Rickie Wang Blog | Changes In U.S. Consumption And China's Investment Opportunities | TalkMarkets
Master of Financial Analysis/FRM Holder
Master of Financial Analysis/FRM Holder. Worked as an investment Manager at Zhongguancun Development Investment Management Co. Ltd., Harvest Capital Management Co. Ltd, China Credit Trust Co. Ltd, and more.

Changes In U.S. Consumption And China's Investment Opportunities

Date: Friday, October 22, 2021 5:03 AM EST

                              

The three stages of changes in the American consumer market: mass consumption → branded consumption → rational consumption

If divided by time, the history of American consumption changes from 1920 to the present can be divided into three stages: mass consumption, branded consumption, and rational consumption. After World War I, the United States experienced "Coolidge" prosperity. Mass consumption gradually occupied the mainstream consumer position in American society in the 1920s. Innovations in the fields of automobile, electrical, and information technology promoted the rapid development of related industrial investment industries; in the late 1970s, per capita GDP has accelerated from US$9,000 to US$30,000. American residents are more pursuing branded consumption, and even show off their income and status through high-end consumption. Since the 1990s, the United States has experienced several economic crises and the widening gap between rich and poor, so that American residents no longer pursue blindly. With high-priced commodities, more attention is paid to the cost-effectiveness of commodities, and rational consumption is on the stage of history.

Five cores drive the long-term prosperity of the U.S. consumer market

1) Economic prosperity + stable income growth

Economic prosperity + stable income growth is the core of the rise of consumption in the United States. In the nearly 100 years since the Second World War, the US economy as a whole has maintained steady growth. Its development process can be roughly divided into four stages: 1946-1973 was the period of rapid economic growth in the United States. The period of growth is obvious, and the level of social productivity and the level of household consumption have increased rapidly; 1974-1980 was the stagflation period of the US economy, at this time the US GDP briefly fell into a negative growth stage, and the unemployment rate increased and inflation coexisted; 1983-1999 was the United States During the economic recovery period, driven by the information and communication revolution, the United States entered the Internet era in the 1990s; ④Since 2000, the United States has experienced the rise and burst of the Internet bubble and the real estate bubble, but it still maintains its dominant position in the global economy.

2) Population expansion + age structure optimization

From the perspective of demographic structure, the United States can be called the "youngest developed country", and the steady growth of the total population has become a rigid force supporting the US consumer industry. After World War II, the United States ushered in a baby boom. Between 1946 and 1964, 76 million babies were born in the United States. The total population of the United States rose sharply from 141 million in 1946 to 192 million in 1964. From the early 1980s to the mid to late 1990s, the population born during the baby boom in the United States reached the age of marriage and childbirth, which once again triggered a new wave of population peaks. Although the population growth rate of the United States has slowed down since then, it has basically stabilized in the range of 1%-1.5%. The good fertility rate and the continuous increase of immigrants are important reasons. Population growth stimulates demand in the consumer industry, and mass consumer goods and the real estate industry have become beneficiaries of the expansion of the US population.

3) Reduce taxes and fees + boost consumer confidence

The U.S. government has long adopted tax and fee cuts to release the vitality of economic growth and improve residents’ income. The U.S. consumer confidence index has maintained a high level for a long time. Looking back on the 100-year history of the United States, we can clearly see that tax cuts and fee reductions are historically an important policy tool for the U.S. government to improve residents’ incomes, boost consumption, and boost the economy. Take the 1980s as an example. Due to the structural contradictions of the American economy and the worsening of the oil crisis, the United States fell into a "stagflation" (business closures, increased unemployment and inflation occurred simultaneously). At this time, the Reagan administration carried out drastic reforms ,by implementing two large-scale tax cuts and fee reductions, the government encouraged government departments to give profits to the residential sector, and increased employment and employment assistance bills to increase labor compensation. Since 1983, the U.S. economy has gradually climbed out of the quagmire and fully recovered. By the end of 1983, GDP had grown by 6.5% for the whole year, and 3.5 million jobs had been added throughout the year, the growth rate is jaw-dropping.

4) Expansion of consumer credit + prevalence of advanced consumption

The concept of advanced consumption and the culture of "no saving" prevail in the United States, and the scale of consumer credit in the United States has maintained high growth. Stable social environment, developed financial institutions, perfect credit system, extensive application of information technology and many other factors have continuously strengthened Americans’ advanced consumption concepts. Most Americans advocate the life and consumption of "spending tomorrow's money today". In this way, the scale of credit consumption continues to expand. According to statistics from the U.S. Department of Commerce, U.S. consumer credit ushered in a period of rapid growth in the 1970s and 1980s. The overall scale surged from  $23.2B in 1950 to $351.9B in 1980, and further increased to an all-time high of $4.19 trillion. The proportion of consumer credit in the total retail sales of consumer goods in the United States continues to rise, reaching 78% in 2020; the proportion of consumer credit in US GDP has also increased from 12% in the early 1970s to 14% in the late 1980s, and this proportion has reached 20% in 2020.

5) Technological innovation changes consumption + reduces consumption costs

The spread of scientific and technological innovation in the United States has become faster and faster, giving birth to many new scientific and technological species. The improvement of industrial production efficiency has brought about a continuous decline in the prices of consumer goods, and technological innovation has greatly reduced consumption costs and the threshold for popularization. Technological innovation is an important driving force for the long-term prosperity of the American consumer market. Epoch-making technological products such as the Internet, personal computers, and mobile phones all originated in the United States. These high-tech products are often very expensive when they were born (according to the US Personal Consumer Expenditure Price Index, the price of personal computers and mobile phones in 80 years is about several hundred times that of today), but due to technological advances, the prices of these consumer electronic products Continued decline, the former "luxury" has spread to millions of households, and has led to a substantial increase in the consumption of related goods and services.

The Evolution of American Residents' Consumption Structure

1) Commodity consumption and service consumption

The per capita GDP reaching 10,000 US dollars is a watershed in the changes in the consumption structure of American residents. Service consumption accounts for more than commodity consumption in American personal consumption expenditures. With the development of the U.S. economy and the improvement of residents’ living standards, the U.S. consumption structure has shown a development path of "non-durable goods→durable goods→service-oriented consumption". American consumers are meeting basic living needs such as food, housing, and clothing , After that, it began to turn to durable consumer goods such as automobiles, home appliances, and home furnishings. After material needs were met, it began to turn to service-oriented consumption such as leisure and entertainment to meet higher-level spiritual needs. The turning point of this change is that after the per capita GDP of the United States reached 10,000 US dollars in the late 1970s, the consumption structure showed a more obvious trend of differentiation. The proportion of service consumption in the US personal consumption expenditure surpassed the consumption of goods, and Since then it has continued to rise to around 65%, while the share of goods consumed has fallen to less than 35%.

2) Consumption of durable goods and consumption of non-durable goods

Among commodity consumption, the proportion of non-durable goods consumption continued to decline, and the sub-sectors showed: ①The proportion of food consumption continued to decline: The proportion of US residents’ fresh milk consumption dropped from 1.4% in 1964 to 0.2%, but eggs, The proportion of essential consumer goods such as fresh fruits and vegetables remained stable for a long time; ②The proportion of soft drinks consumption first stabilized and then declined: The proportion of American residents' consumption of soft drinks such as coffee, tea, mineral water and fruit juice remained basically stable from 1964 to 1983 , And continued to decline thereafter; ③The consumption trend of various alcoholic beverages has differentiated: the consumption trend of spirits is roughly the same as the overall trend of alcoholic beverages, which remained stable from 1964 to 1975, while the proportion of beer consumption did not until after 1983 It began to decline, and the proportion of wine consumption fluctuated greatly.

03) Capital market performance of US consumer goods companies (by time)

1970-1990 was the golden development period for consumption upgrading in the United States. Consumer stocks became the protagonist of the capital market. Food and beverage, tobacco, fast-moving consumer goods, and consumer service sectors performed best at this stage. From 1970 to 1990, the consumption upgrade wave swept the United States. The average annual income of 1% of American households increased rapidly to US$525,000. The increase in income level drove the rapid growth of personal consumption. The proportion of personal consumption expenditure in GDP became higher and higher, The structure of personal consumption has shown a marked trend of upgrading. At this stage, the yield of large market capitalization companies with a value of more than 100 billion US dollars was calculated, and it was found that 8 of the 10 companies with the highest growth rate were from the consumer goods industry. Wal-Mart's stock price increased by a staggering 35 times from 1980 to 1990, The annualized compound rate of return was 43%, and the compound growth rate of net profit was 37%; household-name consumer goods companies such as Altria, Coca-Cola, Pepsi, Nike, Disney, Procter & Gamble, McDonald's also performed well.

From 1990 to 2000, the U.S. health care, information technology, and daily consumer goods sectors ushered in a period of rapid development, and the capital market performed well. After the drastic changes in the Soviet Union and Eastern Europe in the 1990s, the bipolar structure collapsed, the United States became the only superpower in the world, and the US economy regained full prosperity. Information technology was rapidly popularized at this stage, and the Internet wave officially started. Microsoft launched IE 1.0 to allow people to search and browse online information freely. Internet giants such as Yahoo and IBM also shined well until the Internet entered the bubble period in 2000. In addition to information technology and medical care, the daily consumer goods industry (including food and beverage, fast-moving consumer goods, etc.) also showed a relatively obvious consumption upgrade trend at this stage. Companies such as Procter & Gamble and Coca-Cola continue to introduce new products to meet the new needs of consumers , The stock prices of these two companies rose by 6.6 times and 5.9 times respectively during the ten years from 1990 to 2000.

After the dot-com bubble burst in 2000, the U.S. information technology industry suffered a heavy blow (March-October 2000, U.S. information technology companies evaporated about $5 trillion in market value, and the stock prices of Apple, Google, and IBM did not recover until a few years later. ), the energy industry (typically represented by Chevron, Total, and Exxon Mobil) and the financial industry (typically represented by Berkshire, Wells Fargo, HSBC Holdings, and JPMorgan Chase) are favored by the capital market. The consumer sector suffered during the 2008 financial crisis, with a deep slump in economic activity, soaring US unemployment and a brief freeze in consumer confidence

Since 2020, the outbreak of the epidemic(Covid-19) has provided an unprecedented development opportunity for the U.S. pharmaceutical industry. The vaccine company Moderna's share price has been extremely high; the Biden administration has issued a $174 billion electric vehicle support plan, emphasizing the need for the United States to provide subsidies for new energy vehicles. New energy automobile companies such as Tesla have been able to share in the rapid development of the industry, and the market value has risen rapidly; although new economy companies such as Pinduoduo(PDD.US) and JD.com(JD.US) have encountered anti-monopoly disturbances, their share prices are still performing well.

04 The most representative consumer industry in the United States

Cyclical consumer goods dance with the "house", and non-cyclical consumer goods burst out one after another

① Cyclical consumer products in the United States are closely related to the changes in the real estate industry. "Post-cyclical" industries such as home appliances and home furnishings have benefited significantly from the rise of US real estate. For cyclical consumer goods such as home appliances, home furnishings, and automobiles, in addition to the level of economic development and consumption tendency, the real estate market is also an important factor that directly affects their demand. In the 1920s, the historic breakthrough in American automobile production technology helped the rapid popularization of automobiles, and the three major automobile giants (General Motors, Ford, Chrysler) quickly occupied the market by virtue of assembly lines and price advantages. The 1940s and 1960s were an era of changes in the living style of American residents. In only 20 years, the housing ownership rate in the United States increased rapidly from 44% to 62%, and renting houses gradually became self-owned, which directly promoted the large-scale popularization of some home appliances. In the 1970s and 1980s, the real estate sales boom in the United States revived, and American residents' consumption showed an obvious branding tendency, and the home appliance and home furnishing industries ushered in a new round of consumption upgrades.

② Non-cyclical consumer products are growing randomly. Beverages, beer, dairy products, mass food, clothing, retail, jewelry, consumer electronics, social services and other industries are showing their edge in different consumer eras.

A. Beverage industry: Coca-Cola and Pepsi, as the "kings of beverages in the world", successfully traversed 100-year cycle fluctuations, and their rapid growth period began in the international market at the end of the 1970s; B. Beer industry: US population and income growth in the 1960s and 1980s drive the increase in beer consumption; C. Dairy industry: re-enter the stage of rapid growth in the middle and late 1980s; D. Mass food industry: The most prominent category of food spending growth in the United States in the past 30 years is snacks; E. Textile and clothing industry: 1920 The rise of fashion in the 1970s, the supremacy of leisure in the 1970s; F. Retail industry: department stores, supermarkets, shopping malls, discount stores have led the changes in retail formats; G. Jewelry industry: Per capita GDP reached 5,000 US dollars is the turning point of the development of the US jewelry industry, after the 1970s Jewelry consumption has entered a rapid growth channel; H. Consumer electronics industry: ushered in two development springs since the 21st century; I. Social service industry: The 1970s and 1980s entered a golden period of development, as the urbanization rate in the United States increased and the rapid spread of automobiles , The chain business model has boosted the rise of the American catering industry.

Viewing the Investment Opportunities of China's Consumer Industry from the U.S.

①Brand consumption: The history of consumption upgrade in the United States in the 1970s and 1980s is repeating itself in China. The domestic consumer goods industry has gradually moved from the mass consumption stage to the stage of branding, quality, and individualization. The upsurge of consumption brings unprecedented growth opportunities for consumer goods enterprises.

②High-end consumption: Learning from the experience of the United States, when the per capita GDP exceeds 10,000 U.S. dollars, the consumption behavior of residents tends to be more diversified and stratified, the high-end and low-end go their own way. This phenomenon of consumption stratification is particularly prominent in the vast and populous Chinese market.

③Service consumption: From the perspective of consumption structure, China has a high probability of showing a development path similar to that of the United States in the 1970s (non-durable goods consumption→durable goods consumption→service consumption), and the service consumption market is still promising in the future.

④ Emerging consumption: Drawing on the growth schedule of the U.S. consumer category, some of China's consumer product industries (new energy vehicles, cosmetics, health food, pet economy, small household appliances, service consumption, etc.) are still in a period of rapid growth.

 

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Alpha Stockman 3 years ago Member's comment

You would get a lot more views if you applied to be a verified contributor here.   Not many people bother reading the personal blog posts, only the actual articles on TalkMarkets.