March 23rd, 2008
How to turn generation Y into generation
A wide variety of industries from fast food to fashion are
poised to profit from the spending habits of the new kids on the
block. Trevor Hoey reports.
Before you go calling the new group of youngsters following in
the footsteps of generation X generation “why”, you might want to
take a look at their spending habits. There could be some good
investment opportunities in a number of listed companies that are
starting to take notice of these trendsetters.
Critics of generation Y are quick to use labels such as
irresponsible, disrespectful and disloyal. However, marketing and
research groups are more interested in identifying how to tap into
the attributes, attitudes and habits of this demographic with a
view to shaping products and associated sales campaigns around
their understanding of generation Y.
Generation Y’s strengths could include their transient
disposition - they are a group that is not afraid of change, taking
risks and tackling new situations. They can be responsive impulsive
spenders, understandably disapproving of poor workplace standards
and remain independent in the face of peer pressure.
With a strong focus on lifestyle ahead of employment stability,
financial security and deadlines, generation Y can be an employer’s
nightmare but a recruitment agency’s dream, a travel retailer’s
frequent flyer or a financial planner’s most needy client. From an
investor’s perspective, companies emerging as significant
beneficiaries of generation Y can be found in a wide range of
industries including fast food, fashion, and travel.
We take a look at a number of sectors and companies that are
likely to benefit from this gen Y trend.
BIG-TICKET SPENDERS
Motor vehicles and technological equipment top the list of
generation Y’s big-ticket spending. They are also a large component
of the group’s depreciative asset base. The consumption of these
products will continue to be driven by the urge to update, a habit
that manufacturers such as Microsoft, Nokia and Toyota are well
aware of.
Inbuilt obsolescence combined with innovation has been a
significant catalyst of consumer spending, particularly in the past
30 years. There is evidence that this could be an important factor
as the number of generation Y consumers grows.
JB Hi-Fi’s position in the entertainment and technology retail
space suggests that it will be a significant beneficiary of
generation Y’s spending patterns. The company has made no secret of
its strategy to target this demographic as evidenced by the
computer and home entertainment retailer’s move into the games and
mobile phone arena in the past few years.
This month JB Hi-Fi upgraded its expansion strategy from 120 to
150 stores. The company has experienced strong sales growth since
listing on the ASX in 2003 as the first generation Ys turned 21.
Store expansion has contributed to its success but one of the most
impressive features of JB Hi-Fi’s performance has been its ability
to achieve significant sales growth in its existing stores. The
consumption of updated products in traditional lines has
contributed to this trend.
JB Hi-Fi’s share price has reflected this growth, rising from $2
to $17 since listing, but the recent sharemarket turbulence has
resulted in a substantial decline.
Analysts are forecasting that JB Hi-Fi will achieve earnings per
share growth of 40 per cent a year over the next three years. JB
Hi-Fi’s P/E ratio of about 17 relative to 2007-08 consensus
estimates suggests that the company has been oversold and the
recent fall in its share price may present a buying opportunity.
Bell Potter has a buy rating on JB Hi-Fi with a 12-month price
target of $15.60, representing a premium of more than 50 per cent
to the company’s recent trading range.
Motor vehicle, truck and motorcycle retailer Automotive Holdings
Group is another company that has gone from market darling to
reject status in a short period of time. AHG listed on the ASX in
2005 and by 2007 its shares were trading at a premium of more than
300 per cent to its issue price of $1.
In the past six months AHG’s share price has fallen by about $1
despite the fact that analysts have increased their 2007-08 and
2008-09 forecasts following a strong interim result for the six
months to December 31, 2007. Based on consensus forecasts for
2007-08, AHG’s P/E ratio is about 11.5.
In February AHG’s managing director Bronte Howson informed the
market that strong employment, particularly in the company’s key
markets of Western Australia and Queensland, had a powerful effect
on consumer spending and greatly reduced the impact of higher
interest rates and increased fuel prices. In 1999 the first
generation Ys became eligible for a driver’s licence.
The number of generation Y drivers will continue to build over
the next 10 years. There have been record car sales in Australia in
the past two years, passing the 1 million mark for the first time
in 2007.
As the first generation Ys approach 30, new cars are likely to
be on the shopping list. Generation Y are very environmentally
conscious so the emergence of hybrid vehicles could provide sales
momentum. AHG’s decision in July 2007 to become the exclusive
distributor of Vmoto scooters provides the company with another
string to its bow to attract environmentally minded consumers.
FASHIONISTAS
Fashion goods aren’t big-ticket items but they are readily
replaced in order to keep up with the latest look. The fashion
industry is one of the best examples of generation Y’s tendency
towards instant gratification and this helps to provide the
industry with healthy sales even during periods of economic
instability.
Relating lifestyle to products is a key element in terms of
identifying retailers that should benefit from this trend.
Generation Y embrace brand names and seek out apparel that fits
with their leisurely lifestyle, pursuit of fitness activities and
their tendency to make last-minute arrangements.
Beach, surf and skate wear is in demand from stores such as
Billabong that have most of the big brands on sale. The company’s
stores are mainly situated in large malls where walk-past traffic
is high. This helps to cash in on impulse spending, a significant
factor in the way that stores market their products to the younger
demographic.
Denim is the dress for all seasons and most occasions, making
jeans and complementary fashion wear ideal for the transient
generation Y consumer. Just Jeans incorporates a number of brands
such as Jay Jays, Dotti and Smiggle. The first-half performance of
the company’s core Just Jeans stores underlines the resilience of
its traditional products. In a tougher retail environment Just
Jeans’s Australian stores achieved a 5.9 per cent increase in same
store sales.
Just Jeans has the scope to harness significant growth from its
Smiggle business as the company plans to expand by 10 to 15 new
stores a year. The Smiggle target market is teenagers, a
demographic that will be dominated by generation Ys for the next 10
years.
Smiggle led the way in like-for-like sales growth with a strong
21 per cent achieved in the first half of 2007-08. Just Jeans’s P/E
ratio of 11 relative to 2007-08 consensus forecasts suggests that
the company represents good value.
QUICK FIXES
Forward planning and mundane activities are not characteristic
of generation Y. Fast food beats wasting leisure time preparing
meals and also fits with the more spontaneous last-minute lifestyle
they lead. Similarly, a short-haul flight anywhere in the Asia
Pacific region may well be booked the day before departure as that
lazy long weekend transforms into a 72-hour flee and spree.
From a fast food perspective, Retail Food Group has the brands,
locations and products that are likely to appeal to generation Y.
RFG is a multifood brand manager that listed on the ASX in June
2006. Since then the company has outperformed prospectus forecasts
and exceeded subsequent market guidance as well as integrating some
astute acquisitions.
RFG has expanded its bb’s cafe systems business and in 2006-07
opened 37 new Donut King stores. These initiatives have provided
strong organic growth but the acquisitions of Brumby’s Bakeries and
Michel’s Patisserie businesses were company-changing
developments.
In February its management highlighted the fact that the
particular retail food sectors in which RFG operates have
historically remained strong despite downturns in consumer
discretionary spending.
The Michel’s acquisition added 340 franchised outlets to RFG’s
portfolio but the earnings impact of the purchase will be more
evident when it makes a full-year contribution in 2008-09. RFG
achieved strong growth in the first half of 2007-08, its net profit
more than doubling to $8.1 million.
RFG is in a strong position to realise its full-year earnings
per share guidance of more than 15 cents after achieving interim
earnings per share of 10.2 cents, suggesting that its P/E ratio of
about 10 is conservative.
With regard to travel, companies that have internet booking
systems are well supported by generation Y. One of Flight Centre’s
designated goals in 2007-08 is to improve its online and IT
platform, with various projects set for completion including a
fares database, wholesale booking platform and website
redesign.
Flight Centre is cognisant of the need to build a strong retail
clientele. The company has increased its retail product offering by
introducing a Flexirent holiday payment option, an initiative that
should appeal to generation Y.
ON THE JOB
The ability to search for employment opportunities online is a
significant factor in attracting potential generation Y applicants.
It could be argued that the volume of applications that are handled
by a company such as Seek will increase exponentially over the next
decade.
Seek’s growth is unlikely to be bound by employment cycles as
the transient nature of current and future working generation Y’s
drives job search volumes and related revenues. In January Seek
attracted a record 2.8 million browsers to its site.
Another factor working in Seek’s favour is generation Y’s
multifaceted view of what constitutes a “good job”. Research
indicates that issues such as training programs, management style,
work flexibility and staff activities rank ahead of salary when
deciding to accept a job. This indicates that employee retention is
much more difficult today than in previous eras where a pay rise, a
bonus or a car were used to entice and retain staff.
Seek is making substantial progress in the development of its
education business that is aimed at developing applicants’ skills.
Seek has four important partners that assist the company in
providing a broad range of learning options. These include the TAFE
open training and education network, Open Universities Australia
and IT specialist SkillSoft. These institutions provide flexible,
self-paced computer-based training programs - features that appeal
to generation Y.
MONEY PLANS
Generation Y are best known for their ability to spend rather
than save. They are not as asset-rich as the baby boomers and
generation X were at a comparable age but the Ys still have cash to
manage and taxes to pay.
In 2007 KPMG conducted an international study of the funds
management industry and found that there was a significant discord
between the opinions held by fund managers in relation to
generation Y’s perceived needs and the responses by generation Y
regarding their intended money-management strategies.
Just as generation Y do not blindly conform to senior
managements’ workplace expectations they are not inclined to
provide a fund manager with carte blanche authority to dictate how
their savings are controlled.
Given this backdrop, there should be increased demand for
financial planners that provide the opportunity for collaborative
decision-making and supply the client with the means to track the
success or otherwise of their strategy.
WHK Group is a key player in the financial planning industry and
the second-largest independent provider of financial planning
advice in Australia. The company has grown by acquiring small
financial planning and accountancy businesses at a time when
industry consolidation was being driven by generational change and
the need to operate as part of a larger organisation in order to
remain competitive.
WHK’s strategy has been to provide clients with a total solution
whereby the same organisation that processes the taxation return
can assist in anything from investment, insurance and lending
related matters to estate and succession planning. Acquisitions are
helping to boost revenues from both its business services and
financial services divisions - yet the 28 per cent organic growth
achieved by WHK’s financial services arm was well ahead of the 5
per cent increase recorded by the business services operations in
the first half of 2007-08.
WHK’s share price has fallen in line with the rest of the
financial services sector. The company’s fundamentals aren’t
demanding, as it is trading on a P/E multiple of about 11 relative
to 2007-08 consensus forecasts.
MYSTERY GENERATION: HOW WILL Ys SPEND?
THE study of generational change and the impact that it has had
on financial management including spending patterns has
intensified. The baby boomers are entering the retirement phase and
generation X are benefiting from higher levels of income and a
decade of strong levels of employment, wage growth, an escalation
in property prices and a buoyant equities market.
The baby boomers (those aged between 44 and 62) are widely
documented to have a significant impact on various industry
sectors. For the best part, they are asset rich and cashed up with
plenty of superannuation to ensure that they sustain their spending
patterns until the inevitable. That is when generation X emerges,
the first of which will start to retire in about 20 years’ time,
once again financially secure, with most to benefit from a heftier
superannuation bank than their predecessors.
However, what seems to have been missed is the impact that
generation Y is likely to have. While not having the accumulated
wealth of their parents, the generation Ys do command attention as
they approach that high-disposable-income period in their lives.
The first of the generation Ys turn 26 in 2008, so their relevance
as an important consumer group will grow over the coming decade,
prompting the same degree of scrutiny that the baby boomers and
generation X have demanded.
Just as the splurging 25- to 35-year-old generation X group led
the charge in the spending stakes over the last 10 to 20 years,
generation Y is gearing up for a similar spree. Marketing groups,
though, are having some difficulty in establishing just what they
will be buying and how to engage a demographic who many boomers and
Xs find hard to understand - and, in some quarters, are too erratic
to understand.