Follow the Money (and the Millennials)

Once there were Baby Boomers and Gen x’s, and they lived happily. They had brands they really liked along with their favorite beers, cereals, and department stores. They also had their particular way of consuming—looking for a specific physical location, buying lots of things they didn’t necessarily need, and essentially really liking certain products. Then came the millennials, who are less of a brick-and-mortar kind of people. Millennials want to buy everything online. They want everything delivered to them very quickly, with no fee for the delivery. They don’t want to go to Sears to look for a cooking pot or to Macy’s to look for a coat.

Millennials’ preferences are killing dozens of companies and industries. Millennials do not make up the lion’s share of consumers, but they are the ones that companies try to satisfy, as they are different and a hard nut to crack. They also spend a lot of money even if it’s in the cost of setting some money aside,  and we all know that he who has the money has the say, so companies are trying to listen.

So what millennials are like?

Stores are always trying to cater to millennials, but most of them are so far away from millennials’ tastes and their efforts are useless. Quite often their efforts just seem bizarre and fake, which causes even further damage to the company. This mainly happens because marketing managers and executives in these companies are not millennials (the average age of a CEO is 56), and they treat millennials like an unknown animal. In reality, millennials are not that complicated. It is quite simple to understand them and market to them if you place yourself correctly in the following axis:

  • Liberal vs. Conservative—millennials tend to be more liberal, which can affect many industries.  Restaurants that they view as anti-feminist, such as Hooters, are less popular.  Many millennials turn to vegan food out of concern for animals’ welfare. They are concerned with global warming while they consume, and they buy fewer products that are produced by major polluters as well as products they may use only one time.
  • Health awareness—millennials are more aware of their health. The obesity epidemic still affects them, but they are responsible for the rise in popularity of organic good and healthy dining. They cook more at home but also eat more often at restaurants. They go out less often to casual dining chains, and they buy less frozen food. Also, they drink less alcohol (aside from wine)
  • Products vs. experiences—millennials are prioritizing their experiences. They prefer traveling to watching TV (unless it’s Netflix), and they would rather use Uber or participate in ride sharing than buying a car. They also postpone buying homes until they are older, and they also do not really save money.
  • Trusting the system—millennials just don’t. They saw the subprime crisis and the financial system almost collapse, and they prefer to avoid the stock market and financial advisers. They prefer innovative companies that disrupt these markets, and they don’t feel obligated to buy something just because it has been around for a long time.

Most importantly, the world has changed dramatically in the last few decades—much more than it did in the previous decades. Technology and the Internet have been changing all industries, while creating new models for the world of work, consumption, leisure, and essentially everything else. Millennials have grown up in this era, but companies needed to change even if the millennials were not different from previous generations. But they are, and the way companies position themselves will determine if the future of the company is already doomed or if they can thrive in this ever-changing era.

Where does it put value investors

Value investing is arguably the best alternative for investments in the long term. The most proper way to conduct an in-depth valuation analysis for a company is to project a company’s future cash flow.  This can be done by analyzing a company’s structure of revenues and costs, thus estimating the net cash flow left for the shareholders.

In 2017, stores have been closing at an alarming rate, with the number of store closings having already surpassed the number of stores that were closed during 2008 (the year of the subprime crisis). Companies that don’t attract millennials, which are already the largest generation in America, see their revenues falling and have to take some action to stop the trend.

Accordingly, people who are thinking about long-term investment should assess the ability of the potential invested company to deal with millennials and younger generations. The aforementioned axis can give us some clues regarding what companies and what industries’ stocks we should avoid, e.g., producers of unhealthy food, contributors to global warming, and old-fashioned companies in conservative industries.

On the contrary, it might be worthwhile to invest in companies that care about sustainability, climate change, health, and using technology to create a better world. Also, companies that sell experiences rather than products are favored to disrupt markets in the same way as Uber and AirBNB did.

The bottom line

So, I wouldn’t buy stock of a company that makes cigarettes or junk food or beer. If you want to find value stocks, you need to be careful not to be on the bad side of millennials. They are here to stay. The trend is forcing established companies to adapt, but not every company can adapt easily. As always, the best tip is to look at a company’s management capabilities—company that can live and grow with the zeitgeist is one that is worth your investment.

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