Citi Hosted A Huge Conference On The Global Consumer, And This Is What They Learned

macy's, shopping

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The weak jobs report has again raised questions about the U.S. economy. And with a deepening slowdown in China and Europe’s debt crisis consumer spending, at least in developed economies, hasn’t completely recovered yet.Citi recently hosted its Global Consumer Conference in New York with 50 companies to identify key industry and company specific themes acress apparel and footwear, restaurants and leisure, food manufacturing etc.

Where do these companies see growth? What changes are they making in the current macro environment?

U.S. Apparel prices should be flat in the second half of the year

  • Price should be flat in the second half of 2012. Costs should decline significantly for cotton intensive players and could decrease further in 2013.
  • Carter's Inc the branded marketer of apparel for babies is focused on growing domestically and internationally by expanding its retail store, ecommerce. The OshKosh brand is expected to be the next point of growth for the brand.
  • Maidenform Brands has been gaining share of private label and are trying to shorten their supply chain to make replenishment quicker.
  • True Religion hired 2 new designers for its women's business and has changed the merchandise mix in Canada, Germany and the UK and the brand is seeing some traction.

Source: Citi

U.S. luxury apparel, footwear, and accessories are beginning to focus more on colour

  • New interest in accessories and apparel is being driven by colour. Accessory inventories at retail partners are well controlled.
  • In Europe, UK, France and Germany are holding up while Spain and Italy have been disappointing.
  • Fossil has room to incorporate more colour into handbag and watch assortments, and believe that a global jewelry platform is the right way to go. It is also reorienting stores to highlight colour.
  • Harry Winston's luxury division could see margin expansion from 4.6 per cent to anywhere between 15 - 20 per cent.

Source: Citi

American retailers that sell hardware, housewares and sporting goods think Europe has macro challenges but isn't as bad as it seems

  • While hardline companies acknowledge the difficult macro environment in Europe, they think the region isn't as bad as it seems. Companies like Foot Locker, Ralph Lauren, PVH are gaining share by taking away shelf space from competitors. 'The bottom line is companies with strong brands, strong balance sheets with strong relationships with the large retailers in Europe are well positioned to weather the storm in Europe and continue to grow.'
  • There is still strong consumer demand for the athletic category. Companies like Nike, Under Armour and Adidas have such a strong innovation pipeline they are holding back products right now.
  • Companies like Lowe's, Office Max, and Best Buy are trying to turn their businesses around but are struggling against competitors.

Note: Hardline refers to a store department or product line that primarily consists of hardware, housewares, automotive, electronics, sporting goods etc.

Source: Citi

Tobacco makers are focusing on the interest for next-generation tobacco products like dissolvables

  • Promotional spending eased a bit in May but the competitive landscape remains intense because of Altria's promotional support for Marlboro Black.
  • Interest for next-generation tobacco products has increased among U.S. consumers and trial for products like dissolvables and e-cigarettes has been high. Repeat use however has been varied.
  • Camel's shares were resilient to competitive pressure in the first quarter.
  • Reynolds American is willing to lose some volume to preserve profitability and is being 'disciplined from a pricing and promotion perspective'. It is also focusing more on next generation tobacco products.

Source: Citi

Growth in alcoholic beverages is being driven by female consumers and the pricing environment is still challenging

  • U.S. wine and distilled spirits are expected to post another year of low-to-mid single digit growth. In wine, newer brands that appeal to younger consumers continue to be a growth driver. Meanwhile, bourbon is the fastest growth category among U.S. distilled spirits driven by flavour innovation and the 'halo effect' it has on unflavored bourbon.
  • Since consumer spending in the U.S. hasn't recovered entirely pricing is challenging and manufacturers are looking at individual category/brands rather than category-wide pricing.
  • Growth in wine and distilled spirits is being driven by female consumers and sweeter products holder more appeal for younger consumers.

Source: Citi

U.S. restaurants and leisure companies are benefiting from improving consumer demand

  • Leisure companies are starting to see improving consumer demand trends. Moreover natural and organic companies are optimistic about the prospects for their industry because of their exposure to the high-end U.S. consumer.
  • Royal Caribbean Cruises said emerging markets including Australia, New Zealand and Brazil are key growth markets and the company is reducing capacity in Europe. Trends are deteriorating in Europe but strengthening slightly in North America.
  • Hain Celestial Group which manufactures and sells natural and organ products under various brand names said their category strength is driven by higher end consumer spending and long-term growth of organic food.
  • Meanwhile, SunOpta said China and Africa provide large growth opportunities given rising incomes and educated populations. They think Africa could be even bigger than China.
  • Ruth's Hospitality Group, a restaurant company focused on the upscale dining segment, says high-end dining in general has done better with rising consumer confidence. Impact of price increases won't be clear till next year but the company wants to stay price competitive.

Source: Citi

Packaged food manufacturers expect growth from emerging markets and grain processors are optimistic about their earnings prospects

  • Grain processors are optimistic about their earnings prospects. Corn products and Bunge are looking to emerging markets as growth areas. This is Citi's favourite area for investments within U.S. food with Bunge being their top pick in large cap good and Corn Products their top pick in small cap.
  • Packaged food manufacturers see difficulties ahead but do expect profit to improve as inflation eases.
  • Bunge sees growth in global grain demand driven by increasing GDP and living standards in the developing world. Their ability to run sugar milling operations at full capacity will also drive better profitability.
  • Among packaged food manufacturers, ConAgra has a three-pronged growth strategy which focuses on 'building strategic adjacencies to its core business', expanding internationally and developing more of a private label presence'. They are very cautious of the macro U.S. consumer environment.
  • Heinz expects most of its growth from emerging markets but the company is going to step up its marketing investments by $70 million in developed and developing countries.

Source: Citi

Household goods company Tupperware is trying to grow through innovation. Sodastream wants to grow its established markets

European beverage companies are concerned about their exposure to Brazil

  • Anheuser-Busch InBev (ABI), a Belgian-Brazilian multinational beverages company saw a bit of a slowdown in the U.S. and Brazil on account of weather. The weakness in the Brazilian real is causing some investor concern since 40 per cent of ABI's earnings (EBIT) comes from Brazil.
  • Diageo sees no change to declining trend in Western Europe. Trend hasn't changed in the U.S. where sales growth is being driven by their mix of products. The promotional environment continues to improve but the consumer environment stays fragile. They don't see any meaningful slowdown across emerging markets but are cautious about Brazil.

Source: Citi

Department stores are focusing on differentiating their products and in-store experience

  • Broadline and food and drug retailers are upbeat on the health of consumers and current spending trends despite economic uncertainty in Europe and the U.S..
  • Retailers are focusing on differentiating their products and the in-store experience to compete against online competitors.
  • Target expects Canada to be a meaningful contributor to EPS growth beginning in 2014. It is also gaining customer loyalty through its rewards programme.
  • Macy's has gained competitive advantage by helping stores get closer to the customer and react faster to changing consumer needs.
  • Family Dollar hopes to gain greater wallet share from its current customer base by providing an assortment of food and consumables. New categories like tobacco will also increase consumer visits and the company is testing beer and wine in 100 stores.

Note: Broadline retail refers to retailers that deal in high volume at the cheaper end of the product line

Source: Citi

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