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These brands are well positioned for the millennial, Gen Z wealth boom: TD Cowen

Premium brands competing over the growing purchasing power of Gen Z and millennial consumers could have a lot to gain.

Gen Z and millennials wield nearly $165 billion in purchasing power, and their spending is expected to boom as the two cohorts inherit an estimated $60 trillion of wealth by 2050, according to research by TD Cowen.

"As these cohorts, who have grown up in the digital age, grow older and experience rising income, along with the potential for substantial wealth inheritance," the TD Cowen analysts wrote, "consumption patterns of these cohorts could lead to profound shifts in the retail, e-commerce, restaurants, food & beverage, hotel and travel industries, rendering them a critical demographic for investor focus across consumer and tech verticals."

Cowen's survey of Gen Z and millennial consumers found younger consumers have distinct buying habits and preferences. The demographics, which span the ages of 13-42, are more likely to use direct-to-consumer, social commerce, and digital channels while also seeking authentic brand interactions.

The survey also found that value was a priority for Gen Z and millennial consumers, as inflation and a higher cost of living weigh on their spending decisions. According to the New York Fed, millennials experienced the largest surge in credit card delinquency rates.

“They feel fairly uncomfortable from a financial perspective,” TD Cowen analyst John Kernan told Yahoo Finance Live in October. “They expect to cut spend further into 2024, based on the survey data. So value and price [are] very important to them.”

Despite potentially weaker spending in the near term, TD Cowen highlighted several stocks poised to outperform amid the burgeoning wealth shift. From e-commerce giant Amazon (AMZN) to emerging brands such as Deckers (DECK), here are a few of the stocks with “durable growth and stronger competitive positions amidst broader disruptive forces.”

The most durable names in retail

The research team at TD Cowen noted growth potential in several retail stocks, including athletic apparel names such as Nike (NKE), Lululemon (LULU), and Hoka sneakers maker Deckers.

Nike and Lululemon saw new highs in brand preference among millennials and Gen Z-ers. At the same time, disruptive growth companies such as Deckers and On Holdings (ONON) emerged as rising brands.

Another apparel company proving to be disruptive is fast-fashion clothing brand Shein, which soon may become another stock play for social commerce and Gen Z consumer trends.

In November, the China-based company filed to go public in the US, seeking a valuation of $90 billion, according to Bloomberg. At this valuation, Shein would be the biggest IPO for a company founded in China since Alibaba went public in the US a decade ago.

According to the analysts at TD Cowen, "Shein leads again among brand preference when shopping for fashion apparel" among adults age 18-24, "and the direct retailer also takes the top spot again in 2023 for 'going out' dressing among Gen Z at 33%."

The analysts also pointed to younger consumers' growing preference for off-price retailers. Other retail plays catering to the value-focused consumer include T.J. Maxx owner TJX Companies (TJX) and Ross Stores (ROST).

"The broader consumer is overloaded with choice and stimulation across all categories," the analysts wrote. "The most durable companies will be those with pricing power that is driven by innovation, product engineering, and effective marketing."

Black Friday shoppers walk around Woodfield Mall in Schaumburg, Illinois, on Friday, Nov. 24, 2023. (Trent Sprague/Chicago Tribune/Tribune News Service via Getty Images)
Black Friday shoppers walk around Woodfield Mall in Schaumburg, Illinois, on Friday, Nov. 24, 2023. (Trent Sprague/Chicago Tribune/Tribune News Service via Getty Images) (Chicago Tribune via Getty Images)

Internet stocks well positioned as smartphone usage rises

Tech giants like Amazon, Alphabet (GOOGL, GOOG), and Meta (META) are positioned to continue to dominate.

Amazon was once again "the most frequently used channel to begin a product search as well as the most likely place for a consumer to complete the purchase of a new clothing item,” John Blackledge, internet analyst at TD Cowen, wrote. "However, Google Search saw an uptick in relevance along the consumer’s path to purchase this year, which we view as a positive for long-term shopping trends on Google Search."

Meanwhile, Blackledge highlighted Instagram-parent Meta and TikTok as "the clear leaders" in social commerce over the next five to 10 years.

These platforms have further amplified social commerce’s structural gains. According to the survey, 18- to 35-year-old consumers spend on average four to eight hours per day on their cell phones, with one-fifth of that cohort spending eight to over 10 hours a day on their devices.

"The influence they [Instagram and TikTok] have on younger generations' spending patterns and preferences is enormous," Kernan told Yahoo Finance Live. "I think what's manifesting itself further is that ... barriers to enter have come down, and the amount of time that younger consumers spend on their cell phones is truly astounding."

Restaurants catering to Gen Z, millennial preferences

Chipotle Mexican Grill (CMG), Constellation Brands (STZ), and Domino's Pizza (DPZ) are also beneficiaries of Gen Z and millennial preferences.

TD Cowen restaurants analyst Andrew Charles, who has an Outperform rating on Chipotle stock, noted that younger consumers are seeking greater transparency about where their food comes from, which is something Chipotle emphasizes.

Mehmet Aytekin, 28, left, checks his cell phone while waiting to board his United Airlines flight to Newark, N.J. at O'Hare International Airport on Jan. 3, 2020.
Mehmet Aytekin, 28, left, checks his cell phone while waiting to board his United Airlines flight to Newark, N.J., at O'Hare International Airport on Jan. 3, 2020. (Antonio Perez/Chicago Tribune/Tribune News Service via Getty Images) (Chicago Tribune via Getty Images)

"As millennials and Gen Z enter their prime years of purchasing power, we note that younger consumers are 6.6 percentage points more likely to view food transparency (aka 'what’s in my food?') as important or very important in making a restaurant decision," Charles wrote.

Charles added that younger consumers are nearly twice as likely to use third-party delivery services, such as Uber Eats (UBER), DoorDash (DASH), and GrubHub. Domino's partnership with Uber Eats, along with its value perception, make it another stock well positioned within its vertical.

Domino's Pizza's "80%+ digital mix has room to move higher with the upcoming partnership with Uber that will allow the brand to grow relevance with both younger and more affluent consumers," Charles wrote. "This will be complemented by orders placed on Domino’s app & website via an ecommerce refresh & a loyalty program revamp."

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