As global, thematic investors, we look for the long-term trends that will shape the investment landscape for years to come. Consumer behaviour and income growth are by no means new considerations, but they remain vital to identifying long-term trends and the companies best positioned to benefit.
COVID-19 has shown the resilient nature of societies and indeed both consumers and businesses alike. Appreciating the impact of the rapid development of COVID-19 vaccines, and anticipating the behaviour of consumers as governments reduce mobility restrictions, will be key to stock selection within our thematic process going forwards.
This is where our Evolving Consumption theme comes in – the study of people, their behaviours and their spending.
As the name suggests, consumption is not a fixed state. Over time, who the influential consumers are and what they spend on will change. By 2030, over two thirds of the global population are expected to be middle class1, with most of this growth coming from emerging markets, underpinned by female income growth and new generations entering the workforce. By understanding these influential consumers, we can start to identify the sectors and companies likely to provide goods and services that are most desired over the decades to come.
One area that’s seen above average growth for some years now, underpinned by rising wealth both geographically and intergenerationally, is the experience economy.
Consumer preferences have shown that ‘experiences’ are increasingly preferred to ‘objects’. Although part of this preference will be underpinned by the strong relationship between rising disposable income and greater discretionary spending, we believe there are also psychological factors behind the trend. Enjoyment of consumption is measured by utility, and it has been shown that ‘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. This chart shows how growth in spending on live entertainment and spectator sports was notably ahead of average PCE growth and other individual categories such as casinos and cinemas2.
This is not necessarily a new trend however, Live Entertainment and Sports have been gradually increasing their share of PCE over time, up from 0.25% in 1970 to 0.45% in 20173.
Furthermore, despite Millennials showing a greater preference for experiences (research suggests over 70% of this age group prefer experiences over objects4), older and wealthier consumers are the largest spenders5. As younger generations enter the workforce and their spending power increases, we see these growth trends strengthening.
You had to be there
So why are live experiences so compelling to consumers and to us as investors? We believe that the emotional aspect of live experiences is impossible to replicate using technology. Technology can play an increasing role, for example through the live streaming innovations used during the pandemic, but rather than a threat, we think the ability to also offer live streams can be an incremental revenue stream for event promoters. This is a view that is shared by companies such as Live Nation and Eventbrite.
Furthermore, as the economics within the music industry for artists continue to evolve, we expect to see an increase in supply of live events. Touring and playing live concerts is the greatest value offering for artists, and this is where they generate the most of their income. Live Nation estimates that income from touring for an artist is 7x what they can earn from streaming and recorded music6. This increased supply of events provides promoters such as Live Nation and Eventbrite with even greater growth opportunities.
COVID-19 has certainly been a challenge
For a sector that thrives on proximity, atmosphere and crowds, the pandemic provided an unprecedented, potentially existential, threat. Multiple cancellations, postponements and a level of financial strain not likely seen by many before has put huge pressure on event promoting companies, and while government help, where available, has gone some way to ease the pain, without live crowds, the industry isn’t viable. However, as vaccines continue to rollout and pathways to reopening are laid out, there are reasons to be optimistic.
Will crowds return? We think so. As proposed by Maslow in 1943 in his seminal paper, A Theory of Human Motivation, humans are social beings. Along with basic needs such as shelter and safety, we also have psychological and self-fulfilment needs, which include the need to belong, accomplish and be creative. Many of these are met by live events and provide rationale as to why we believe that the demand for live events will return.
It is early days in the UK, but globally, there are signs that crowds are indeed 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. Live Nation also suggest that around 80% of us held onto tickets for postponed events, thus we can be confident of crowds returning as economies continue to reopen7.
Building back better
As the world emerges from the pandemic, many companies have discussed how the pandemic forced them to really examine cost bases and the efficiency of its operations. As a result, many of the companies that we monitor closely are returning to growth as leaner companies, with more efficient business models. Not only does this suggest we could see more profitable businesses going forwards, importantly, we believe that many businesses that will be more profitable than current consensus estimates.
We are not naïve in terms of the challenges that lie ahead and recognise it will not be a straight forward recovery. However, we think the last year offers a salient reminder of what investing for the long-term really means – multi-year, often multi-decade ownership. And that so long as you have good reason for owning a company, you should continue to do so.
Many of the companies that we monitor closely are returning to growth as leaner companies, with more efficient business models.
Company in focus – Walt Disney
Thanks to its unrivalled intellectual property, Disney is able to operate in a number of arenas each benefitting from relatively inelastic demand. For example, trips to Disney Theme Parks, tickets for new film releases and video on demand (SVOD) subscriptions.
At its core, Disney is a content machine, able to generate multiple revenue streams for each piece of content, ranging from Minnie & Mickie, to Star Wars and Marvel. Since Disneyland first opened in 1955, Disney’s expanding Theme Park business has been a key element of the company’s storytelling capabilities, and continues to contribute to a significant proportion of Disney’s revenue and its profits (in 2019 - 31% of revenues and 33.1% of profits8).
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 over the early months of the pandemic, the share price reached lows not seen since around 2014.
As the pandemic took hold, we undertook 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. We had to answer two key questions: does the company have enough liquidity to stay solvent throughout the pandemic, and do we still want to own it? In the case of Disney, with not just Parks but also live sports and content production also on hold, these were big questions.
We concluded that we were confident Disney could withstand the pandemic, and our investment thesis, founded on the opportunity for the streaming business, was not just intact, but likely to be boosted.
Crucially, the exercise enabled us to identify that the shares were undervalued in March and April 2020 - allowing us to start or build positions where appropriate. As we pass a year since the beginning of the pandemic, the share price chart highlights just how beneficial our process has been.
1Source: The Brookings Institution, Who gained from global growth last decade and who will benefit by 2030? 16 January 2020.
2Source: Berenberg Capital Markets (BCM), Live Nation Entertainment Research Note, May 14 2020
3Source: US Bureau of Economic Analysis, Goldman Sachs Global Investment Research, Live Nation Research Note, 2 April 2017
4Source: Neilsen, Goldman Sachs Global Investment Research, Live Nation Research Note, 2 April 2017
5Source: Morgan Stanley, Live Nation Entertainment Research Note, 23 January 2020.
6Source: Berenberg Capital Markets (BCM), Live Nation Entertainment Research Note, May 14 2020
7Source: Morgan Stanley, Tech, Media & Telecom Conference, February 2021
8Source: Disney, Annual Report, 2020
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