Consumption-Driven Investing

By Manas Rajaram & Katharine Hawthorne

Consumer spending accounts for 70% of US gross domestic product (GDP), and is clearly a driving force behind the US economy. It’s no surprise then, that the COVID-19 slowdown in consumer spending consequently triggered one of the largest recessions in US history. Brookings estimates that $3.3 trillion dollars of consumer spending were lost globally due to the pandemic, equivalent to the GDP of Germany and France combined.

As the US economy builds back, it’s notable that much of short-term economic growth has been spurred by consumer spending. In Q1 2021, consumer spending grew by 11.4%, leading to an overall GDP expansion of 6.4%, according to the US Bureau of Economic Analysis.

Globally, the consumer class consists of 4 billion people spending more than $11 a day, or $55 trillion a year. Today roughly half of the world remains in poverty, and is not well served by existing products and services. As more people join the middle class, the consumer class is expected to grow to 5 billion people by 2027.

While consumption is expected to expand, we are faced with the reality of limited resources on a finite planet. Companies can lead behavior change towards more inclusive and sustainable models of consumption, through designing for affordability, integrating zero waste practices, incentivizing “fewer and better” purchases, and building habits of reuse.

The Builders Fund takes a “consumption-driven” approach by listening to consumer spending, identifying secular trends, and investing in products and services that enhance sustainability, health, and inclusion. Builders’ portfolio companies PosiGen and MPOWERD provide inclusive clean energy products and services to low-income consumers. Traditional Medicinals, MIXT, and Urban Remedy offer sustainably-sourced, healthy food products, and promote inclusion through responsible labor practices. As the economy rebounds, we are faced with a prime opportunity to invest in trends such as climate solutions and regenerative food by partnering with businesses paving the way for more responsible models demanded by consumers.

The Sustainability-Minded Consumer

According to Nielsen surveys, 73% of global consumers said they would “definitely or probably” change their consumption habits to reduce their environmental impact, with strong Millennial interest anchoring the future of sustainable consumption in the US.

The sustainability-minded consumer is increasingly looking to spend at the intersection of what’s healthy for them, and what’s healthy for the planet, factoring in key purchasing criteria such as organic, sulfate-free, hormone-free, paraben-free, non-GMO, and beyond. 41% of consumers surveyed by Nielsen indicated that they would pay more for products containing organic or all-natural ingredients, and 38% would pay more for products that contain environmentally-friendly materials, such as recycled plastic.

The biggest question then becomes: given the many shifts in consumer behavior and spending during and after COVID-19, will these patterns continue to hold? Early indications suggest so — 93% of the 14,000 consumers surveyed across nine countries by IBM claim the pandemic influenced their views on sustainability. More than half of the respondents would be willing to pay more for environmentally sustainable brands, and also care about individual issues such as fresh water scarcity, pollution reduction, and addressing climate change.

Similarly, recent BCG survey results indicate 70% of participants were more aware now, than before COVID-19, that human activity threatens the climate. 40% intend to adopt more sustainable behavior in the future, such as buying local goods, decreasing household energy consumption, and composting. 87% said companies should integrate environmental concerns into their products, services, and operations more now than ever before.

Post-COVID Consumption Shifts

Survey data is just one part of the puzzle in understanding consumer behavior, and is often aspirational in nature. According to Harvard Business Review, 65% of surveyed participants said they want to buy sustainability-driven brands, and yet only 26% did. To better understand how and what the sustainable consumer is purchasing, we took a closer look at buying behavior in Fast-Moving Consumer Goods (FMCG) and beyond.

Food and Grocery: Organic products are up 21% as of April 2021. SPINS data shows conventional grocery products grew 6.3%, behind natural grocery products at 9.8% and health and wellness grocery products at 14.1%. Almost $1 of every $10 dollars is spent on natural products. Plant-based products are booming, growing 21% compared with average 9% annual growth for food and beverage.

Supplements: SPINS data shows natural supplements outperformed conventional through COVID-19. Products with immunity-boosting ingredients such as beta-glucans, vitamin D, zinc, and elderberry all saw over 90% year-on-year growth as of November 2020. Post-pandemic, consumers are expected to continue seeking natural supplements and ingredients that will boost immunity, lower stress, improve gut microbiome function, and broadly, follow a supplement routine complementing a “food as medicine” mindset.

Personal Care: Natural and organic soap products grew 47.2% compared with 16.2% in conventional. Hair care products with better-for-you ingredients outperformed conventional with a growth rate of 14.2% compared to -1.7% for traditional hair care products. Overall, consumer preference for non-toxic, clean, and naturally sourced ingredients is expected to continue expanding, driven by awareness of the environmental and human health impacts of personal and home care.

Fitness & Wellness: COVID-19 transformed the fitness industry from in-person to virtual, with MindBody reporting a 230% increase in virtual class attendance in mid-March 2020 as shelter-in-place orders went into effect. The pandemic highlighted the importance of mental health and mindfulness, and meditation app revenue increased 43% over 2019. While many consumers intend to return to in-person fitness eventually, the industry may not recover to pre-pandemic levels for several years, with hybrid fitness the new-normal.

Energy Usage: Americans overall spent $6 billion dollars more on at-home power consumption during COVID, nearly offsetting the decline in electricity consumption from business and industrial segments. Despite the pandemic, the US solar market installed a record 19.2 GWdc of solar capacity, a 43% increase over 2019, with residential deployment up 11%. In 2020, Solar accounted for 43% of all new electricity-generating capacity in the U.S., a trend likely to continue in 2021.

Travel and Commuting: Almost 70% of Americans surveyed worked from home during the pandemic; studies showed that Zoom meetings and video-conferencing technologies expend only 7% of energy or carbon required for an in-person meeting. Now aware of time savings, increased work flexibility, and emissions reductions, commuting may become less common for individuals, changing patterns of use for automobiles, air travel for business, and public transit.

Investing in the Sustainable Consumer

The pandemic reminded us of the value of a healthy ecosystem: carbon emissions dropped by 17% globally, lockdown-induced air pollution reductions are estimated to have saved 77,000 lives in China, and in the US, nitrogen dioxide levels dropped by 25.5%. However, current rates of American consumption would require the resources of approximately four planet Earths, demonstrating the imperative to decouple consumption from resource intensity.

At Builders, we believe in the power of the consumer economy, and invest in companies that build more sustainable, regenerative, circular consumer products for all. We do this in the hope that driving economic growth will not come at the expense of our planet; in fact, we believe the next frontier of consumer-driven investing will focus on creating solutions to our most pressing problem: climate change and its effects on our ecosystem, families, and communities.