EQUITY RESEARCH DEPARTMENT CONSUMER DISCRETIONARY EQUITY RESEARCH DEPARTMENT CONSUMER DISCRETIONARY

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  • EQUITY RESEARCH DEPARTMENT

    CONSUMER DISCRETIONARY INDUSTRY

  • EQUITY RESEARCH DEPARTMENT

    CONSUMER DISCRETIONARY INDUSTRY

    CONSUMER DISCRETIONARY INDUSTRY

    EQUITY RESEARCH

    RESEARCH ANALYSTS Hikmet Coskun

    Kyle Looi Jie Yong

    Claudia Claire Tan

  • EQUITY RESEARCH DEPARTMENT

    CONSUMER DISCRETIONARY INDUSTRY

    Contents Page Executive Summary: Consumer Discretionary Industry 1

    Industry Overview 1

    Retailing Industry 1

    Automobiles & Components Industry 3

    Demand and Supply Analysis 3

    Retailing Industry 3

    Demand Analysis 4

    Supply Analysis 5

    Automobile & Components 6

    Demand Analysis 6

    Supply Analysis 8

    Products Analysis 10

    Retailing Industry 10

    Retailing Products 10

    Market Dynamics 11

    Barriers to Entry 11

    Shifting of Demand 12

    Automobiles & Components Industry 12

    Automobiles Products 13

    Market Dynamics 13

    Barriers to Entry 13

    Shifting of Demand 13

    Components Products 15

    Market Dynamics 15

    Barriers to Entry 15

    Shifting of Demand 16

    Key Drivers 16

    Retailing Industry 16

    Overview 16

    Short Run Drivers: ‘Patience’ stance in interest rate hikes 16

    Short Run Drivers: US-China Trade war truce 16

  • EQUITY RESEARCH DEPARTMENT

    CONSUMER DISCRETIONARY INDUSTRY

    Long Run Drivers: Increase in e-commerce and m-commerce penetration 17

    Automobiles 17

    Overview 17

    Short Run Drivers: Millennials growing up 17

    Short Run Drivers: Trade war truce 17

    Long Run Drivers: Partnerships between manufacturers 18

    Long Run Drivers: Autonomous vehicles and ridesharing 18

    Components 19

    Overview 19

    Short Run Drivers: Tariffs’ suspension in China 19

    Long Run Drivers: Increasing number of old vehicles 19

    Long Run Drivers: Rising complexity of auto parts 19

    Case Study – LVMH Moet Hennessy Louis Vuitton SE (EPA: MC) 21

    Company Description 21

    Key Financials 24

    Investment Thesis 24

    LVMH Strategy for Luxury Experiences 24

    LVMH Pioneers Untapped Super-Luxury Smartwatch Market 25

    Luxury E-Commerce Has Room to Grow 25

    References 27

  • EQUITY RESEARCH DEPARTMENT

    CONSUMER DISCRETIONARY INDUSTRY

    1

    Executive Summary: Consumer Discretionary Industry

    Industry Overview

    The consumer discretionary industry encompasses various types of companies, ranging from

    automobiles to retailing. These companies create products and services which are generally

    non-essential by consumers but desirable if their available income is sufficient to purchase.

    Hence, consumer discretionary products and services are generally more sensitive to

    economic cycles and business cycles. This industry can be broken down into smaller sub-

    industries, namely Automobiles & Components, Consumer Durables & Apparel, Consumer

    Services, and Retailing. Market concentration in these industries are low as there are many

    substitutes available, hence companies have to compete and entice consumers to choose

    their brands over competitors’. As a result, product differentiation, good marketing and

    branding is imperative to a company’s success.

    Retailing Industry

    The retailing market is a subsector under the Consumer Discretionary Industry and it involves

    both softline and hardline. Softline merchandise includes apparel or linens (sheets) products

    unlike hardline merchandise which include hardware, housewares, electronics.

    Figure 1: Total retail sales worldwide from 2015 to 2020 (in trillion U.S. dollars) (Source: Statista)

  • EQUITY RESEARCH DEPARTMENT

    CONSUMER DISCRETIONARY INDUSTRY

    2

    In general, based on Statista, total retail sales worldwide in 2019 is expected to hit USD$27.73

    trillion. Walmart remained largest retailer competitor with USD$374.80 billion, followed by

    The Kroger Co. with USD$115.89 billion and Amazon with USD$102.96 billion in 2017.

    Currently, internet retailers are dominating the top five largest retailers after JD’s entry to the

    5th spot. Based on Deloitte’s Global Powers of Retailing 2018 report, the global retail sector

    grew at CAGR of 4.8% over the past 5 years till 2016.

    Figure 2: Retail m-commerce sales worldwide, 2016-2021 (Source: eMarketer.com)

    The current retail standards have been disrupted with technological advances - shoppers now

    participate greatly in online shopping and are demanding for better shopping experiences.

    Based on eMarketer.com, retail e-commerce sales worldwide increased by 24.8% YoY to hit

    USD$2.3 trillion in 2017. Mobile e-commerce (m-commerce) was a key factor as it accounted

    for 58.9% of digital sales.

    In addition, industry disruptors such as Amazon and JD.com are growing rapidly, with

    Amazon’s sales revenue rising from #157 globally in 2001 to #3 in 2016 at a CAGR of 17.6%.

    Hence, intense competition from online retailers are forcing brands with traditional brick and

    mortar stores to look into experiential retailing and multi-channel to build loyal followers

    through well-thought concept stores.

  • EQUITY RESEARCH DEPARTMENT

    CONSUMER DISCRETIONARY INDUSTRY

    3

    Automobiles & Components Industry

    Global sales of passenger cars are forecasted to hit 82 million vehicles in 2019. Along with

    China, the United States is counted among the largest automobile markets worldwide, both

    in terms of production and sales. About 6.1 million passenger cars were sold to U.S. customers

    in 2017, and around four million cars were produced here in the same year. The United States

    became a key automotive market in the early 1900s, when Ford introduced assembly line car

    production to mass-manufacture its Model T. Today, the Ford Motor Company still ranks

    among the leading manufacturers of passenger cars, its most popular passenger car model

    currently being the Ford Focus, which was also one of 2016’s best-selling light vehicles

    worldwide. In terms of revenue, Toyota, Volkswagen, and Daimler topped the list of major

    automobile makers in 2016, while the automotive supplier industry was dominated by Bosch,

    Continental, Denso and Magna.

    Prompted by global initiatives, such as the Paris Agreement, several countries around the

    globe are enacting stricter emissions controls on new vehicle models. As such, automakers

    are beginning to expand their business into the electric mobility sector. Germany is expected

    to lead the way with projected electric car production to reach some 1.3 million units by 2021.

    Over the next decade, Internet-connected car technologies and autonomous vehicles are set

    to stir up yet another revolution in the automotive sector. In 2016, some 40 percent of U.S.

    respondents stated that they were willing to use fully autonomous vehicles, presumably

    because they consider autonomous vehicles to be safer than conventional cars. The global

    market for autonomous driving hardware components is expected to grow from 400 million

    U.S. dollars in 2015 to 40 billion U.S. dollars in 2030.

    Demand and Supply Analysis

    Retailing Industry

  • EQUITY RESEARCH DEPARTMENT

    CONSUMER DISCRETIONARY INDUSTRY

    4

    Demand Analysis

    Globally, we can expect the retail market to grow steadily, bringing in USD$26.29 trillion in

    2019 from USD$24.86 trillion. E-Commerce is set to be the fastest growth channel for global

    retail till 2022, according to Euromonitor. Online retailing of food and drinks is also expected

    to grow the fastest at 80%.

    We expect high e-commerce growth specifically in APAC and China markets, where rising

    affluence in the middle class and higher mobile penetration are changing consumption habits.

    Tourism will be the top online spending segment for China and slightly more developed APAC

    markets such as Indonesia, Singapore and Malaysia. Digital travel sales is set to rise across all

    markets through 2020, despite global uncertainty with US-China trade dispute and the falling

    equities market. With 2/3 of global middle class in APAC and China’s middle class to reach 1

    billion by 2030, online retail and digital tourism spending is poised to increase in the medium

    to long term. In addition, there is an increasing shift from offline to online retailing, with

    fashion and accessories doing well in developed and developing markets.

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    CONSUMER DISCRETIONARY INDUSTRY

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    Figure 3: M-commerce growth from 2016 to 2021 (Source: eMarketer, Statista)

    Based on eMarketer.com, the growth in e-commerce was largely influenced by Asia-Pacific

    where 14.6% of overall retail spending went toward e-commerce, unlike Central and Eastern

    Europe where e-commerce accounted for less than 5% of retail sales. Global m-commerce

    sales increased by 40.3% last year to USD$1.36 trillion which amounts to 6.0% of