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The rise of the experience economy

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In recent years, consumers have been devoting more of their spare cash to having fun, providing a boost to companies in the ‘experience economy’. Can the party continue?

Click to toggle accordion What you'll learn:

About the trend to spend on experiences rather than things

The growth in the leisure sector

How investors can access this theme

Earlier this year, the chief executive of clothing retailer Next blamed poor sales figures on a generational shift by British shoppers. He warned shareholders that customers were moving away from buying ‘things’, and instead were spending more of their money on ‘experiences’.1

Consumer spending on leisure activities in the UK, from eating out to live events and holidays has grown steadily in recent years. The leisure sector doubled in size between 2011 and 2016 and contributed about £200bn to the UK economy last year.2 Spending on gym memberships jumped by 44% in 2015 alone.3

This trend has continued recently. In the final three months of last year, spending in restaurants, pubs, and entertainment venues, such as cinemas and concert venues, rose by 11%, 10% and 8% respectively year-on-year. Over the same period, spending on food and clothing dipped.4

It isn’t just confined to the UK. Since 1987, the share of consumer spending on live experiences relative to total US consumer spending has increased 70%.5

In the short term, companies in the UK that are dependent on consumer spending could be buffeted by rising inflation and the impact of Brexit, although this could be offset by increased tourism. Over the longer-term, however, the shift towards spending on experiences could continue to provide support for Britain’s leisure sector.

The growth in leisure

Britons have been spending more of their money in restaurants and cafes, one of the biggest areas of spending in the ‘experience economy’. There are now 17,000 coffee shops in the UK, up from 7,000 in 2010.6 Costa, the largest coffee chain in the UK, which is owned by hospitality group Whitbread, has more than 1,500 locations.

In London, people eat out more than twice a week on average,7 and across the country, spending in restaurants and hotels is at its highest level in five years.

But consumers aren’t just eating out more. Last year was the highest-ever grossing year for cinemas in the UK and Ireland, taking £1.33bn in box office revenues.8 Cineworld, the FTSE 250-listed cinema chain, sold more than 100m tickets, the first time it has achieved this milestone.9

Meanwhile, an estimated 1,000 festivals, ranging from music and literary to beer and food promotions, took place last year, six times as many as 12 years ago.10 Holiday spending has also risen sharply, with more people taking trips for fun. Three-quarters of holidaymakers planned to take two or more trips in 2016.11

In previous years, low inflation, low interest rates and steady economic growth have given consumers the confidence to use more of their discretionary spending for activities in the experience economy, from holidays to eating out.12 But there has also been a trend towards consumers valuing new activities in general, particularly among millennials.

A survey in late 2014 found that two-thirds of 18-34 year-olds feel more fulfilled by experiencing something than purchasing an item of the same value. Almost 75% agreed that a fear of missing out’ (FOMO) – partly fuelled by experiences being shared on social media – prompted them to seek out activities that were out of the ordinary.13

Bumpy times ahead?

In the immediate wake of the EU referendum, consumer spending in the UK held up well, although it has been showing a drop recently.14 But the dramatic fall in the pound against other major currencies has pushed up import costs, fuelling inflation, slowing economic growth and knocking consumer confidence.

Inflation reached 2.9% in May, the highest level in four years. What’s more, as wage growth starts to slow, consumers’ confidence in their disposable income has fallen to its lowest level in more than two years.15 The UK economy grew by only 0.3% in the first three months of this year, below expectations.

However, the leisure sector could benefit from another consequence of the weaker pound, in the form of increased tourism. A recent survey found that 63% of international tourists claim to be more interested in visiting the UK than in previous years. The main reason given was the weak pound following Brexit.16

Britons may also be more likely to opt for ‘staycations’. Nearly four in ten Britons taking a holiday in the UK cited the weaker pound as the reason they didn’t go abroad. And 39% said a domestic holiday represents better value for money in 2017, which bodes well for UK hotels and holiday operators. Center Parcs, the holiday parks business owned by Brookfield, hit 97.7% occupancy rate in the 2015/2016 financial year, its highest-ever level.17

How Barclays could help

The short-term impact of rising inflation could prove to be challenging for companies in the UK leisure sector. However, the generational shift towards paying more for experiences, eating out and holidays could present an opportunity for investors.

One way to gain exposure to the theme is through a fund such as Newton UK Opportunities (ISIN: GB00B8HQWK01). It holds catering giant Compass, and National Express Group, the bus and train company, in its top 10 holdings.

Investors could also gain exposure to the theme with an exchange-traded fund covering the listed pan-European travel and leisure sector. The iShares STOXX Europe 600 Travel & leisure UCITS ETF has 69% of its holdings devoted to UK stocks. Its top-five holdings include Compass and Ryanair, the low-cost airline.

While investing in funds is less risky than opting for individual shares, bear in mind that you could still lose money. All investments can fall as well as rise and you may get back less than you invested.

Our referring to these investments does not constitute advice or a personal recommendation to invest in these or any other investment. You can find a wide range of investments on the Barclays Stockbrokers Funds Market.

We do not provide investment advice. If you’re unsure whether an investment is right for you, you should seek independent advice. If you already have an account with us, please log in. If not, you can find out more about the accounts we offer by visiting our website.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

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