Incomes dictate Purchase dictate Economy: Cyclical Status of Consumer Discretionary sector

Consumer Discretionary Sector

Our Global industry is classified into 3 sector structures – cyclical, defensive and sensitive. Industries that come under the Sensitive group are the Industrials, Infotech, Energy and Communication services. In the Defensive sector group, we have consumer staples, energy, healthcare, communication services, utilities and real estate. The Defensive sector group are the kind of sectors that are always in demand at the stock market regardless of how the economy is doing. The Sensitive sectors have a very mild correlation to the business cycles of the economy. For this article, our focus would remain on the third group, i.e. the Cyclical sector group. This group comprises of companies that are easily affected by the strength of the economy. It grows well when the economy is enjoying its bull run. However, as the bear claws back at the stock market, this sector is the one that is affected the most. The sectors included in this group are –  Financials, Technology, Real Estate and Consumer Discretionary. For this article, we are going to focus on the Consumer Discretionary sector to better understand consumer behaviours today.

Value of Consumer’s Prudence

Two types of products and services exist in the market. There are those that consumers need daily and then there are those that are not necessary for survival. The Consumer Discretionary sector comprises the latter part. It includes Fast Food, Specialty food, furniture and appliances, automobiles, travel and certain luxury services and products.

As per a report, from September 2010 to 2022, the consumer discretionary sector has had a CAGR of around 14 percent with a standard deviation of around 15 percent. Analyzing the performance of the sector, we see that at the MSCI World Consumer Discretionary Index, the value of the portfolio decreased from USD 27,150 in March 2019 to USD 23,857 in March 2020. However, after the global rollout of the COVID-19 vaccinations, this value shot up by almost 100 percent to USD 43,215  in 2021 and moderate growth in 2022 to reach USD 43,982. This same performance is echoed at S&P Global 1200 with the valuation of the sector dipping to USD 2,623.44 in March 2020 from USD 3,373.62 in March 2019. However, in 2023, hostile macroeconomic conditions increased the risk factor of the consumer discretionary sector.

In 2023, most companies in the sector showed signs of a weak growth trajectory due to the growing scepticism among investors. Investments for 2023 in the sector were badly affected due to rising inflations and a grim macroeconomic outlook. Several companies in the consumer discretionary sector have shrunk their yearly estimates for 2024 as well. Another shocking revelation is the fact that in the US, the healthcare and the consumer discretionary sectors together accounted for half of the bankruptcy filings in the private sector. This is also the same period (2022-23) when Consumer Staples (daily necessary products and services) saw one of its greatest quarter-over-quarter increases.

Riding the Working Class Economy

Automobiles are one of the biggest GDP contributors in most parts of the world. Transport and Logistics are essential for our daily lives and the automotive industry thrives on the demand for ‘delivering by road as promised on the phone’. In most developing nations, a two-wheeler (preferably a small capacity one) is seen as a household necessity to meet the daily errands and the office commute needs in a densely populated city. However, with an exception for a few cities in Asia, a two-wheeler is seen as the best choice for last-mile connectivity in the transport and logistics sector. As mentioned earlier, the automotive industry has a big share in the overall GDP of a country as it breeds several other industries such as the steel, aluminium, rubber, plastic, electronics and others. This is one sector that enjoys the most during an economic uptick and at the same time suffers the most during a negative macroeconomic outlook. Simply put, we observe high sales figures when the economy is doing well. Subsequently, we see a heavy rush in the public transport system when the economy is down. The Commercial vehicle segment is another indicator of the health of the market. More trucks are plying on the roads when everybody is doing good business and vice-versa. We can understand the past year’s performance of the Consumer Discretionary sector by studying the Indian two-wheeler segment.

The Indian two-wheeler industry is the biggest by volume in the world. The OEMs (Original Equipment Manufacturers) have a vast portfolio ranging from 80cc engines to 800cc engines. They also have high-end big-capacity motorcycles assembled in India. Of the lot, the 100cc to 200cc capacity two-wheelers are considered to cater to the commuter segment, essential for daily needs with frugal running costs at a pocket-friendly sticker price. These are the alternatives people choose over the jam-packed public transport system. Above 200cc till 300cc, we see premium commuter segments that cater to the office-going mass as well as to those who prefer a casual weekend ride around the hills or the beach. After 300cc is where the Indian two-wheeler market reserves its innovative top-class lot. This is the segment where most of the products are packed to the brim with best-in-class technology and accessories to deliver world-class performance and give the rider the feeling of luxury and premiumness. This is a characteristic of the South Asian two-wheeler market. This is the segment where the bikes are priced close to some of the entry-level family cars. That’s why, OEMs try to make their 300cc portfolio as premium as possible. In India, buyers need to be convinced that even though they are buying this bike due to their own discretionary choice, it needs to appear value for money in front of their family members. So, if a buyer is looking for a bike/scooter for the general commute to the office for a quick errand to the local shops, or even for the monthly grocery stock-ups, he/she would stop at the 200cc segment. This becomes the prime mode of transport for most of the middle-class people. 

Making the Premium Choice

The Indian 300cc-500cc segment is where most of the Indian OEMs have placed their flagship models. The fact that we have seen a majority of the new launches in this segment in the past 2 years, says a lot about the rising per capita income of the people of India. However, the sales charts carry a different story here.

In 2018, the sales of the motorcycles in the 300-500cc segment reported a decline. This was attributed to the new emission norms that were implemented by the Indian government which led to decreased demand for the older bikes and sluggish production. At the same time, the new bikes that adhered to the new emission standards came with a high asking price. This brought down the sales performance even further. The lack of stocks and the high selling prices continued to dissuade people from the 300-500cc segment in 2019. In the same period, we saw EVs catching the fancy of the masses across the nation. By the end of 2019, new models in the 300-500cc segment gained traction. With the beginning of the pandemic in 2020, most of the productions had either stopped or partially operational. Interestingly, it was during this period that we saw a rise in demand for low-budget cars that came at almost the same price as a high-end 500cc bike. It was the time when people became more considerate about their family’s safety. However, this did not deter some of the manufacturers from launching new models in the 300-500cc segment. They also brought updates to some of their older models to meet the new emission standards. This bore some fruit in 2021 when most of the people received vaccinations and people started venturing out of the government-imposed lockdowns. India saw a sharp rise for the 350cc segment bikes that were capable enough for long tours without being too demanding on the wallet. Since 2021 also witnessed a sharp rise in fuel prices, India saw an exodus of demand for environment-friendly electric two-wheelers for their household errands and daily office commutes. In 2022, the threats of massive layoffs and a looming depression in the market again brought down the demand for bikes in the 300-500cc segment. However, India maintained its strong exports for these segments with some of the newly launched models performing exceptionally well in the developed markets. 2023 proved to be a comeback for this segment. It seemed like people were holding their savings or amassing the capital to get their hands on the best value-for-money offers. The 300-500cc segment saw a 3.7 percent growth in total domestic sales. Incidentally, this was also the year when almost every Indian OEM had something fresh and innovative to offer in the segment. 

Even though this segment went through a huge devaluation during the dreaded COVID-19 pandemic period, it regained quite a bit in 2023. Unlike other sectors, every one of the new two-wheeler launches enjoyed healthy bookings at the time of the launch itself, in 2023. This also coincides with the fact that India showcased a sharp rise in its per capita income in 2023 while becoming one of the few Asian nations to post a 7+% GDP growth. The high inflation rate and the high fuel prices kept the demand for electric vehicles up. This shows that Indian consumers, like most Asian consumers, are very price-conscious and give great importance to value-for-money products and services. The premium two-wheeler segment saw a spike in its sales charts only after the macroeconomic conditions improved. Despite the high unemployment rate in India, a steady recovery of the rural economy pushed for a significant demand for sub-200cc vehicles.

2024 outlook

With several geopolitical tensions still rampant across the globe, very few countries seem to be making any positive strides in their overall financial conditions. Many exporting majors like India, China, Bangladesh, and Vietnam are deeply affected by the new skirmishes in the Red Sea. The European market is grappling with a new wave of price hikes and inflations due to these new tensions. 2024 is also the year of many new political changes with elections happening in some of the major economies. With such political ambiguity, experts believe that consumers could resort to lower-priced brands or value-based substitute products, especially in the FMCG, food and beverages and clothing sectors.

Blog by Ujal Nair

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