The consumer businesses that should thrive in 2021
The COVID-19 lockdowns brought massive changes to consumer behaviour this year. Now, the economic re-opening is bringing a new set of changes. These should benefit many of the consumer businesses that suffered during the lockdowns, thus providing some great opportunities for investors. Let’s look at some of the businesses that should thrive in 2021.
At a recent virtual institutional investor conference, the behaviour of Australian consumers was discussed and the outlook considered. You might remember the pandemic delivered a number of investible ideas. The first, which our small companies seized upon was the mix shift from services, which were banned and shut down, to goods.
The consequent acceleration in online sales for companies that had excellent online offerings was reflected in an equally rapid acceleration in share prices. Consumers locked down at home also experienced the urge to renovate and do-up the house and home office. Then, as the shutdowns progressed and infection rates brought under control domestically, it became clear overseas travel would take much longer to recover than domestic travel. Spending on local holidays, after-market car accessories and camping gear surged.
With the virus in Australia largely eliminated (for now at least), and with three vaccines currently on the path to approval and wide distribution, investors are taking profits from their pandemic winners and looking to rotate into the next theme.
A shift in spending back to services
Changes in consumer behaviour during the present re-opening is therefore a potential treasure-trove of opportunity. Clearly there will be a mix shift in spending back to services from goods. Domestic travel should be robust with internal borders reopening but camping goods sales may be tempered if La Niña delivers above average rainfalls during the summer.
NSW Premier Gladys Berejiklian announced on 25 November that her government would lift a public health order on December 14 requiring employers to allow employees to work from home unless it was absolutely necessary; bosses will insist staff return to work. Surfing the web and online shopping will slump during businesses hours. The triple digit sales growth rates many online retailers enjoyed will potentially taper.
According to the data presented at the institutional investor conference, wages growth remains robust. This should support ongoing consumption, keeping the aforementioned mix shift back to services and the move from online back to ‘bricks and mortar’ in mind. Supportive wage growth translated to expectations of a slight increase in overall consumer spending.
Are consumers saving money?
Consumers are expecting to save less in the coming 12 months, but are not prepared to take on more debt. Having said that, we note in the most recent quarter a lower portion of households have a positive outlook on their finances over the coming 12 months than in the previous quarter.
Respondents generally believe property prices will rise in the next 12 months and 35 per cent of those surveyed said they are planning on buying a property within the next 12 months and this is important because they will be competing for a subdued inventory of properties for sale, and they’ll be competing with over 380,000 Australian expats who are returning to make Australia home again. Meanwhile 11 per cent of those surveyed said they expected to sell their property, suggesting a large number of those surveyed might be first home buyers or intending to buy an investment property.
A large number intend to undertake home improvements with a higher portion planning major renovations versus doing it themselves.
A large jump was observed in the number of respondents planning on buying a new car versus second hand. This is a function of both the $43bn normally spent on overseas holidays being directed domestically, as well as the fact secondhand car prices surged and the stock of available vehicles has declined as Australians made the decision to eschew public transport. Within the cohort of people expecting to buy a new car, an increasing proportion intend to buy an electric vehicle, or EV.
The growing demand for EVs is fast approaching the tipping point. California (the largest passenger car market in the US) is legislating to ban entirely the sale of emitting vehicles from 2035 and because the US is the world’s largest passenger car market, and California the biggest market within it, car manufacturers the world over will have to retool to deliver EVs. The rest of the world will receive EVs whether they like it or not.
The EV tipping point is fast approaching with consequences for every business in both the incumbent internal combustion engine vehicle and new supply chains.
Beneficiaries of the opening economy
Due to the easing domestic movement restrictions and border re-openings, a step-up in individuals looking to a domestic leisure flight within six months was observed. Qantas (ASX:QAN), Webjet (ASX:WEB) and Corporate Travel Management (ASX:CTD) confirmed as much in their recent updates.
Beyond the conference deliberations, Harvey Norman (ASX:HVN) this week reported 30.4 per cent Australian like-for-like sales growth to 21 November as well as a 160 per cent growth in group profit before tax to 31 October. As expected, sales and earnings growth rates have moderated (although more slowly than for JB Hi-Fi) from the previous trading update and investors should not rule out negative growth rate comparisons next year. On the other hand a stronger housing cycle should be followed by demand for appliances and furniture.
There’s little doubt analysts will be pouring over retailer growth rates, with this quarter’s numbers likely to remain robust given they are cycling bushfire-impacted numbers last year. But a longer duration of growth can only temper the pace of profit taking in anticipation of an eventual sharper decline. And keep in mind the end of JobKeeper payments in March.
The Montgomery Funds owns shares in Webjet and Corporate Travel Management. This article was prepared 30 November 2020 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Webjet or Corporate Travel Management you should seek financial advice.