Global consumer spend stands to benefit from favourable sentiment and demographic trends. U.S. consumer sentiment reached 99.7 in February 2018, the second strongest reading since 2004, and up from the 98.4 averaged through the fourth quarter of 2017.
Meanwhile, the U.S. small business optimism index lifted to 107.6 this February, nearly matching the highest reading ever recorded of 107.7 in July 1983. We attribute a portion of this strength to added confidence around economic development resulting from the passage of tax reform late last year and reduced regulations.
In addition to favourable consumer and corporate confidence, we see demographic tailwinds aiding consumer spend globally. For instance, we estimate that the number of baby boomers moving into retirement years is set to rise at a double-digit rate every five years through to 2030.
Supportive Demographics
Also, younger travellers; Generation X and millennials, are now entering their peak earning years, representing around 70% of the U.S. working population in 2015 but growing to roughly 90% in 2025. Additionally, we believe China’s rising middle class is set to roughly double to more than a 200-million-person opportunity over the next decade.
We see travel benefiting from favourable sentiment and demographic tailwinds, as it continues to see revenue and cost enhancing investments that stand to support long-term growth and brand, scale, and network advantages we award various operators.
For instance, cruise line operators have recently launched wearable and mobile app technologies that allow travellers to more easily book events and food, while also being able to control room electronics. This technology effort should improve traveller experience through less time spent booking itinerary and more time vacationing, leading to opportunities for improving yields for operators.
Online travel operators are also investing into technology and platforms, aiding the network advantages we award leading industry participants. While all operators continuously look to refine the user experience on desktop and mobile apps, some are now beginning to invest aggressively in the cloud. And by moving capabilities from physical data centres to the cloud, operators are able to improve latency performance and foster innovation, quicker speed to market of new products, all at a lower compute cost. Online leaders are also continuing to invest in building out the supply side of their platform networks, by expanding reach in vacation rental and international markets.
Outside of travel, mall traffic continues to decline, and e-commerce is steadily stealing apparel market share, reaching more than 25% in 2017 with the potential to reach more than 40% in the next five years. Once-powerful competitive advantages, including a broad national brick-and-mortar footprint and the ability to garner economies of scale, not only no longer hold the advantage they once did but now can also be viewed as a disadvantage.
Amazon Remains Dominant
We see e-commerce and, more specifically, Amazon.com (AMZN) as the largest disruptive force to existing apparel companies. Although e-commerce at its advent had some weaknesses that protected brick-and-mortar retailers, advances in shipping, targeting, merchandise display, and checkout, in addition to shifting consumer demand for convenience, reviews, and information, have tilted demand more favourably to online retailers, in our view.
Despite Amazon's dominance, we see unique competitive advantages resulting in the parallel rise of strong niche players and brand partners. Interviews with five innovative, high-growth new entrants to the retail space yielded four key themes that we see as a sustainable source of moat in this new retailing world: Big Data capabilities, customisation, responsiveness of the supply chain, and distribution channel flexibility.
Based on these emerging capabilities, apparel manufacturers, off-price retailers, and select specialty retailers are best positioned to hold their competitive advantage, while our department store coverage and general apparel retail universe is likely at biggest risk.
