Oxstones Investment Club™The kids of Generation Z are about to become the planet’s biggest consumer spending force. That portends many opportunities in the globe’s two largest economies, the U.S. and China. But retailers and brands in many developed nations with less robust economies aren’t cheering. That’s because their Gen Z youth have grown up in the shadow of financial crises and economic recessions, leaving them indelibly marked by frugality.
Surveys show that unlike millennials, many members of Generation Z are cautious about excessive consumption. After seeing their parents walloped by the 2008 financial crisis, they’re attracted to thrift stores, sustainable brands, and saving for a rainy day — even when they have steady jobs and rising wages. That’s particularly true in Europe and Japan, where growth has failed to bounce back as it has in the U.S. and China. Those Gen Zers, born in the mid-1990s or later, are part of a generation that’s entering the workforce with a far more cautious approach to spending than their predecessors.
“They’ve seen so much uncertainty that it’s their normal, and [it] has made them much more realistic and practical about spending and saving,” says Jason Dorsey, president of the Center for Generational Kinetics, a consulting firm. “So they created their own version of what spending should be according to the circumstances that existed when their spending habits were formed.”
Nowhere is that more apparent than in Japan. The island nation has had five technical recessions in the past 20 years, transforming its young people from consumption-driving spenders to one of the most tightfisted of all local age groups. In 1984 consumers younger than 25 would spend 88.7¢ of every extra dollar they made, more than the national average of 86.2¢. By 2014 the figure for Gen Z consumers had shrunk to 76.8¢, less than the national average of 78.4¢, according to a white paper issued by the Japanese cabinet office in 2017.
This mindset endures in the face of relatively rosy economic conditions and wage growth. Japanese Gen Zers are highly sought after by employers in the tightest labor market in decades, and big companies such as Uniqlo owner Fast Retailing Co. are raising entry-level pay next year by more than 20 percent to attract top talent. “Truthfully, I feel I don’t know how to spend money,” says Kaoruko Shimizu, 23, who’s been working for a year at a big pharmaceutical company. “If I go shopping, it’s just to buy necessities.”
In Western Europe, the average annual income of about $30,000 for people age 20 to 24 is almost three times as high as that in China, but European youth are less willing to take loans to cover expenses than their Chinese peers are, according to Lan Ha, population senior consultant at researcher Euromonitor International. One reason: The jobs outlook for European Gen Zers remains far more dire. Last year youth unemployment in Western Europe was 16.4 percent, compared with 10.1 percent in China and 4 percent in Japan.
© Photographer: Ryan Lowry for Bloomberg Businessweek
That poses a big challenge for consumer businesses hoping to profit from the rise of Gen Z. From beer to cosmetics, brands are realizing that the days when rising incomes alone could be counted on to produce bigger revenue are over. This new generation will have to be coaxed to spend. Companies increasingly say “value” is key to Generation Zers. That means providing not only lower price points but also more customized and sustainable experiences for their buck. They’re also turning their backs on some of their parents’ habits that brands used to be able to rely on.
In Japan, for example, today’s youngest workers are less likely to go out drinking with colleagues at restaurants, a custom that was almost mandatory in the past, causing beer sales volume to fall. While the percentage of young people who drink is still high, they need to be sold on drinking beer, says Kenichi Shiozawa, president of Asahi Group Holdings’ main alcoholic beverages unit. “We need to come up with new products that fit their taste or have some flair to appeal to them,” he says. So the company is experimenting with selling a less bitter version of its flagship Super Dry beer to bars, bypassing the restaurants where Gen Zers are now unlikely to linger. It’s also added new labels to the bar-focused bottlings. “If it’s not cool, they won’t drink it,” Shiozawa says.
Style at a lower price is increasingly a rallying cry for products aimed at Gen Z. Last year, Cartier owner Richemont introduced Baume, an affordable sub-brand of watches that focuses on using recycled materials to make timepieces customized to the purchaser’s taste and sold online. Fast Retailing is focusing more on its fashion-forward—and cheaper—Gu brand, which appeals to younger customers.
It’s not just what’s on sale that matters. “Gen Z is a little different from former generations, as they’re looking at the companies, not just the products, to start with,” says Masahiko Uotani, chief executive officer of Shiseido Co. “They’re asking, ‘Are they really delivering value to the society, are they transparent, are they promoting diversity and inclusion?’”
Frugal Gen Zers are attracted to sustainability. That’s one reason startups focused on resale and sharing services have hit pay dirt. Japan’s Mercari Inc., a flea market app connecting consumers to sellers of used items, has 11 million active users, half of them in their teens and 20s, according to a 2018 survey. One of only two unicorns the country has produced, the company went public last year in an initial offering that valued it at about $4 billion. And Italy’s Depop, a resale app where items cost an average £30 ($39), saw sales soar 85 percent in 2018 as it gained popularity in the U.K. and U.S. More than three-quarters of its users are under 24.
That willingness to recycle clothing is something Europe’s Gen Zers have in common with their U.S. counterparts, and it could become a long-term worry for apparel makers. In the U.S., 1 in 3 Gen Z consumers will buy used clothing this year, compared with 1 in 5 boomers or Gen X consumers, according to a report from fashion resale company Thredup. Secondhand apparel is on track to become bigger than fast fashion within a decade, it said.
Just ask Tharani Cortesi, a 21-year-old office clerk in Zurich, who says she’d never buy clothes at the Tommy Hilfiger or Louis Vuitton boutiques on the city’s high-end Bahnhofstrasse. “If I want to wear those brands, I’ll get them at secondhand shops,” she says. “You can find a great Lacoste sweater for about 20 francs, so one can wear luxury brands for little money.”
—With Corinne Gretler and Shiho Takezawa
Tags: consumer business, financial crisis, Frugality, Gen Z, recycle clothing, secondhand apparel, spending habits, sustainability, sustainable brands, thrift stores