number of consumers ages 35 to 44 will decline in most parts of the U.S. throughout the coming decade. Census 2000, which counted about 45 million people in that category, confirms this decline. Although the population in that age cohort increased by 20 percent compared with the 1990 census, the Census Bureau is projecting a 12 percent decline in the number of people ages 35 to 44 by 2012.
This age segment accounted for 26 percent of consumer expenditures in 2000, according to the Bureau of Labor Statistics (BLS). The growth rate of this important group will decline an average of just over 1 percent per year in this decade, from a 2 percent per year increase on average during the 1990s.
Several characteristics make the 35-to-44 age group a particularly rich market. Household size peaks in this category at 3.3 people per household, so these 24 million households have a big food budget. Also, no other age group includes more of the most vital consumer segment of our economy — married couples with children. In fact, married couples with children account for only about a quarter (23.5 percent) of all households in the country, but constitute nearly half (48 percent) of households ages 35 to 44.
Quite a few industries will feel the impact of the decline in growth rate in this cohort. The household items that 35- to 44-year-olds spend the most on will come as no surprise to anyone with older children or teenagers still at home. According to the BLS, this list includes breakfast cereals, chicken, candy, soft drinks, fast food, telephone service and Internet connections, living room furniture, children's clothing and footwear, and entertainment expenses, such as TVs, radios, musical instruments and photographic equipment.
Unless they are prepared to direct their marketing efforts to other demographic segments, some firms in the above industries may be in for a lean decade. Several industries, however, are introducing products that may spur millions of consumers of all ages to shop. The photography industry, for one, is already making the transition to digital cameras, while the television industry is on the verge of a changeover to high-definition TVs.
A Turnaround in Younger Consumers
The number of consumers ages 20 to 34 has been on the decline: Between 1990 and 2000, it shrank to about 58.8 million, a 5 percent reduction. The number of households in this age segment fell to 24 million, a 4 percent drop.
However, over the next decade, the number of consumers in this category is projected to grow by about 10 percent. The household income of this group is likely to increase as well, because their level of educational attainment is rising. According to the Census Bureau, 34 percent of women and 29 percent of men in this age cohort have a bachelor's degree, an all-time high.
The combination of rising numbers and increased income is likely to significantly heighten the importance of this consumer segment. During the 1990s, for example, households under age 35 accounted for a declining percentage of all consumer expenditures. Their share slipped to 22 percent in 2000 from 26 percent in 1990, reports the BLS. A return to a 26 percent share could add between $150 billion to $200 billion a year to spending on the goods and services that this segment prefers.
Perhaps the biggest impact will be felt by the rental housing market. Consumers under age 35 may number only about 1 in 4 households, but they pay 44 percent of all aggregate rent. As this decade progresses, their share of rental payments will probably exceed 50 percent, because nearly two-thirds of these young households rent their homes.
The growth in this age group may impact maternity wards as well. According to birth data for 2000 from the National Center for Health Statistics, 3 out of 4 U.S. births are to women ages 20 to 34. In addition, birth rates for women in that age range have increased since 1995, to about 110 per thousand women from about 100 per thousand women. The demand for infant wear, toys and child care is likely to increase as the number of births again rises above 4 million, as it was before 1990.
The Consumer Business Context
These shifts in the size of two important consumer segments need to be considered in the context of other factors that impact businesses. For example, not everyone offering rental housing will find financial success, because so much of a property's value to landlords depends on location and the size of the dwellings most in demand.
When considering a long-term investment, individual investors often consider it useful to track slow-moving demographics to help identify the sectors that are likely to see demand softening or increasing. However, beware of investing opportunities that advertise skyrocketing demand and promise the sudden accumulation of vast wealth, if you buy in today. As with most hype, these promises sound too good to be true for a reason — they are.
Peter Francese is the founder of American Demographics. He can be reached at [email protected].
Consumers under age 35 are expected to grow 10 percent by 2012, while those ages 35 to 44 are projected to decrease 12 percent.
|HOUSEHOLDS UNDER AGE 35||HOUSEHOLDS AGES 35-44|
|Number households in 2000||24 million||24 million|
|Household growth, 1990-2000||-4.3%||+17.5%|
|Projected household growth, 2002-2012||+10%||-12%|
|Share of all 2000 consumer spending||22.2%||26.0%|
|Sources: Census Bureau, Bureau of Labor Statistics|