By 2030, more than two thirds of the global population is expected to be middle class, with most of the increase taking place in 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 seen above-average growth for some years now, underpinned by rising wealth geographically and intergenerationally, is the “experience economy”.
Consumers increasingly prefer experiences to objects. Enjoyment of consumption is measured by utility, and experiences tend to provide greater and more prolonged utility to individuals when compared with objects.
This shift in consumers’ preferences can be seen in the growth rates of different categories of personal consumption expenditure. 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 their share of PCE, 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.
For a sector that thrives on atmosphere and crowds, the pandemic provided a potentially existential threat. While government help has gone some way in easing the pain, the industry is not viable without live crowds. However, as pathways to reopening are laid out and taken up, 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 being a threat, the ability to offer live audio or video streams of events can be an incremental revenue source for event promoters. This is a view shared by global entertainment companies 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 artists’ income from touring is seven times what they earn from streaming and recorded music. This provides promoters with even greater opportunities for growth.
Globally, there are signs crowds are returning. In countries that have had fewer cases of Covid-19, 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 than before. Importantly, not only does this suggest we could see more profitable companies going forward, many businesses will be more profitable than current consensus estimates.
We are not naïve about the challenges that are 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 invest.
One such example is Disney. It is a content machine, able to generate multiple revenue streams for each piece of content that it owns — ranging from Mickey Mouse to Star Wars. Since Disneyland opened in 1955, Disney’s expanding theme park business has been a vital element of its storytelling capabilities: before Covid-19, theme parks contributed a significant proportion of Disney’s revenue and were responsible for about a third of the company’s profits.
However, as the pandemic took hold in early 2020, Disney’s theme parks around the world were shuttered. Coupled with global cinema closures, this meant several of Disney’s businesses were under threat and its share price reached lows not seen since about 2014.
We conduct stress-testing exercises for each of our investee companies — 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 that 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.