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Talking About the Millennial Generation

19 November 2018 | by Sean Stannard-Stockton, CFA

People try to put us down
Just because we get around
Things they do look awful cold
I hope I die before I get old
-The Who (My Generation, 1965)

One of the narratives driving stock price behavior over the last decade has been the idea that Millennials are fundamentally different from past generations and that their different preferences will drive different consumer spending patterns. This is an important concept to wrestle with because consumer spending is 70% of the US economy and where exactly consumers focus their spending can radically change the fortunes of different industries and companies.

In general, the narrative about Millennials has been mostly negative. They live with their parents, they eat too much avocado toast, they aren’t interested in growing up and so they aren’t buying cars and houses and the other trappings of adulthood. But we believe that for the most part the negative narrative is partly just older people complaining about young people the way they always do (see The Who’s My Generation, a hit song over 50 years ago) and partly a function of Millennials’ reaction to the Financial Crisis.

Much as Depression Babies had fundamentally different spending behaviors due to coming of age in the Depression of the 1930s, it is perfectly reasonable to think that those young adults who came of age in the wake of the Financial Crisis might have distinct spending patterns. Importantly, these spending pattern deviations will be strongest in the short term after a crisis and fade over time, as new life experiences are laid over the memories of the Financial Crisis.

Let’s take home ownership trends amount Millennials as an example. The chart shows the home ownership rate for the prime first time home buyer age bracket of 30-34. The dark purple line is the home ownership rate while the pink line is the percentage of that age group that has a job. Importantly, the employment graph is lagged by 5-years. Basically the chart looks at the percentage of people in this age bracket who own a home vs the percentage of those same people who have had a job for the past five years.

What we see here is that basically all of the reduction in demand to buy homes for Millennials is due to the difficulty they faced in getting a job due to entering the work force in the middle of the worst economy in a hundred years. It is easy to paint a picture of Millennials wanting to live in apartments and take Uber everywhere and not have kids and refuse to grow up. But the data suggests that this generation is just paying the price of the economic disaster they were bequeathed with. Since we know that the percentage of people in this age bracket that have a job is up considerably from where it was five years ago, it is very likely that over the next five years this age bracket will be buying homes at much higher rates than they have in recent years.

What about cars? Aren’t Millennials all childless, city dwellers who ride around in Uber? Here’s a string of quotes from a report out of University of Pennsylvanian’s Wharton business school.

“Millennials, the boomers’ children, have seemed far less interested in cars than their parents… But it turned out that the concern was largely misplaced. According to an article in Wards Auto, the weak sales were less a reflection of the generation’s attitudes toward cars and more the result of the Great Recession and the younger generation’s lack of resources… too many have mistaken the presence of millennials in cities as an indication that they prefer urban living. According to the 2016 National Association of Realtors Home Buyer and Seller Generational Trends study, a growing share of homebuyers are millennials, and more of them are purchasing single-family homes in suburbia.”

Here’s NPR with a similar take in an article titled “As Millennials Get Older, Many Are Buying SUVs To Drive To Their Suburban Homes”:

“As millennials get older — and richer — more of them are buying SUVs to drive to their suburban homes… Generationally speaking, the stereotype of millennials as urbanites falls flat when it comes to homeownership… And how are millennials navigating the suburbs? With SUVs, according to several recent studies… Millennials just might be mainstream after all.”

But wait, aren’t Millennials blowing all their money on avocado toast and frivolous travel that they document on Instagram? Whatever happened to buying tons of branded stuff to show off how successful you are like the Baby Boomers did? Well, while it might be easy to poke fun at Millennial consumption patterns, it is just as accurate to say that they are the least materialistic generation of the post war period. Avocado toast, travel and social media use seems frivolous? How about eating healthy, prioritizing experiences over stuff and spending your time engaging with your peers as well as the wider community of which you are a part?

At least we know Millennials are wasting their time playing video games right? Isn’t that solid evidence that they aren’t maturing into adults and that us older people are justified in complaining about their lack of work ethic? Well… How does spending every waking moment preparing to live and work in a digital economy sound? You think the military drone operators would be as good if they hadn’t played video games? Studies show gaming is a critical training activity for the modern military. How about surgeons who will spend their career manipulating robotic surgery tools like those produced by Intuitive Surgical? Studies show surgeons who have a history of playing three or more hours a week of video games committed 37% fewer errors and completed surgery 27% faster.

My teenagers type incredibly fast. The difference between their typing speed and mine is most noticeable on touch screens. Today, we dismiss that because we don’t take texting as a serious communication system. But as we move into a world where keyboards fade in relevance, older generations are going to be at a significant disadvantage against the younger generation. Just as corporate employees in their 60s and older tend to type slowly on a keyboard compared to Gen Xers who learned to type in school, I’m certain that as computing interfaces shift away from keyboards and mouses towards touch screens, voice and even augmented reality, us “olds” are going to suddenly realize that the time young people were spending on their phones and playing video games was actually an advanced, intensive training regime preparing them for their future jobs.

None of this is to say that the Millennial Generation will end up being clones of past generations. They are the most educated generation, many went to grad school pushing off employment until later in life and then needing to pay back student loans. That forced them to (responsibly) delay the phase of life where you get married, have kids, and buy a house, ie what is considered “growing up”. But they do have unique preferences (as all generations do). We feel certain they will eat healthier, travel more, be less interested in materialistic consumption and more interested in experiences (which they may well keep documenting on Instagram as their own version of social status signaling). A whole range of other preferences will also emerge over time as well, some positive and some negative. Some will fade as they get older and others will strengthen into defining characteristics.

As we look at the last decade of New Normal weak growth and observe the increasing rate of growth being experienced today, the key question to answer is whether the last decade was a drawn out hangover from the great recession or if something fundamental has changed. In thinking about Millennials and how their economic decisions compare to past generations, we’re solidly in the camp that people are people, their hopes and dreams and fears may change, but at the end of the day, they are striving for the same core life outcomes that past generations pursued.

The Millennial cohort saw the first decade of their working lives sidetracked by the foolish decisions of their elders. As the economy gets back on track, we expect the economic engagement of this cohort to rise considerable, creating a material tailwind to the economy from their pent up demand.

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. The opinions expressed within this blog post are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Nothing contained herein should be construed as a comprehensive statement of the matters discussed, considered investment, financial, legal, or tax advice, or a recommendation to buy or sell any securities, and no investment decision should be made based solely on any information provided herein. Links to third party content are included for convenience only, we do not endorse, sponsor, or recommend any of the third parties or their websites and do not guarantee the adequacy of information contained within their websites. Please follow the link above for additional disclosure information.

Ensemble Capital Client Call Transcript: Tiffany & Co Update

21 October 2019 | by Ensemble Capital

We recently hosted our quarterly client conference call. You can read a full transcript HERE.

Below is an excerpt from the call discussing our investment in Tiffany & Co (TIF)

Excerpt (Todd Wenning speaking):

When we think about luxury goods, two things tend to come to mind. First, we tend to think of European brands like Louis Vuitton, Chanel, and Cartier. In fact, according to the consulting firm Deloitte, French, Italian, and Swiss companies together accounted for just under half of global luxury good sales in 2017. Second, we tend to recognize a luxury brand when we see one. A Ferrari, for example, is unmistakable, as are Louis Vuitton handbags with their ubiquitous LV insignias. That’s largely the point in purchasing a luxury item, of course – to communicate status to others.

Curiously, Tiffany does not fall into either of those buckets. It’s one of just a few global American luxury brands and the casual observer cannot tell a Tiffany diamond engagement ring from one purchased elsewhere. There’s no room on a diamond for logo placement, after all.

So how does Tiffany do it? Like its European luxury counterparts, Tiffany is draped in a wonderful narrative and history. You might be as surprised as I was to learn, for instance, that Tiffany has been around since 1837 and has been in the diamond business since 1848, when Charles Lewis Tiffany opportunistically purchased diamonds from fleeing French aristocrats in the French Revolution of 1848. His timing couldn’t have been better, as new American millionaires clamored for royal jewelry to show off their recently achieved status. That’s what got the ball rolling.

As a company, Tiffany is older than Cartier (founded in 1847), Louis Vuitton (founded in 1854), and Burberry (founded in 1856). This durability matters in luxury because it communicates a brand’s ability to endure all kinds of major socioeconomic changes and remain relevant over successive generations. It also communicates a certain timelessness of core products that remain in fashion despite intermittent fads and trends.

Tiffany is one of the few brands in the world that can be identified by a color alone. Its trademarked robin egg blue provides instant recognition, from near or far. And that color communicates elegance, exclusivity, and sophistication. To be sure, more than one would-be suitor has tried his hand at putting a non-Tiffany item in a Tiffany Blue Box to achieve the desired effect. It’s a risky move, of course, for if the ring doesn’t fit, you have some explaining to do when the recipient needs it to be resized. But that speaks to the power of the Tiffany brand – that the color of the box can multiply the value of what’s inside it. Assuming the item was properly acquired, a Tiffany ring in a Tiffany Blue Box communicates to the recipient that you’re worth the extra money.

Tiffany’s narrative has been carried forward into the modern era by popular media, such as the classic movie Breakfast at Tiffany’s starring Audrey Hepburn, and more recent movies like Sweet Home Alabama and The Great Gatsby. The most recent advertising campaigns feature millennial celebrities like Zoe Kravitz, Lady Gaga, and Elle Fanning.

To be sure, the Tiffany brand has been mismanaged at various points in its history. However, we think current CEO Alessandro Bogliolo, who joined the company at the end of 2017, has been a fantastic brand steward and is executing well in the areas the company can control. Notably, we are encouraged by his focus on “informal” luxury to better resonate with the Millennial generation. Last year, for instance, Tiffany opened a “style studio” in London’s Covent Garden, about a mile away from its ritzy high-end storefront on Old Bond Street. The “style studio” format is more informal than the main store, with barstool seating, fragrance dispensers, and opportunities to interact with and customize Tiffany-branded jewelry. We think this is a healthy way for Tiffany to reach out to new consumers without diluting the core brand value.

Like other luxury brands, Tiffany is seeing growth in emerging Asian economies, some of which are adopting Western-style engagement ring culture. In August, Tiffany announced a partnership with India-based luxury retailer Reliance Brands Limited to open new stores in Delhi and Mumbai. As the CEO of Reliance Brands put it in the press release announcing the deal, “Tiffany needs no introduction in India – it is iconic and timeless.”

That quote brings up an important point about Tiffany’s brand-driven moat. As I mentioned earlier, it’s extremely challenging to attach a brand (and command a related price markup) to a piece of jewelry that from a distance cannot be differentiated from a similar item. Given its rich heritage and place in popular culture, Tiffany, as the Reliance Brands CEO put it, “needs no introduction.” This is a huge advantage for Tiffany against any would-be upstart competitors.

In many other areas of the luxury goods market, we’ve seen direct-to-consumer brand startups leverage social media to take on incumbents. But it’s far more difficult to start and scale high-end jewelry, as the product doesn’t outwardly advertise the brand. It takes decades, if not generations, to be considered “iconic and timeless.” And this says nothing about the expensive input costs – gold, platinum, diamonds, skilled artisan wages – that would go into a high-end jewelry operation.

In summary, we’re confident in Tiffany’s moat and have growing confidence in Tiffany’s management. We think the company is set up well for continued relevance in future generations.

You can read the full transcript HERE.

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. The opinions expressed within this blog post are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Nothing contained herein should be construed as a comprehensive statement of the matters discussed, considered investment, financial, legal, or tax advice, or a recommendation to buy or sell any securities, and no investment decision should be made based solely on any information provided herein. Links to third party content are included for convenience only, we do not endorse, sponsor, or recommend any of the third parties or their websites and do not guarantee the adequacy of information contained within their websites. Please follow the link above for additional disclosure information.

Weekend Reading

27 July 2019 | by Ensemble Capital

A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

Soon Your Phone Will Be Your Driver’s License, MetroCard and More (Joanna Stern, @JoannaStern, The Wall Street Journal)

These days it seems like we have a card for everything including our driver’s license, gym membership, credit cards, and many more.  Because of our expanding wallets, several companies have been seeing big success in selling slimmer and more compact versions of the wallet.  To take this concept a step further, the evolution of the digital wallet continues to progress and Delaware in particular is piloting a program for digital driver’s licenses.  Digital payments known as “contactless” are the normal method of payment in many metropolitan areas throughout Europe and this is expanding in the US.  This article discusses the progression of the digital wallet and what’s to come in the future.

Rare Nike Trainers Sell for More than £350,000 (BBC News)

A Canadian shoe collector is the proud new owner of a pair of Nike trainers for the bargain price of $437,500!  The shoes are an incredibly rare pair that were handed out to Olympic runners in 1972 and this particular pair is the only one that is thought to have never been worn.  The auction predicted that the shoes would sell for $160,000 and to give context, the second highest price achieved for a pair of shoes at a public auction was for a pair of 1984 Converse trainers signed by Michael Jordan for $190,373.

American Suburbs Swell Again as a New Generation Escapes the City (Valerie Bauerlein, @vbauerlein, The Wall Street Journal)

Many US metropolitan city centers have been seeing increases in job growth which has led to more people moving into already crowded cities.  With the influx of new people, also comes more traffic, impacted schools, and higher prices.  For many, this is enough to move their home search to the suburbs where you can get more space for your money.  As this trend continues, we can now see that some suburbs account for the fastest growing US cities.  This article examines the trends of millennials as well as where major employers are looking to base their main offices.

Mutually Assured Disruption in Silicon Valley (Justin Lahart, @jdlahart, The Wall Street Journal)

Silicon Valley is known for its innovation and for some of the world’s most iconic disruptors.  Because of this, the valley is rich with venture capitalists looking for the next big thing.  But what happens when venture capital frees so freely that the beneficiary company’s focus shifts away from innovation and more towards beating your competition.  This article explores some of the major disruptors as well as several companies that have had significant cash injections but fail to survive.

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. The opinions expressed within this blog post are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Nothing contained herein should be construed as a comprehensive statement of the matters discussed, considered investment, financial, legal, or tax advice, or a recommendation to buy or sell any securities, and no investment decision should be made based solely on any information provided herein. Links to third party content are included for convenience only, we do not endorse, sponsor, or recommend any of the third parties or their websites and do not guarantee the adequacy of information contained within their websites. Please follow the link above for additional disclosure information.

Weekend Reading

19 January 2019 | by Ensemble Capital

A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

Netflix Raises Prices on All of Its Subscription Plans (Joe Flint, @JBFlint, Wall Street Journal)

Netflix opted to raise prices across all of their subscription plans this week.  The new prices will go into effect immediately for new customers and over the next few months for existing customers.  Ensemble Capital’s Arif Karim wrote about Netflix’s Pricing Power, explaining the ability for Netflix to raise prices and not lose customers.  Arif also did a deeper dive on the reasons behind investors’ enthusiasm for Netflix in his blog post Netflix and the Rise of the Global Scale Media.

China’s Annual Trade Surplus With U.S. Hits Record Despite Trump’s Tariff Offensive (Liyan Qi, @QiLiyan, & Xiao Xiao, Wall Street Journal)

Despite the Trump administration’s tariff policy targeted at China, the country’s trade surplus with the United States hit a new record high last year.  Part of the increased surplus was due to exporters who accelerated their shipments in anticipation of increased tariffs.  The US and China had been aiming to reach an agreement by March 1 to help ease the trade conflict, but U.S. Officials are currently debating lifting China tariffs to hasten a potential trade deal and calm the financial markets (Bob Davis, @bobdavis187, & Lingling Wei, Wall Street Journal).  The equity markets reacted positively to the news.

Microsoft’s Leap Into Housing Illuminates Government’s Retreat (Emily Badger, @emilymbadger, The New York Times)

In an effort to combat the affordable housing crisis in Seattle, Microsoft announced a pledge of $500 million to help build affordable housing in Seattle.  The pledge is indicative of a nationwide void in addressing the issue of affordable housing.  Rather than cut a check to charities or build housing just for their own employees, Microsoft is aiming to fix a market failure.  “It really represents something almost unprecedented,” said Matthew Gordon Lasner, an associate professor of urban studies and planning at Hunter College. “What we’re seeing Microsoft do is in effect privately assume the role that historically the federal government and the states have played.”

As Americans Drink Less, Booze Makers Look Beyond the Barrel (Saabira Chaudhuri, @SaabiraC, & Jennifer Maloney, @maloneyfiles, The Wall Street Journal)

Americans are consuming less alcohol driven by “a growing trend toward mindful drinking or complete abstinence, particularly among the millennial cohort,” says IWSR’s U.S. head Brandy Rand.  To combat the slowdown in sales, producers are looking for ways to expand their product line into non-alcoholic alternatives to appeal to teetotalers.  “IWSR forecasts low- and no-alcohol products in the U.S.—still a small slice of the market—to grow 32.1% between 2018 and 2022, triple the category’s growth over the past five years.”  Sean Stannard-Stockton wrote about the influence of the millennial generation in a recent blog post.

Rihanna and LVMH Make a Deal and, Possibly, History (Vanessa Friedman, @VVFriedman, The New York Times)

Moët Hennessy Louis Vuitton LVMH, the parent company of Dior, Givenchy and Fendi, recently agreed to a deal to back Rihanna’s fashion brand, “making her the first female designer of color at the largest luxury conglomerate in the world.”  The deal represents a shift in the fashion industry as celebrity and social media influencers have a new power in how brands target different audiences.  Besides Rihanna’s 14 No. 1 singles on the Billboard 100 chart, more than 50 Top 40 hits, and 67 million Instagram followers, her influence in the fashion and beauty world has already been notable with the incredible success of her Fenty Beauty brand.

The Most Powerful Person in Silicon Valley (Katrina Brooker, Fast Company)

According to Fast Company, the most powerful person in Silicon Valley isn’t Elon Musk, Jeff Bezos, or Mark Zuckerberg, it’s billionaire Masayoshi Son.  Through his Vision Fund, he is spending hundreds of billions of dollars to create an AI-powered utopia where machines control how we live.  The Vision Fund invests a minimum of $100 million in the companies in its portfolio and since October 2016, the fund has committed over $70 billion of capital into some of the most influential companies in the world including Uber, WeWork, Nvidia, ARM and Flipkart among many others.  The companies within the Vision Fund have the potential and power to influence the $228 trillion real estate market, the $5.9 trillion global transportation market, and the $25 trillion retail business.

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. The opinions expressed within this blog post are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Nothing contained herein should be construed as a comprehensive statement of the matters discussed, considered investment, financial, legal, or tax advice, or a recommendation to buy or sell any securities, and no investment decision should be made based solely on any information provided herein. Links to third party content are included for convenience only, we do not endorse, sponsor, or recommend any of the third parties or their websites and do not guarantee the adequacy of information contained within their websites. Please follow the link above for additional disclosure information.

Weekend Reading

12 January 2019 | by Ensemble Capital

A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

China’s Car Sales Just Fell For The First Time In 20 Years (Charlie Zhu, @CharlieZhu, Bloomberg)

As China has continued on the path to urbanization and industrialization, we’ve seen significant increases in new infrastructure spending leading to more highways throughout the country which means additional auto manufacturing.  So much so that they have been the world’s leader in auto sales, until recently where sales fell 6%.  A slowing China economy and concerns fueled by a potential trade war has the Chinese auto buyers looking at caution ahead.  The contraction in sales is one of the clearest signs that the Chinese economy is struggling. However per capita car ownership in China is still less than half the level in developed economies so it is very likely that growth in car sales will return to solid levels over time.

You Know Your Diamond’s Cut and Carat.  But Does It Have Ethical Origins? (Tiffany Hsu, @tiffkhsu, The New York Times)

We often know the origin of the items we buy such as the farm where our cheese came from or the appellation of the wine but what about the origin of diamonds?  With the introduction of synthetic diamonds and millennials waiting longer to tie the knot, the jewelry industry is having to adapt to stay competitive.  Tiffany & Co. is looking to gain interest by offering piece of mind that their consumers aren’t buying a “blood diamond” and they will begin telling their customers the diamond’s country or origin and eventually the specific mine that it came from.  Ensemble’s President and CIO, Sean Stannard-Stockton wrote about the millennial generation in this article: Talking About The Millennial Generation

iPhone XR Revisited: The Best iPhone Apple Can’t Sell (Joanna Stern, @joannastern, The Wall Street Journal)

Does the old adage of what comes up must come down hold true for Apple?  After their historic $1Tn valuation and reports of decreasing sales on their latest phones, the stock has been trending lower in recent months.  One theory for the pullback in the stock is that their phones have gotten so reliable that consumers are holding onto them longer before deciding to upgrade.  Another contributor that has been discussed is slowing growth out of the China market.  The Wall Street Journal quoted Arif Karim, senior analyst at Ensemble Capital for his thoughts in this article: Apple Shares Sink After iPhone Suppliers Lower Outlooks

SoftBank Scraps $16 Billion Plan to Buy Most of WeWork (Eliot Brown, @eliotwb, The Wall Street Journal)

Rents for office space have been on the rise for several years and WeWork has been offering shared office spaces for either short or long-term periods at attractive pricing.  The Japanese company SoftBank was so confident in WeWork that they were planning on a $16Bn investment in the company.  Following the recent market turbulence and opposition from some investment partners, this planned investment has gone down to $2Bn.  Eliot Brown discusses the hurdles seen here throughout this article.

Starbucks CEO Kevin Johnson Reigns In Predecessor’s Ambitions: I’m Not Howard (Julie Jargon, @juliejargon, The Wall Street Journal)

In an increasingly crowed coffee marketplace, Starbucks CEO Kevin Johnson has a different vision for growth than his predecessor Howard Schultz.  Schultz had plans to open 1,000+ of the high end Starbucks Reserve cafes which offer more expensive coffees and a full bar but Johnson is scaling that number back and is focusing on developing more innovative beverages while increasing their market share in China.

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. The opinions expressed within this blog post are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Nothing contained herein should be construed as a comprehensive statement of the matters discussed, considered investment, financial, legal, or tax advice, or a recommendation to buy or sell any securities, and no investment decision should be made based solely on any information provided herein. Links to third party content are included for convenience only, we do not endorse, sponsor, or recommend any of the third parties or their websites and do not guarantee the adequacy of information contained within their websites. Please follow the link above for additional disclosure information.