In an economic cycle, consumption themes generally emerge and represent a key part of economic growth and investment opportunity. In the 2000’s, for example, home buying saw tremendous demand and was a core consumption theme. As a result, investments in housing saw strong returns (before the eventual bust, of course). Today’s economic environment doesn’t seem to have any overt consumptions themes quite like housing, but several more nuanced themes do indeed exist. One such theme is something that MACM refers to as The Experience Economy.
Background: Changing Preferences – Experiences vs Things
We define The Experience Economy as one in which people prefer to spend on and consume experiences, rather than tangible goods. Indeed, over the past few decades, the share of consumer spending on experiences and events has increased by 70% relative to total US consumer spending. In fact, from 2014-16, growth in experience-related spending was trending at 6.3% year-over-year, while growth in tangible goods spending was sitting at just 1.6%. While the leaders of this trend are Millennial consumers, the same consumption theme exists across generations.
So, what gives? Why aren’t people out there buying more fancy new cars and luxury watches like the days of old? There are likely several reasons for this. Among them are scars from the 2008 financial crisis, a Millennial generation burdened with student loan debt, the growth of social media and sharing of our lives, the rise of rental service businesses, and strong scientific evidence that experiences actually provide more happiness than things.
Many Millennials watched as their parents lost their houses and life savings in the 2008 financial crisis, leaving distrust for accumulating assets and the tendency for assets to appreciate over time. Further, many Millennials are burdened by hefty student loan debt, and are having a more difficult time qualifying for major purchases of things like houses or other big-ticket items. This has led to both Millennials and their older generations to spend on experiences rather than on assets and tangible goods.
The rise of social media has also had an outsize impact on the shift to The Experience Economy. With widespread social media use, consumers have become more and more focused on the sharability of their lives. Indeed, the number of followers one has on a social platform is more of a status symbol than a luxury watch. To this end, unique experiences and mutual moments with friends tend to be the most sharable items on social platforms, driving the most engagement (likes, comments, follows, etc). Consumers are thus opting to spend on unique and interesting experiences for their sharability on social platforms.
Rental service businesses are also at play. With Uber, AirBnB, and the like, it has become increasingly simple to get transportation and housing on-demand, without any formal commitment. With the average Millennial only staying at a job for three years, not being anchored to a mortgage or auto-loan commitment allows a highly desirable amount of flexibility. This leaves money to spend instead on things like experiences.
Lastly, scientific studies have comprehensively demonstrated that experiences provide more and longer-lasting levels of happiness than tangible goods. Most notably, experiences are unique and difficult to compare to something someone else has. While you might have a lessened appreciation for your Apple Watch 2 when your friend upgrades to an Apple Watch 3, there is no real comparison to diminish a thrilling trip you might have taken river-rafting in Colorado. Good or bad, experiences leave lasting and unique memories that provide satisfaction demonstrably beyond that of material things.
Implications for Businesses & Investment
It’s worth dissecting the business and investment implications of The Experience Economy into two cases: (1) Established/traditional experience businesses that are well positioned as incumbents, and (2) Other businesses that are adapting to meet the changing preferences of consumers.
With the incumbents, The Experience Economy likely has and will continue to provide a boon in revenue as consumers focus their spending in this arena. Travel, entertainment/events, and dining are some of the primary industries that are likely beneficiaries of the changing consumer preferences. Unfortunately, much of this is not easily investable, as with things like small restaurant groups and live entertainment ventures. However, there are some largely investable segments, including things like cruise lines, amusement parks, and hotels/casinos. Royal Caribbean, Disney, and Las Vegas Sands are a few of the names that come to mind as incumbent players that may be well positioned to benefit.
Royal Caribbean has notably done a terrific job of expanding the scope of its cruises – including experiences designed for families, Millennials, partiers, singles, etc. Indeed, Royal continues to improve the build-out of its ships, offering more forms of on-board entertainment and experiences to drive overall business. You can see better live theater on a cruise ship now than at many off-Broadway venues! Disney also continues to excel by focusing on its various revenue streams, several of which are experience-based. Disney movies drive visits to theme parks to be immersed in the world of Disney, and further drive purchases of toys related to the movies. This is a great experience-driven feedback loop for revenue.
Other typically non-experience type businesses have opportunities as well. Businesses with a keen eye on this trend have been building out the experiential nature of their businesses to address this change in consumer preferences. Capital One, for example, has introduced Capital One Cafes – traditional bank branches that also offer a coffee bar, yoga workshops, and other experiences. JP Morgan Chase introduced its Sapphire Reserve credit card, with a spending rewards system and special benefits tailored directly to travel, dining, and related experiences. Indeed, American Express has seen outflows of consumers who prefer a card with perks more tailed to their experiential preferences. These businesses and others are making smart strategic moves to capture the consumption theme of The Experience Economy.
While some of the drivers of The Experience Economy may not last forever – financial crisis scars, for example – there are entrenched drivers behind the shift in consumer preferences to experiences over tangible goods. As Millenials rise in the corporate ranks and eventually have more disposable income, experience-based consumption may well continue on its path of growth for years to come.