I’ve just returned from visiting Yosemite and Lake Tahoe for the first time.  Both places add a new dimension to the word awesome.  One night, I also had a very interesting conversation with our Airbnb host, who pointed out that almost all of his business came from the over-55 age group, a group that is generally neglected in the hospitality business: “We wouldn’t make a living without them” was his summary. And he was amazed that so many businesses still focused on the 25-54 age group to drive their revenues and profits.

The conversation was a living example of the  argument I made in my blog post last month, when  I suggested that the supply-driven models that served us so well during the Baby-Boomer-led Supercycle (when the U.S. economy suffered just 16 months of recession between 1983 and 2007) are now well past their sell-by date.  Economic growth is decelerating under the influence of today’s ageing populations.  Common sense tells us that older people already own most of what they need, and their incomes decline as they approach retirement.  New business models are needed if the chemical and pharma industries are to continue to grow revenues and profit in the future.

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As I found on my travels, we have to forget the conventional view that those under the age of 55 are the only demographic that matters when it comes to consumer markets.  This concept made sense when life expectancy was close to retirement age, but it makes no sense at all today.  Latest data from Social Security shows the average 65 year-old male can now expect to live to age 84, and a woman till age 87.

The key issue, as the chart above highlights (based on Bureau of Labor Statistics data), is that household spending patterns change quite dramatically with age:

  • The under-25s have least money, with many dependent on their parents for accommodation, and for financial support through college
  • Between 25 -34, spending increases by nearly 60% as people’s careers develop and they begin to settle down and set up home
  • Between 35 – 44, spending increases a further 25%, as family needs develop, particularly for those with children, whilst their incomes continue to rise
  • Spending then peaks between the ages of 45 - 54, when it is double the spend of the under-25s as family needs and incomes peak
  • Between 55 – 64, spending drops by 16% as children leave home and needs reduce, as people own most of what they need and prepare for retirement
  • After 65, spending is 25% below peak levels, as people move into retirement
  • At 75 and over, spending is almost back to the level of the under-25s

Another critical factor, of course, is that people’s needs change quite dramatically as they get older. The ageing of the Baby Boomers has meant that U.S. housing markets, for example, have seen a reversal of their Supercycle demand patterns.  Large McMansion-size single family homes in the suburbs are no longer the growth area. Instead, apartment-living in city centers is coming back into fashion, as the Boomers prefer to drive less and to be closer to shops, friends and medical services.

In turn, this change is impacting driving habits, with latest Department of Transport data showing average vehicle miles driven per adult have fallen by 6% to 12500 miles/year since the 2004 peak.  And, of course, the decline in spending power with age highlights the need for companies to think in terms of affordability rather than always focusing on opportunities for premium pricing.

Increasing life expectancy is one of humanity’s great triumphs.  If it means lower, or even negative economic growth, then I can’t imagine many of us would worry too much about the trade-off involved.  But it does mean that our business models need to adapt to this New Normal world.  We have to recognise that success will come from developing products that match demand, rather than only focusing on supply.  In simple terms, one-size no longer fits all.

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Paul Hodges is chairman of International eChem (www.iec.eu.com), trusted advisers to the chemical industry and its investment community. He is a member of the World Economic Forum’s Industrial Council on chemicals, advanced materials and biotechnology, and presents the ACS ‘Chemistry & the Economy’ webinars.

 

Paul's biannual ACS Webinar on chemistry and the economy will be held on Thursday, July 21, at 2 PM ET. Join us for Chemistry and the Economy: The Brexit, Challenges of Over-Supply and the End of Bank Stimulus.https://www.acs.org/content/acs/en/acs-webinars/business-entrepreneurship/hodges -2016.htmlPaul Hodges and Bill Carroll, another Industry Voices contributor, will share how the Brexit, oversupply and the demand in emerging markets are shaping the economy for chemists.