• Home
• »
• Insight

• Home
• Executive Jobs
• Features
  • Focus
  • Career Couch
  • Radar
  • Water Cooler
  • Insight
  • Podcasts
• Place an executive ad

Before you go calling the new group of youngsters following in the footsteps of generation X generation "why", you might want to take a look at their spending habits. There could be some good investment opportunities in a number of listed companies that are starting to take notice of these trendsetters.

Critics of generation Y are quick to use labels such as irresponsible, disrespectful and disloyal. However, marketing and research groups are more interested in identifying how to tap into the attributes, attitudes and habits of this demographic with a view to shaping products and associated sales campaigns around their understanding of generation Y.

Generation Y's strengths could include their transient disposition - they are a group that is not afraid of change, taking risks and tackling new situations. They can be responsive impulsive spenders, understandably disapproving of poor workplace standards and remain independent in the face of peer pressure.

With a strong focus on lifestyle ahead of employment stability, financial security and deadlines, generation Y can be an employer's nightmare but a recruitment agency's dream, a travel retailer's frequent flyer or a financial planner's most needy client. From an investor's perspective, companies emerging as significant beneficiaries of generation Y can be found in a wide range of industries including fast food, fashion, and travel.

We take a look at a number of sectors and companies that are likely to benefit from this gen Y trend.

BIG-TICKET SPENDERS

Motor vehicles and technological equipment top the list of generation Y's big-ticket spending. They are also a large component of the group's depreciative asset base. The consumption of these products will continue to be driven by the urge to update, a habit that manufacturers such as Microsoft, Nokia and Toyota are well aware of.

Inbuilt obsolescence combined with innovation has been a significant catalyst of consumer spending, particularly in the past 30 years. There is evidence that this could be an important factor as the number of generation Y consumers grows.

JB Hi-Fi's position in the entertainment and technology retail space suggests that it will be a significant beneficiary of generation Y's spending patterns. The company has made no secret of its strategy to target this demographic as evidenced by the computer and home entertainment retailer's move into the games and mobile phone arena in the past few years.

This month JB Hi-Fi upgraded its expansion strategy from 120 to 150 stores. The company has experienced strong sales growth since listing on the ASX in 2003 as the first generation Ys turned 21. Store expansion has contributed to its success but one of the most impressive features of JB Hi-Fi's performance has been its ability to achieve significant sales growth in its existing stores. The consumption of updated products in traditional lines has contributed to this trend.

JB Hi-Fi's share price has reflected this growth, rising from $2 to $17 since listing, but the recent sharemarket turbulence has resulted in a substantial decline.

Analysts are forecasting that JB Hi-Fi will achieve earnings per share growth of 40 per cent a year over the next three years. JB Hi-Fi's P/E ratio of about 17 relative to 2007-08 consensus estimates suggests that the company has been oversold and the recent fall in its share price may present a buying opportunity. Bell Potter has a buy rating on JB Hi-Fi with a 12-month price target of $15.60, representing a premium of more than 50 per cent to the company's recent trading range.

Motor vehicle, truck and motorcycle retailer Automotive Holdings Group is another company that has gone from market darling to reject status in a short period of time. AHG listed on the ASX in 2005 and by 2007 its shares were trading at a premium of more than 300 per cent to its issue price of $1.

In the past six months AHG's share price has fallen by about $1 despite the fact that analysts have increased their 2007-08 and 2008-09 forecasts following a strong interim result for the six months to December 31, 2007. Based on consensus forecasts for 2007-08, AHG's P/E ratio is about 11.5.

In February AHG's managing director Bronte Howson informed the market that strong employment, particularly in the company's key markets of Western Australia and Queensland, had a powerful effect on consumer spending and greatly reduced the impact of higher interest rates and increased fuel prices. In 1999 the first generation Ys became eligible for a driver's licence.

The number of generation Y drivers will continue to build over the next 10 years. There have been record car sales in Australia in the past two years, passing the 1 million mark for the first time in 2007.

As the first generation Ys approach 30, new cars are likely to be on the shopping list. Generation Y are very environmentally conscious so the emergence of hybrid vehicles could provide sales momentum. AHG's decision in July 2007 to become the exclusive distributor of Vmoto scooters provides the company with another string to its bow to attract environmentally minded consumers.

FASHIONISTAS

Fashion goods aren't big-ticket items but they are readily replaced in order to keep up with the latest look. The fashion industry is one of the best examples of generation Y's tendency towards instant gratification and this helps to provide the industry with healthy sales even during periods of economic instability.

Relating lifestyle to products is a key element in terms of identifying retailers that should benefit from this trend. Generation Y embrace brand names and seek out apparel that fits with their leisurely lifestyle, pursuit of fitness activities and their tendency to make last-minute arrangements.

Beach, surf and skate wear is in demand from stores such as Billabong that have most of the big brands on sale. The company's stores are mainly situated in large malls where walk-past traffic is high. This helps to cash in on impulse spending, a significant factor in the way that stores market their products to the younger demographic.

Denim is the dress for all seasons and most occasions, making jeans and complementary fashion wear ideal for the transient generation Y consumer. Just Jeans incorporates a number of brands such as Jay Jays, Dotti and Smiggle. The first-half performance of the company's core Just Jeans stores underlines the resilience of its traditional products. In a tougher retail environment Just Jeans's Australian stores achieved a 5.9 per cent increase in same store sales.

Just Jeans has the scope to harness significant growth from its Smiggle business as the company plans to expand by 10 to 15 new stores a year. The Smiggle target market is teenagers, a demographic that will be dominated by generation Ys for the next 10 years.

Smiggle led the way in like-for-like sales growth with a strong 21 per cent achieved in the first half of 2007-08. Just Jeans's P/E ratio of 11 relative to 2007-08 consensus forecasts suggests that the company represents good value.

QUICK FIXES

Forward planning and mundane activities are not characteristic of generation Y. Fast food beats wasting leisure time preparing meals and also fits with the more spontaneous last-minute lifestyle they lead. Similarly, a short-haul flight anywhere in the Asia Pacific region may well be booked the day before departure as that lazy long weekend transforms into a 72-hour flee and spree.

From a fast food perspective, Retail Food Group has the brands, locations and products that are likely to appeal to generation Y. RFG is a multifood brand manager that listed on the ASX in June 2006. Since then the company has outperformed prospectus forecasts and exceeded subsequent market guidance as well as integrating some astute acquisitions.

RFG has expanded its bb's cafe systems business and in 2006-07 opened 37 new Donut King stores. These initiatives have provided strong organic growth but the acquisitions of Brumby's Bakeries and Michel's Patisserie businesses were company-changing developments.

In February its management highlighted the fact that the particular retail food sectors in which RFG operates have historically remained strong despite downturns in consumer discretionary spending.

The Michel's acquisition added 340 franchised outlets to RFG's portfolio but the earnings impact of the purchase will be more evident when it makes a full-year contribution in 2008-09. RFG achieved strong growth in the first half of 2007-08, its net profit more than doubling to $8.1 million.

RFG is in a strong position to realise its full-year earnings per share guidance of more than 15 cents after achieving interim earnings per share of 10.2 cents, suggesting that its P/E ratio of about 10 is conservative.

With regard to travel, companies that have internet booking systems are well supported by generation Y. One of Flight Centre's designated goals in 2007-08 is to improve its online and IT platform, with various projects set for completion including a fares database, wholesale booking platform and website redesign.

Flight Centre is cognisant of the need to build a strong retail clientele. The company has increased its retail product offering by introducing a Flexirent holiday payment option, an initiative that should appeal to generation Y.

MONEY PLANS

Generation Y are best known for their ability to spend rather than save. They are not as asset-rich as the baby boomers and generation X were at a comparable age but the Ys still have cash to manage and taxes to pay.

In 2007 KPMG conducted an international study of the funds management industry and found that there was a significant discord between the opinions held by fund managers in relation to generation Y's perceived needs and the responses by generation Y regarding their intended money-management strategies.

Just as generation Y do not blindly conform to senior managements' workplace expectations they are not inclined to provide a fund manager with carte blanche authority to dictate how their savings are controlled.

Given this backdrop, there should be increased demand for financial planners that provide the opportunity for collaborative decision-making and supply the client with the means to track the success or otherwise of their strategy.

WHK Group is a key player in the financial planning industry and the second-largest independent provider of financial planning advice in Australia. The company has grown by acquiring small financial planning and accountancy businesses at a time when industry consolidation was being driven by generational change and the need to operate as part of a larger organisation in order to remain competitive.

WHK's strategy has been to provide clients with a total solution whereby the same organisation that processes the taxation return can assist in anything from investment, insurance and lending related matters to estate and succession planning. Acquisitions are helping to boost revenues from both its business services and financial services divisions - yet the 28 per cent organic growth achieved by WHK's financial services arm was well ahead of the 5 per cent increase recorded by the business services operations in the first half of 2007-08.

WHK's share price has fallen in line with the rest of the financial services sector. The company's fundamentals aren't demanding, as it is trading on a P/E multiple of about 11 relative to 2007-08 consensus forecasts.

MYSTERY GENERATION: HOW WILL Ys SPEND?

THE study of generational change and the impact that it has had on financial management including spending patterns has intensified. The baby boomers are entering the retirement phase and generation X are benefiting from higher levels of income and a decade of strong levels of employment, wage growth, an escalation in property prices and a buoyant equities market.

The baby boomers (those aged between 44 and 62) are widely documented to have a significant impact on various industry sectors. For the best part, they are asset rich and cashed up with plenty of superannuation to ensure that they sustain their spending patterns until the inevitable. That is when generation X emerges, the first of which will start to retire in about 20 years' time, once again financially secure, with most to benefit from a heftier superannuation bank than their predecessors.

However, what seems to have been missed is the impact that generation Y is likely to have. While not having the accumulated wealth of their parents, the generation Ys do command attention as they approach that high-disposable-income period in their lives. The first of the generation Ys turn 26 in 2008, so their relevance as an important consumer group will grow over the coming decade, prompting the same degree of scrutiny that the baby boomers and generation X have demanded.

Just as the splurging 25- to 35-year-old generation X group led the charge in the spending stakes over the last 10 to 20 years, generation Y is gearing up for a similar spree. Marketing groups, though, are having some difficulty in establishing just what they will be buying and how to engage a demographic who many boomers and Xs find hard to understand - and, in some quarters, are too erratic to understand.