What Is the Consumer Discretionary Sector?
The consumer discretionary sector comprises businesses that sell nonessential products and services that consumers may avoid without any major consequences to their well-being. Unlike consumer discretionary goods, consumer staples products, such as food, beverages, and tobacco, are goods that consumers tend to buy regardless of where the economy is in its business cycle.
Consumer confidence plays a central role in the consumer discretionary sector. The University of Michigan's consumer sentiment index provides a gauge of how optimistic U.S. consumers feel about the state of the U.S. economy and their expected spending habits. Other things that contribute to improvement in consumer spending power, such as higher wages or decreases in prices of other goods, can also improve economic prospects for the consumer discretionary sector. The sector is also facing secular trends that create headwinds, including a continued shift to online shopping and consumers' pursuit of healthier lifestyles.
- Consumer discretionary refers to those household goods that are consumed more so as to wants than needs.
- Demand for these goods tends to rise when the economy is strong, while people cut back on discretionary spending when the economy falters.
- Cars, household appliances, specialty items, luxury, and leisure are all considered part of the consumer discretionary sector.
How the Consumer Discretionary Sector Works
The demand for consumer discretionary goods is typically much more elastic in comparison to consumer staples goods. This elastic demand means that it can plummet very quickly in response to decreases in consumers' incomes or increases in prices of consumer discretionary goods. The sector includes numerous companies operating in various industries, including retail, media, restaurants, consumer durables, and apparel.
Auto Components Industry
The auto components industry consists of companies that supply various auto parts used in the manufacture, repair, and maintenance of cars, including airbags, transmission systems, car seats, electrical circuits, and exhaust systems. The industry is highly competitive and consists of numerous companies of different sizes.
The car manufacturing industry is cyclical, and therefore this creates a fluctuating demand for auto parts, resulting in high volatility in the industry's profitability. On top of that, many auto part manufacturers face cost variability due to changing prices of raw materials, such as copper and steel. One of the largest players in the auto part industry is Johnson Controls Inc. (JCI), which has a dominant position in the car seating, automotive interior, and auto batteries markets.
The automobile industry designs, produces, and markets cars, trucks, buses, and other types of vehicles. The industry is one of the most capital-intensive, as it requires billions of dollars to build plants and acquire technology. Because the demand for cars is highly sensitive to economic cycles, the automobile industry's profitability margins can show high degrees of volatility, as many of its expenses remain fixed throughout the business cycle. The largest global car manufacturers are Toyota Motor Corporation (TM) and Volkswagen (VOW3).
The distributor industry consists of companies that operate various channels for the distribution of a wide range of products and services, including consumer equipment products, apparel, replacement parts, wholesale consumer electronics, and food. Companies within the industry typically import or buy goods from manufacturers and then resell them through their own networks of dealers and distributors. However, certain distributing companies may have their own manufacturing facilities.
One example of a company in the distributor industry is LKQ Corporation (LKQ), which is a distributor of vehicle replacement parts and components used in car repair and maintenance.
Diversified Consumer Services
The diversified consumer services industry includes companies that provide services, such as education, home security, legal advice, interior design, and consumer auctions. These companies typically provide specialized services that are not classified elsewhere. Examples of diversified consumer services companies include H&R Block, Inc. (HRB) and Graham Holdings Company (GHC).
H&R Block provides tax preparation, tax advice, and planning services, while Graham Holdings is a diversified education and media company with well-known brands such as Kaplan, Inc. and The Slate Group.
Hotels, Restaurants, and Leisure
The hotels, restaurants, and leisure industry comprises companies that operate hotels, fast food restaurants, resorts, casinos, and cruises. Many companies within the industry do not own their real estate properties, but they act as operating companies and sign lease agreements. Also, many hotels and restaurants pursue franchise business models rather than owning and operating restaurants themselves.
Examples of restaurant, hotel, and leisure companies include McDonald's Corporation (MCD) and Carnival Corporation (CCL), a cruise vacation company.
The household durables industry manufactures products that cannot be consumed immediately and are bought only infrequently. Examples of household durable goods include lawn and garden equipment, home and office furnishings, appliances, photographic equipment, and sporting goods.
An example of a household durables company is Tempur Sealy International, Inc. (TPX), which is a manufacturer and distributor of bedding products.
Internet and Catalog Retail
The internet and catalog retail have been among the most rapid growth industries within the consumer discretionary sector, as consumers shifted to purchasing goods online. The industry includes companies that operate online marketplaces or their own online stores that sell a wide variety of consumer products.
Amazon.com, Inc. (AMZN) is a dominant player in this industry with billions of annual sales.
The leisure products industry consists of companies that cater to consumers' leisure activities, such as sports, toys, and various outdoor activities. Leisure goods include various camping equipment, toys, all-terrain vehicles, and golf carts.
Examples of leisure products companies include Mattel, Inc. (MAT) and Callaway Golf Company (ELY).
The media industry provides various entertainment content for consumers, including movies, TV programming, newspapers, magazines, and radio. One of the biggest players in the media market is The Walt Disney Company (DIS).
The multiline retail industry includes operators of department stores and other stores that sell general merchandise, such as hypermarkets and large-scale supercenters.
A typical example of a multiline retailer is Macy's Inc. (M), which operates Macy's, Bloomingdale's, and Bluemercury stores and websites.
The specialty retail industry includes retail companies that specialize in selling specific categories of goods to consumers, such as apparel, electronics, home improvement, automotive retail, and home furnishings.
Examples of specialty retail companies include The Home Depot, Inc. (HD) and Best Buy Company, Inc. (BBY).
Textile, Apparel and Luxury Goods
The textiles, apparel, and luxury goods industry includes manufacturers of apparel merchandise, footwear, and a wide variety of accessories, such as handbags, eyewear, and travel-related goods. Examples of companies operating in this industry include Under Armour, Inc. (UA) and Coach, Inc. (COH).