What Should Consumer Investors Focus On?

There are some clear winners & losers headed into ‘24

The economy is getting to us all. A friend of mine recently joked, “Why do my kids eat so many goddamn eggs?” after the price of groceries skyrocketed. Others are making small, but meaningful changes, like cutting back on turkey for a Thanksgiving meal with family. We’ve all heard the stories, we’ve felt the worry in different ways, specific to our own socio-economic background. Inflation is real, and yet no one seems to be in agreement of what’s happening in the economy. Are we moving into a recession, or are we looking at a soft landing? I wish I had a crystal ball. 

So how does all this relate to consumer investing? Both in terms of the past, present and future. And how should consumer founders be thinking about fundraising, positioning and more? Welcome to my new newsletter - Something Beyond - where I’ll share my thoughts on a monthly basis about what’s going on in all things consumer. You’ll get to know me and my team at Maveron much better once you subscribe. We came up with the name as a nod to former Starbucks CEO and co-founder of our firm Howard Schultz, who once described Starbucks as being “something beyond” a cup of coffee. That’s the magic of building a high-quality consumer experience. It evokes an emotional response, not just a financial decision. 

So let’s start by taking a step back. What the heck is going on in the economy? Here are a few nifty charts to give you a sense of things when it comes to how consumers feel about the job market, inflation, and so on. 

As you can see, things are trending down overall when it comes to consumer sentiment in the post Covid era. Consumer sentiment relates to how people think and feel about their finances and the state of the economy. 

It’s interesting to note there’s a big gap between the current situation in the economy, versus people’s expectations. That will have an impact over time. When people think the economy isn’t strong, they’re more likely to stop spending and instead flip into a mode of saving. That’ll hit parts of the economy over others. Health care, for instance, isn’t usually as impacted because people still get sick no matter what happens in the economy. But luxury, as you might expect, does tend to seem more optional to consumers when there’s a perception of instability. 

As many of you know, Covid has certainly had an impact. In the years following the pandemic, spending somehow defied inflation. People had money to spend simply because they didn’t spend it while stuck at home. As we round out the year, that may be coming to an end. Earnings from some of the country’s largest retailers suggest that this trend is starting to slow. Overall, we’re still seeing more resilience than the experts expected, but most analysts believe that will not continue for too much longer. That, by the way, could mean that interest rates start to come down. Other factors that are impacting all this include rising debt and the high cost of housing. 

But the picture isn’t completely bleak when it comes to consumer sentiment. People will continue to invest in specific areas. Walmart, for instance, shared with Wall Street that consumers are still continuing to spend big in grocery, health and wellness-related products. Personal care, as you can see from the chart below, is holding out particularly strong. Wellness has become a $250 billion market, per McKinsey, and it’s showing no signs of slowing down. 

At Maveron, that’s been a big part of our thesis. While interest in certain categories like fashion, beauty, and home improvement might wane, consumer is never dead, and in fact, a recessive period might be the best time for certain categories to grow like education, categories of work and earning, and healthcare. We’ll extrapolate on all of this and back it up later in this post. Beyond that, a trend that I predict will take off involves this notion in consumers taking pride in a few things, versus lots of cheap, throwaway items. We’re not seeing this reflected just yet in the data, especially with Black Friday and Cyber Monday sales up 7.5% and 9.6% YoY, respectively. But I spend my entire life examining consumer trends and I believe it’s coming. Anecdotally, I keep hearing that consumers are waiting to make big purchases, saving for those purchases, asking themselves multiple times if they truly “need” something, and there are more financial tools out there than ever before to help people stop spending beyond their means.  

To summarize, the areas where I suspect we’ll still see consumer spend include:

• Food, specifically around eating healthily. Food is getting more expensive, per the Bureau of Labor Statistics.

• Health and Wellness (Per McKinsey, around 50% of US consumers now report wellness as a top priority in their day-to-day lives, a significant rise from 42% in 2020.)

• Self improvement tools including education, upskilling, and AI to make human life easier (the personal development market is now expected to be worth north of $73 billion by 2025). 

• Human connection, people will spend on IRL experiences like dining out, networking events, and concerts (data is now showing that post Covid, Americans are spending more money on dining out, despite that it’s become more expensive to do so). 

Unsurprisingly, since Covid, some of the best performing stocks include:

Procter & Gamble

Credit: Motley Fool

Walmart

Lululemon

Credit: Motley Fool

And where I think spend will decline:

• High-end fashion, as well as throwaway fashion (Ralph Lauren, LVMH and Tapestry have all taken a hit in recent months with revenue growth slowing dramatically) 

• Home Improvement (it’s been a rocky year for stocks like Home Depot, which have previously experienced a lot of stability. The simple reason? Americans are not feeling great about housing). 

• Wildly expensive travel (travel investors were buoyed by a strong rally in the early part of the year but now Delta Airlines, Airbnb, and others are all on the decline. The industry is proving to be volatile.)

• Alcohol (Consumers still seem to be buying spirits, but beer sales are down and market share is shrinking. This trend has been ongoing since about 2014 as more people opt against heavy drinking at home in favor of alternatives like weed). 

Credit: Forbes

Credit: Motley Fool

What I’m Bullish On Going into 2024

Here’s a prediction: The combination of economic uncertainty coupled with a fear of AI, not to mention climate change and wars, is going to lead to people looking inwardly. I’ve noticed a mantra amongst my millennial friends that people seem to be overwhelmed by life so they’re focusing on what they can control: Themselves. That might span the physical - finding a way to move the body that’s sustainable - or emotional/spiritual. This may sound cheesy, but I genuinely believe there will be a focus on what really matters: friends and family, as well as community. My philosophy is that what’s in is true human connection. Not social media, which only seems to make people feel worse about themselves. 

And all that relates to my investment philosophy. I won’t go into the details of our portfolio - although if you’d like to, you can read about it here, but I am pursuing a thesis along these lines. Whether you want to call it “self improvement” or something else, I’m looking to invest in companies that help people feel better in this crazy, chaotic world. These, incidentally, are also the things that people are still willing to spend money on. 

Related to this, I’m super into any tools that make people’s lives a little easier when it comes to organization/management. That includes booking travel, sending holiday cards, scheduling meetings, paying bills and so on. 

A few examples that aren’t in the portfolio: 

• Stardust - a period tracking app that integrates astrology that Gen Z is loving right now!

• Duckbill - an AI-based personal assistant 

• OpenAI - Despite all the drama, it seems to be the only AI right now that people have truly integrated into their lives to make things easier (btw, I promise, I didn’t have GPT-4 write this post)

• Eight Sleep - Sleep is truly the final frontier! 

• Oura - Because it has been the first wearable bold enough to give consumers actionable takeaways and the ring form factor is crucial 

• Notion - Founders are now using it for their pitches and I see so many expanded use-cases!

So yes, consumer is hard. But it’s such an inspiring area to invest in because of that powerful connection to the consumer. Companies that can prove they are building something consumers really want (that “something beyond”) will have a true edge over competitors. And it’s also a well-trodden path into enterprise sales. It’s easier to sell a large contract to a buyer if you can show that consumers are already adopting it en masse (we’ll delve into B2B2C in a later edition of this newsletter). So good luck out there! And don’t forget… the team at Maveron is always here to help. 

I hope you’ve enjoyed this inaugural post and happy holidays! 

If anyone is building in this space and has thoughts on any of my predictions or anything else in this post, I’d love to hear from you. I’m anarghya@maveron.com.