Leisure spending poised for generational shift

Casino, travel and cruise line companies must adapt as millennials take over from boomers as the dominant force.

Ashley Redmond 27 May, 2014 | 6:00PM

For the baby boomers -- those born between 1946 and 1964 -- life should be pretty sweet right now. They are at or nearing retirement, and after years of working they finally have some extra cash to throw around. In fact, they represent approximately 70% of all disposable income in the United States, according to a study done in 2012 by Nielsen (comparable stats in Canada aren't available, but we can safely assume that our numbers would be similar). Predictably, companies are bending over backwards to appeal to this age group that controls such a large portion of the wealth.

Research by Morningstar equity analysts shows that boomers tend to base their leisure spending decisions on convenience and perceived value, and they spend more time than any other generation researching alternatives. For example, if they are booking a 10-day trip to Italy, they likely enjoy being able to independently book hotels and flights through online providers such as Expedia EXPE or Priceline Group PCLN, while maintaining the option of physically going to a travel agency.

But boomers' domination over the way leisure providers offer their services won't last forever. Millennials -- those born between 1980 and 1999 -- are about to enter their peak discretionary spending period over the next 20 years, and they are poised to take over as the main players in leisure spending -- and I can't imagine a millennial physically walking into a travel agency; it sounds like an SNL skit to me.

In 2013, personal consumption in the United States totalled US$11.5 trillion, with about 10% of that attributed to leisure, which includes: restaurants, online travel, casinos/gambling, weight management, toys and games, sporting goods, powersports, cruise lines and movie theatres. In 20 years that number is expected to grow to 11%.

What will this shift mean for the leisure industry?

Online travel companies such as Expedia, Priceline and TripAdvisor TRIP are in great shape. They are positioned to cater to both millennials and boomers, and they've done an excellent job addressing each market and its specific needs. Millennials are on the go and have little time to research and book travel, whereas retiring baby boomers spend a great deal of time researching trips online. Online travel companies are prepared for the shift and will likely strengthen their economic moats as a result.

Fast-casual restaurants that don't offer table service but have a higher quality of food than a fast food restaurant, such as Chipotle Mexican Grill CMG and Panera Bread Co. PNRA, are what millennials want. They typically have a more diverse menu and are quicker than casual dining restaurants like Boston Pizza BPF.UN that boomers tend to prefer. Morningstar research shows that in order for casual dining restaurants to stay competitive, they will have to take steps to connect with millennials, including increasing menu diversity, affordability, speed of service and digital connectivity.

Sporting goods companies like Nike NKE and Under Armour UA are in good shape for a few reasons: millennials exercise more frequently and have more free time than boomers. Also, they tend to have fewer children, though once millennials start having children there is the possibility that growth may slow down. New sporting technology is expected to play a major role in future company performance as this demographic requires a marriage of fitness and technology. For example, activity trackers like Nike+ FuelBand are popular; it tracks your movements throughout the day, giving you real-time data on energy expanded from activities like unloading your groceries from the car.

The approach to weight management is changing, as boomers generally prefer the traditional approach of companies like Weight Watchers International WTW, whereas millennials gravitate toward fitness and calorie-counting apps like MyFitnessPal. Millennials are twice as likely as all other age groups to use health apps, so it's imperative for weight management companies to integrate technology into their current offerings in order to broaden their appeal to the younger generation.

Video game companies such as Sony Corp. SNE, which owns the Playstation console, are millennial-specific; the average age of a gamer is now 30. The combined video game market (console, PC, online and mobile) is expected to outpace the broader entertainment market, overall having a negative impact on movie theatres. This category has a bright future and will likely only exceed analysts' high expectations as millennials' disposable income increases.

Powersport companies -- think motorcycles and ATVs -- have shifted to cater to a broader audience in the past few years. Companies like Harley-Davidson Inc. HOG now target women, young adults, African Americans and Hispanics, who together comprise three times the market as Caucasian men between 35-74 years of age -- its traditional market. Numbers released by the U.S. Census Bureau reveal that the audience shift is working. In 2012, nearly half of global sales were to new customers, and Morningstar analysts believe this will give pricing power to powersport firms.

Toy companies like Mattel MAT are facing issues such as lower domestic birth rates and increased price competition via e-commerce. However, according to Morningstar equity research the new middle-class from developing and emerging markets is significant to this category. If the new middle class decides to spend money quickly, then the supply-demand equilibrium could shift, putting toy companies in an interesting position to dictate pricing and create global brand recognition.

Companies that have higher fixed cost bases like cruise lines Carnival Corp CCL and movie technology provider Imax IMAX will likely experience greater operating profit volatility as sales trends fluctuate. They may struggle to adapt as consumer spending preferences shift between generations, as millennials are less likely to participate in a cruise and options for home entertainment systems seem to improve daily.

The future may be murky for casino operators like MGM Resorts MGM because millennials have less disposable income. Although they are currently travelling to Las Vegas in about the same numbers as the previous generation, they spend their money at nightclubs, shows and concerts as opposed to gambling. U.S. casinos have reacted to this by investing in low-ROIC (return on investment capital) non-gaming activities. For example, Caesars is constructing Project Linq, a US$550-million development that features restaurants, retail shops and nightclubs. However, Morningstar equity research shows that innovation in electronic games and online gambling is a more attractive alternative for meeting the needs of millennials.

As companies face the transition from boomer spending to millennial spending, their approach must be all-encompassing, as this generation is more concerned with corporate transparency than previous generations, and they care not only about the product or service that they are purchasing, but also about who is running the company. Are they environmentally friendly? Is the product sustainable?

There is undoubtedly a direct correlation between technology and millennials, and companies are expected to bring technological innovation to these customers -- no easy feat in today's world of fast adopters.

--Information for this article was taken from Morningstar's May 2014 Consumer Observer Report.

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Ashley Redmond

Ashley Redmond  Ashley Redmond is a Vancouver-based freelance writer.