Consumer Discretionary

What is Consumer Discretionary?

Consumer discretionary refers to goods and services mostly acquired using discretionary income as they are optional in people’s lives such as designer clothes or luxury cars. Unlike food and medicines, discretionary products or services are not essential for survival.

Key Takeaways
  • Consumer discretionary represents the category of goods and services that are not vital for a person’s life. As such, their demand moves in line with economic conditions and the availability of discretionary income with the consumer.
  • These goods are counterparts of consumer staples, representing goods and services that people regularly need for healthy survival.
  • Some predominant sectors that flourish with growing discretionary income are automobile, hospitality, retail and entertainment among others. When these sectors are well-performing, economy is said to be expanding. It pushes many businesses to focus more on luxurious products as compared to essentials due to higher consumer preference.

Explanation

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The sales volume of companies selling consumer discretionaries is related to personal incomePersonal IncomePersonal income refers to the total earnings of the individuals and households of a nation through multiple sources such as salary, wages, business profits, bonus, investment returns, dividends, rental receipts, employer contribution in provident or pension funds, etc.read more. They are non-essential commodities like fancy bath work, branded clothing, or the latest video game edition. People will prioritize spending towards commodities that will guarantee their health and survival if their income is insufficient. Also, they will choose to preserve money and impede purchasing discretionary items if the economy is weakening.

For instance, a man who spent his weekends going to the cinema will cut back on his weekend spending in response to the economic hardship to save for essentials. Companies selling discretionary products or services make a profit during the economic growth phase. Economists acknowledge a positive correlation between economic growthEconomic GrowthEconomic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period.read more and consumer spending.

When the nation’s GDPGDPGDP or gross domestic product refers to the sum of the total monetary value of all finished goods and services produced within the border limits of any country. GDP determines the economic health of a nation. GDP = C + I + G + NXread more is rising, people’s discretionary income and purchasing power climb. Consequently, the sale of discretionary products and services also increases.  Let’s use an example to show how essential understanding the discretionary concept is to a business.

If Walmart, for instance, only sold discretionary goods, it would be very reliant on these cycles of the economy. However, Walmart also sells food staples, which people need to buy unceasingly. This food business makes it profitable even during an economic recessionEconomic RecessionEconomic recession is when economic activity is stagnant, and there is contraction in the business cycle, over-supply of goods compared to its demand, and a higher unemployment rate resulting in lower household savings and lower expense, inflation, higher interest rate and economic crisis due to higher fiscal deficit.read more

Consumer Discretionary Sectors

Discretionary goods are present in several sectors. Some major sectors are as follows –

  1. Automobiles & Auto-Components Industry – Automobiles include cars, motorcycles, and other general types of vehicles. Components are the parts used in the creation and maintenance of vehicles. Tires, rubber, engines, and electrical circuits are good examples. 
  2. Consumer Services Across Segments – This sector encompasses services in general. Examples include private security, education, legal assistance, etc.
  3. Hotels, restaurants, and leisure – These are the services that belong to the leisure service industry, ranging from cinemas, fast food diners to expensive hotels.
  4. Consumer Durables & Apparel – It includes most items present in a house, such as a piece of furniture, office equipment, electronics, etc. Another segment under this sector includes apparel, and luxury goods such as clothes, watches, sunglasses, bags etc. from high-end brands.
  5. Leisure products – These are the products that directly relate to leisure. Items such as sports equipment, video games, board games, and TV can be included here.
  6. Retail – Covers multiline and speciality retail selling all kinds of general goods in their stores. Speciality retail includes the companies that specialize in selling only one type of goods such as electronics, cars, or furnitures.
  7. Internet & direct marketing retail – It features all companies that sell goods online, like Amazon.

Top Consumer Discretionary Stocks

Consumer discretionary companies sell products or services that people want, and their possession or consumption exerts a positive feeling. However, financially prudent people will spend on discretionary products when they have adequate disposal incomeDisposal IncomeDisposable income is an important mechanism to measure household incomes, and includes all sorts of income such as wages and salaries, retirement income, investment gains. In other words, it is the amount of money left after paying off all the direct taxes.read more. Therefore, revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more from sales of discretionaries flourishes during the economic expansion phase and plummets during the recession phase.

Several companies that offer discretionary products have their stocks listed. Investment in such stock provides the chance to earn a profit when they grow in value. As per a NASDAQ report, the following names have been listed as some shinning consumer discretionary stocks of 2021.

  • Alibaba Group Holding Ltd. 
  • Amazon.com Inc. 
  • GameStop Corporation 
  • Discovery Communications Inc. 

Amazon Inc.

Amazon is one of the largest IT companies famous for its e-commerce platform, digital streaming services and AWS (Amazon Web Services). AWS contributes to a significant portion of Amazon’s profit.  As of August 2021, Amazon has a market capitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more of $1.67 trillion.

Alibaba

Alibaba is one of the world’s largest e-commerce companies. Over the years, it has secured a highly reputable name in artificial intelligence as well. As of August 2021, Alibaba has a market capitalization of $459 billion.

Walt Disney

Walt Disney (DIS) is one of the best picks from the entertainment industry. The company owns ventures like Pixar, Marvel and ESPN. As of August 2021, Walt Disney has a market capitalization of $324.01 billion.

Consumer Discretionary ETFs

These exchange-traded fundsExchange-traded FundsAn exchange-traded fund (ETF) is a security that contains many types of securities such as bonds, stocks, commodities, and so on, and that trades on the exchange like a stock, with the price fluctuating many times throughout the day when the exchange-traded fund is bought and sold on the exchange.read more (ETFs) concentrate on tracking stocks of companies selling discretionaries. In this case, one can invest in the overall market of discretionary companies by picking one of the ETFs and access to risk diversification.

Significant investments include the Consumer Discretionary Select Sector SPDR Fund (XLY) and the Vanguard Consumer Discretionary ETF (VCR). XLY tracks the S&P 500 Index featuring the companies from the industry such as media, retail, hotels, etc. The fund’s average market capitalization stood at $588,278.50 in June 2021.

Consumer Discretionary vs Consumer Staples

Both the categories possess contrasting features. Consumer staples are a regular in people’s life. Examples of consumer staples include basic food, household and cleaning products, medical supplies, etc.

Many consumer staples are FMCG products, and people buy products from the consumer staple category incessantly. They are price inelastic. This is the reason why they represent a much larger part of the economy than non-essential goods.

When non-essential products and services manifest sensitivity to the economic/business cycleBusiness CycleThe business cycle refers to the alternating phases of economic growth and decline.read more, staples remain insensitive to the economic cycle. This is because the demand and quantity purchased do not exhibit a proportional relationship with the economic cycle. As a result, the consumer staple industry remains competitive and attractive even during the recession, as people don’t choose to hinder spending on consumer staples. 

FAQs

What are examples of consumer discretionary stocks?

Some prominent examples are:
• Apple Inc. (NASDAQ: AAPL)
• Starbucks (NASDAQ: SBUX)
• McDonald’s (NYSE: MCD)

What companies are consumer discretionary?

Consumer discretionary companies present non-essential products or services in their product and services line, such as hotels, luxury cars, high-end apparel, etc.  

Is Tesla considered consumer discretionary?

Yes, it is as Tesla’s primary product is electric vehicles which is a non-essential product.

This has been a guide to Consumer Discretionary. Here we discuss its meaning, key takeaways, sectors, differences between Consumer Discretionary and Staples, along with industry examples. You may learn more about financing from the following articles –