I have a quick trivia question. What share of US net worth
does the bottom 60% of the US hold? Stop for a second and think about the
answer. The correct answer is just 4.2% while the top 5% of the US owns nearly
62%. Now consider an average superstore
in an average mall (such a thing doesn’t actually exist but assume it does) and
accept that spending correlates strongly with net worth (it does) this would
mean that just 5 out of a 100 shoppers is doing the bulk of spending. Meanwhile
6 out of the 10 are doing just 4% of the buying. Now hold that thought.
A Realistic Way to
Think About Spending
The reason I am engaging the reader in this kind of thought
framing is because it is the reality whereas it is so easy for us to fall into
the delusion of misattributing spending trends thanks to the language we use.
Analysts and commentators use words like ‘mass’ and ‘luxury’ to describe the
retail market. They are useful concepts and I am not in any way arguing that
the top 5% only buys luxury goods! However the point is that we should think
about retail trends in terms of who is doing the spending rather than just
assuming that the conditions of the majority (80% of the US only holds 15.1% of
net worth) dictate overall spending.
In order to graphically demonstrate income distribution I’ve
broken out the numbers graphically below. All numbers in this article come from
research carried about
Edward Wolff.
I’ve put the bottom 40% but even then it is hard to see! The
top 5% is broken out and as you can see comprises almost 62% by 2007.
A Bifurcated America?
Indeed the trends appear to be slowly getting worse and I’m
sure the economy of recent years has accelerated them. For a host of reasons
–most of which I can’t go into here- I think that this will continue. My
central point is that there appears to be a growing bifurcation in America and
it is just not about money. Lifestyles are also bifurcating and at the heart of
the reasons for it lie two ideas which I think are mistaken but widely accepted
as truth by the constituent groups that holds them. On the one hand one group
seem to think that the US lives in a pure meritocracy and taxes and government
expenditure are a disdainful burden on them that is intended to punish their
success. On the other, another group seems to believe that all men are born
with equal attributes and abilities and the purpose of Government policy is to
rectify any ‘unnatural’ imbalances via redistribution of resources. This is
part of the reason why the US has such large public debt. You can’t reduce a
debt by paying less and spend more, yet that is the ‘happy’ consensus that US
has been living in for years.
The result of this mess is that the wealthy are getting
distrustful of the merits of the public sector while the poorer segments are
developing a dependency culture. Moreover the cultural ties that bind America
are splitting.
What Does This Mean
For Stocks?
Of course many of these observations have been made by
Citigroup in its investment research on plutonomy stocks, however the stocks I
want to discuss are subtly different. Whilst those stocks were primarily about
luxury stocks, I want to focus on stocks that are emblematic of the cultural
shifts and that are dependent upon them continuing. For example the wealthy
bought Louis Vuitton bags in the 60’s and they do so today but, what about
other differentiating trends in wealthy peoples spending habits?
Let’s focus on lifestyle. Take Lululemon Athletica (Nasdaq: LULU) and Whole Foods Market (Nasdaq: WFM). The former appears to be a
business without any significant moat and therefore susceptible to margin
erosion as rivals threaten to introduce cooler yoga gear. Indeed a quick look
at the figures from Yahoo finance indicates that there is a 27% short interest
in the stock. While I sympathize with such an approach and find some of the
company’s pronouncements over the cultural importance of its yoga pants to be
comedic, I would caution against being too negative. It is not pitching itself
into the mass market but rather at the kind of wealthy health conscious lady
with significant spending power. Her spending priorities are not governed by
the same kind of economics as the rest of the athletics gear market.
As for WFM a relatively small number of its customers make
up a huge amount (around 20/80) of its revenues. Moreover as long as the trend
towards healthy living and differentiation from the eating habits of the rest
of the nation continues then I think WFM can convert shoppers to its offering.
WFM doesn’t just offer a healthy option, it offers a tangible differentiated
lifestyle choice and wealthy people in the US appear willing to pay for this in
itself.
Similarly take something like the Boston Beer Co (NYSE: SAM). Beer is as far from a ‘luxury’ stock as
you will ever get but SAM does offer premium craft beers and this market is
growing significantly in excess of the mass market beers. All it requires is a
notable shift in purchasing behavior from the top 10% of the US and there will
be a notable marginal shift in demand. Given that SAM has such a small market share
it is not hard to see the company continuing to generate double digit revenue
growth.
Another area in which we can expect the wealthy to continue
to spend is in personalized health care and cosmetic surgery. Stocks like Myriad Genetics (Nasdaq: MYGN) and Allergan (NYSE: AGN) are worth a look.
The former develops diagnostic tests for people who want to assess the risk of
developing certain diseases (typically hereditary). Admittedly it needs to
develop revenues outside of its Bracanaysis (breast and ovarian cancer) test
but if the trend towards the wealthy spending money on personalized and
pre-emptive medicine then its chances will improve. As for Allergan, as long as
the trend towards cosmetic surgery increases among the wealthy then it can
expect good sales of its market leading Botox product.
