The Federal Reserve: Millennials spend less because they have less

The Federal Reserve: Millennials spend less because they have less

Millennials and their spending habits have been targeted as one of the reasons behind reduced demand from homes, cars and retail sales. New research, however, from the Federal Reserve points to the reason behind those spending habits as the simple fact that they spend less because they have less money to spend. In many respects that comes as no surprise given the magnitude of debt levels between the levels of student loan and credit card debt they are juggling, but that has also impacted their level of savings with more Millennials having nothing saved.

While it may come as a surprise to some, the above revelation that a growing percentage of Millennials are living lives that are in tune with our Middle-class Squeeze investing theme.

 

In recent years, slow home construction, declining new-car sales and the poor performance of brick-and-mortar retailers have all been blamed on the “unique tastes and preferences” of those born between 1981 and 1997. That means millennials have been accused of killing everything from canned tuna to the suburbs.

Actually, though, millennial habits are not so different from that of previous generations, “once the effects of age, income, and a wide range of demographic characteristics are taken into account,” according to a new paper by the Federal Reserve.

Younger people are spending less because they have less money to spend, the Fed concludes.

“Millennials are less well off than members of earlier generations when they were young, with lower earnings, fewer assets, and less wealth,” write authors Christopher Kurz, Geng Li and Daniel J. Vine.”

For family income,” they write, controlling for age and work status, “Generation X and baby boomer households have a family income that is 11 percent and 14 percent higher, respectively, than that of demographically comparable millennial households.”

That jibes with recent research showing that the median millennial only has $2,430 in savings and that a growing percentage of millennials have absolutely nothing saved. In fact, that generation is still largely relying on Mom and Dad for help: Most American adults between the ages 21 to 37 receive financial assistance from their parents or guardians, according to a report from Country Financial.

Source: Federal Reserve study: Millennials spend less because they’re poorer

Is Diet Coke diluting and deluding itself with its latest move?

Given falling sales of soda, both the regular “sugary” kind as well as diet, Coca-Cola is once again trying to entice consumers with a new round of Diet Coke-branded beverages that will be available in the coming weeks. We’ve not tried them, and while we’re somewhat skeptical our preference for first-hand research means giving them a go.

Our concern is the potential risk to the Diet Coke-brand, which to date has focused on cola beverages. And while we understand the argument to be had with brand extension and consumer choice, we’ve also seen too much choice dilute a brand resulting in a company that needs to bring a brand “back to its core.”

At the same time, creating a new brand is no easy task. To us, it says Coca-Cola could have a tough time ahead as it tries to keep consumers coming back for its products as they look for healthier alternatives.

 

Starting in two weeks, you can buy Diet Coke in Ginger Lime, Feisty Cherry, Zesty Blood Orange and Twisted Mango.

They will come in a skinnier silver can, reminiscent of Red Bull’s. And the company may have had another drink in mind when it mixed up the flavors — LaCroix seltzer, which has attracted exactly the audience Coke is after.

Coke wasn’t shy about which customers it’s targeting.”Millennials are now thirstier than ever for adventures and new experiences, and we want to be right by their side,” said Rafael Acevedo, the group director for Diet Coke in North America. “We’re making the brand more relatable and more authentic.”

The company is not changing the classic Diet Coke formula, which will still be available in the traditional, squatter 12-ounce cans.

Coke has been paying special attention to its low- and zero-calorie drinks.Over the summer, the company replaced Coke Zero with a drink called Coca-Cola Zero Sugar.

But in general, consumer appetite for soda, both regular and diet, is shrinking. People are turning away from the artificial sweeteners used to flavor diet sodas — including the new Diet Coke flavors.

In a note published on Tuesday, the research group Cowen reported that diet soda sales fell 2% in the last three months of 2017. In that period, Diet Coke sales fell by 4% and Diet Pepsi (PEP) by 8%.

Source: Diet Coke’s new cans and flavors are Millennial-friendly – Jan. 10, 2018

What You Don’t Know About the Housing Market – But Should

What You Don’t Know About the Housing Market – But Should

The Personal Consumption Expenditure inflation rate from the Department of Commerce showed slower price increases than the Labor Department’s CPI report, with both headline and core PCE inflation coming in below expectations. Headline August PCE inflation expectations were for 1.5%, but came in at just 1.4%, (having started the year at over 2.0%) while Core PCE Inflation was expected to come in at 1.40%, but fell yet again to just 1.3%. This measure has been in near free-fall since the beginning of the year where it was over 1.9%.

 

The major spending category keeping core PCE inflation from falling even further has been the persistent increase in rents. The Consumer Housing Trends Report for 2017 from Zillow Group sheds light on today’s usual dynamics. The report found that fewer people are moving today than at any point in recent history and a larger share of Americans are renting today than they have in decades with renters accounting for 37% of all households in America. Despite what we’ve heard about the sharing economy and the younger generations’ desire to live asset-light, 57% of Generation Z and 55% of Millennials consider buying over renting. Despite coming of age during the financial crisis, 69% of Millennials believe that owning a home is an essential part of the American Dream, a higher percentage than any other generation!

 

Our omnipresent Connected Society investing theme is evident in the way that renters search for their home, with 83% using online tools. However, there is room for growth as 32% report encountering difficulties determining whether a rental listing is illegitimate or fraudulent. Buyers also rely on online tools to aid them in their search, with 79% going online and 74% using agents to find their home. We find plenty of opportunity for our Cashless Consumption investing theme to expand as while the vast majority of renter search for their home online, 53% pay their rent in person and 84% sign their lease in person rather than electronically, which accounts for just 16%. Our Cash-Strapped Society investing theme appears in that 79% of renters who moved from a previous rental experienced a rent increase before moving. This theme also emerges in some of the fast-growing markets where rents can consumer upward of 40% of a typical renter’s income, despite the conventional wisdom that total housing costs should account for just 30% of income.

 

Despite the tight housing market, 50% of sellers report selling their home for less than the list price, a manifestation of our Cash-Strapped Consumer, even though across the United States, the number of homes available for sale has fallen year-over-year every month since February 2015. Buyers just don’t have the funds and/or access to loans as growth in consumer lending has been slowing. We also see room for growth in our Connected Society in the selling process, as 89% of sellers list with an agent and 36% attempted to sell their home on their own, yet only 11% sold without an agent. As for timing, sellers on average have their homes listed on the market for just over three months with 51% receiving two or more offers on their home. Despite the tight inventories, 76% of sellers have had to make at least one concession.

 

We’ve written before how our Cash-Strapped Society means more home improvements rather than trading up. The Zillow report found that 86% of homeowners have no plans to sell within the next three years and less than 23% say their home is in like-new condition. Given that 77% report their home could use some at least some updating, 72% have plans to conduct at least one home improvement project in the next 12 months. The most popular improvements are painting the interior (25%), bathroom improvement (22%), landscaping (21%), and replacing carpet or flooring, (21%) all good news for Home Depot (HD) and Lowe’s (LOW).

 

The post-financial crisis regulatory overhaul was intended to seriously tighten lending standards, yet 29% of first-time home buyers put down just 3% to 9%. This doesn’t leave a whole lot of room for home prices to fall before a homeowner finds themselves underwater. Recall that at its peak, roughly 33% of homeowners with a mortgage were underwater during the financial crisis. Today that number has dropped to around 10%.

 

The bottom line is that the fundamentals of the housing market have materially changed which makes comparisons to historical norms less useful than in the past at best and misleading at worst. On the positive side, homeownership rates have stopped declining and today sit around where they were in late 1994.

Nestlé takes its coffee upscale with Blue Bottle Coffee 

Nestlé takes its coffee upscale with Blue Bottle Coffee 

Over the last several quarters, we’ve witnessed larger breweries scoop up smaller, craft brewers with the goal of not only buying market share but also tapping into products that consumers are favoring. We are starting to see that happen in Big Food with Danone acquiring White Wave and now Nestle taking an interest in premium coffee company Blue Bottle Coffee. Several of team Tematica have sampled Blue Bottle’s hot and cold coffees, and in our view, they are a clear-cut example of an Affordable Luxury. Just so we’re all on the same page, we define an Affordable Luxury as a premium product or service that makes consumers feel like they are splurging, but it’s priced so that splurge can be fit into their weekly budget. A slice of heaven that doesn’t break the bank.

There’s a very big difference between a cup of lukewarm Nescafé instant coffee and a cup of freshly roasted pour-over coffee, yet the same parent company will be able to bring give you both. Nestlé has reportedly paid around $500 million for 68% of the Brooklyn-based roastery Blue Bottle.

Acquiring millennials, er, coffee brandsNestlé will have the option to acquire the remaining 32% of the company if Blue Bottle reaches certain unspecified goals, and says that the brand will be allowed to function independently. The company’s founder, a former professional clarinet player who turned his coffee-roasting hobby into a worldwide business, will stay on, as will the current CEO.

In an interview with the Financial Times, which broke the story, Nestlé marketing director Patrice Bula was pretty honest about why it acquired the company: It wants expertise in what’s currently considered premium coffee, and it wants to be part of a market that’s actually growing among millennial customers.

Source: Nestlé Pays $500 Million For 68% Of Blue Bottle Coffee – Consumerist

With Jet.com Wal-Mart moves to target digital and Millennials sales

With Jet.com Wal-Mart moves to target digital and Millennials sales

While it’s true that companies, especially large ones, take time to evolve their business very much the way it takes a large boat to turn. That said, there is a tipping point at which the turn picks up speed, and we are seeing that at Wal-Mart when it comes to our Connected Society investing theme. Its moves, which are now being copied by Target (TGT) and others, make it one of the likely survivors of the current retail-mageddon.

 

A discount giant is using its newest acquisitions to connect with its millennial shoppers. During an earnings call, Walmart revealed that it’s trendy, upscale Bonobos or ModCloth brands will soon be sold via jet.com. This move highlights how Walmart plans to leverage its Jet division to target the millennial shopper, according to Business Insider.

Unlike Walmart’s goal to appeal to most demographics, company spokesperson Randy Hargrove said in the report that “The Jet customer demographic —millennial, urban, higher income — aligns well with the demographics of ModCloth and Bonobos.”

They also align well with Jet’s other millennial-focused brands and lines, including La Croix seltzer, fresh produce, and ethical cleaning products. The retailer added that Bonobos or ModCloth product will likely not see the inside of a Walmart store in the near future, the report said.

Source: Two high-profile Walmart acquisitions will find a home on jet.com | Chain Store Age

Millennials Politically Apathetic?

Millennials Politically Apathetic?

NewImage.png

I typically enjoy the publication The Economist, so this week I was terribly disappointed to read the Lexington piece, “Not running, but fleeing,” which was all about the potentially devastating consequences of America’s youth turning their backs on politics.  Are Millennials politically apathetic?  I’d like to suggest a different interpretation.

First, we need to be clear on our terms.  The article discusses at length the importance of having a society that is politically engaged, particularly in democracy such as America.  Errr, what!?  First of all, America is not a democracy, it is a republic.  Now that may sounds like a silly distinction to some, but America’s founding fathers were more fearful of a democracy than of nearly any other form of government.  The focus of the founding fathers was on the proper relationship between the individual and the state.  The original core concept for America’s government was the notion that the only legitimate purpose of government is to protect the inalienable rights of its citizens and nothing more.  A democracy is quite possibly one of the worst forms of government to meet this goal for as the saying goes, democracy is 51 wolves voting to eat the 49 lambs.

The inaccuracy here goes further though in that it belies a fundamental misunderstanding of the goal of the American form of government.  Recall the saying attributed to Thomas Jefferson, “That government is best which governs least.”  The exact phrasing here is unlikely to have been exactly Mr. Jefferson’s, but it conveys his views accurately.  If the ideal government is that which governs least, leaving individuals to determine their own course through life, so long as their chosen course doesn’t interfere with another’s inalienable rights, then we would not seek to have a nation full of politically oriented individuals – translation – busybodies who love to direct other people’s lives.

The article’s author is concerned that Millennials are not interested enough in politics.  Fair enough, but what exactly is the state of politics today? The political arena in America has devolved into a discussion of to what degree do I get to dictate how you live.  Politics is about bureaucratic mudslinging, ridiculous hyperbole, embarrassingly phony hand-wringing and the blatant telling of bold-faced lies. Perhaps Millennials’ abhorrence of politics these days is more a reflection of the level of respect they have for the behavior and attitude of those in power. Excessive spending has lead to an enormous increase in debt alongside endless broken promises in the form of bankrupt pension plans and a social security system than any grade school math student see is beyond busted!

Perhaps the supposed apathy is in reality an awareness that the one-size-fits-all programs that have been shoved down the throats of Americans for decades haven’t worked and that perhaps, just perhaps, we will all be better off leaving each other the hell alone and simply focusing on making the most of our own lives.  Maybe they are the generation that has finally figured out, when you aren’t always sure what is best for you, why tell anyone else how to live?