By 2030, more than two-thirds of the global population are expected to be middle class, with most of this growth coming from the emerging markets. By understanding these influential consumers, we can identify the sectors and companies likely to be most desired over the decades to come.
One area to have generated above average growth for some years now, underpinned by rising wealth geographically and intergenerationally, is the experience economy.
Consumer preferences have shown experiences are increasingly preferred to objects. Enjoyment of consumption is measured by utility, and it has been shown experiences tend to provide greater and more prolonged utility to individuals when compared with objects.
This shift in consumer preference can be seen in the growth rates of different personal consumption expenditure (PCE) categories. Growth in spending on live entertainment and spectator sports was notably ahead of average PCE growth and other individual categories, such as casinos and cinemas, from 2013 to 2017.
This is not necessarily a new trend however – live entertainment and sports have been gradually increasing the share of PCE, up from 0.25% in 1970 to 0.45% in 2017.
Furthermore, despite millennials showing a greater preference for experiences, older and wealthier consumers are the largest spenders. As younger generations enter the workforce and their spending power increases, we see these growth trends strengthening.
Covid was no curtain call
For a sector that thrives on atmosphere and crowds, the pandemic provided a potentially existential threat. While government help has gone some way to ease the pain, without live crowds, the industry is not viable. However, as pathways to reopening are laid out, there are reasons to be optimistic.
The emotional aspect of live experiences is impossible to replicate using technology. Technology can play an increasing role, but rather than a threat, the ability to offer live streams can be an incremental revenue stream for event promoters. This is a view shared by groups such as Live Nation and Eventbrite.
Additionally, we expect to see an increase in the supply of live events, which is where artists generate most of their income. Live Nation estimates income from touring for artists is 7x what is earned from streaming and recorded music. This provides promoters with even greater growth opportunities.
Globally, there are signs crowds are returning. In countries with lower cases, such as Australia and New Zealand, we have already seen stadiums complete with crowds. In China, the first major economy to reopen, crowds have returned to music venues and theme parks. In the UK, there are early signs of demand returning, with many summer events selling out in seconds.
Many of the companies we monitor closely are returning leaner, with more efficient business models. Not only does this suggest we could see more profitable companies going forward, importantly, many businesses will be more profitable than current consensus estimates.
Trusting the process
We are not naïve in terms of the challenges ahead. However, the last year offered a salient reminder of what investing for the long term really means – multi-year, often multi-decade, ownership. As long as you have good reason for owning a company, you should continue to do so.
One such example is Disney. It is a content machine, able to generate multiple revenue streams for each piece of content – ranging from Mickey Mouse to Star Wars. Since Disneyland opened in 1955, Disney’s expanding theme park business has been a key element of its storytelling capabilities, and prior to Covid-19, it contributed to a significant proportion of revenue and about a third of profits.
However, as the pandemic took hold in early 2020, Disney’s theme parks across the globe were shuttered. Coupled with global cinema closures, a number of Disney’s businesses were under threat, and its share price reached lows not seen since about 2014.
We conduct stress testing exercises on each investee company – examining cash flow, dividends and covenants in the event of a sustained period of lower revenue and negative operating leverage. With Disney, we needed to answer two key questions: does it have enough liquidity to stay solvent throughout the pandemic, and do we still want to own it? We concluded Disney could withstand the pandemic, and our investment thesis, founded on the opportunity for its new streaming business, was not just intact, but likely to be boosted.
Crucially, the exercise enabled us to determine the shares were undervalued in March and April 2020. More than a year since the beginning of the pandemic, Disney’s share price chart highlights just how beneficial our process has been.
Brook Harris is a global equity analyst at Sarasin & Partners. The views expressed above are his own and should not be taken as investment advice.