Investing in the Consumer Experience

Friday, September 15, 2017

Consumer spending has undergone a marked shift over the past 15 years, as consumers have elected to spend less of their discretionary income on physical goods—such as cars, furniture, and clothing—and are reallocating this spending (at an accelerating rate) toward experiences, a trend consumer analyst Ryan Sundby believes will continue. Personal consumption expenditures on consumer experiences have grown at a midsingle-digit compound annual rate during this time frame and have grown faster than overall spending on goods and services in 12 of the past 16 years. More specific, sales of consumer experience-related services, which include staging and providing activities such as event promotion, theme parks, sporting events, movie theaters, golf courses, and ski resorts, reached an estimated $250 billion in 2016 (despite facing some pressure during the financial crisis). Despite this growth, experience spending still equates to just $2 of every $100 spent on services, suggesting there is ample room for consumers to allocate more of their discretionary income toward this market in the future.

The consumer experience industry is made up of a group of companies that produce and stage stimuli for guests to experience. Centuries ago, when most of the population lived and worked on farms, businesses were primarily tied to agrarian products; farmers bought and sold undifferentiated offerings (such as corn) primarily based on price. During the Industrial Revolution, the development of factories enabled businesses to mass produce goods (such as tools, clothing, and furniture) on a larger scale and at a much lower cost. As a result, individuals could afford to purchase more goods, further strengthening the manufacturing industry until it became the primary economic offering in the late 19th and early 20th centuries. During the second half of the 20th century, manufacturers started providing services (such as installation, repair, and financing,) as a way to differentiate their goods. As customers began to value these services (in some cases more than the goods themselves), this led to the creation of the service industry. By the end of the century more people were employed by service providers than goods manufacturers.

As illustrated in the Harvard Business Review article, ‘Welcome to the Experience Economy,’ using the example of procuring a cake for a birthday offers practical insight into this ability to move consumers up the economic value chain. Long ago, parents made their children’s birthday cakes from scratch, mixing together ingredients from the farm (flour, sugar, butter, eggs) for a cost of mere dimes. As goods became more prevalent, they could buy a box of premixed ingredients from brands like Betty Crocker for a dollar or two. As services became more prominent, parents then had the option to order a premade cake from a bakery or grocery store for about $10. Today, parents are willing to pay more than $100 for admission to an experience provider like Pump it Up to stage a memorable birthday party for their child (and the cake is thrown in for free).

Looking at demographics, millennials recently surpassed baby boomers as the largest living generation. As this group enters their earnings prime, they are increasingly choosing to spend their time and money on experiences, which research has shown can create higher and more enduring levels of happiness than possessions. Sundby believes this change in purchase behavior (not limited to just millennials) “is being driven by a number of factors, including increased adoption of social media, the development of the sharing economy, and a greater need for consumers to connect on a social level in an increasingly digital world.”  For example, according to Internet Marketing Inc., travel is now the biggest vertical on Facebook, with 76% of social media users posting vacation photos on social networks after returning from a trip. As a result, 52% of users have indicated that a friend’s photos inspired their travel plans; and a similar number said they dream about vacations while on Facebook (without one even being planned).

Sundby believes the winning consumer experience providers will likely come from those that operate durable franchises—particularly leaders that can connect and engage with consumers to build value-added experiences—and are supported by barriers to entry. This includes companies that can leverage brand equities and consumer insights, loyalty programs, and innovation to strengthen the guest connection; and those that can back these efforts with competitive moats in the form of scale, geographic scarcity (and associated first-mover advantage), and reinvestment.

Industry risks include the ability to maintain consumer appeal and relevance during periods of economic malaise, as attendance and spending on experience-related activities is largely discretionary in nature and the potential for net operating losses due to the fixed-cost nature of much of the industry.

This report initiated coverage of Vail Resorts, Inc., Live Nation Entertainment, Inc., Six Flags Entertainment Corporation, and AMC Entertainment Holdings, Inc. For more information on these or other companies from Ryan Sundby’s coverage list, please contact your William Blair sales rep.

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