Home & Baby Companies Plan To Profit as Millennials Settle Down

8/28/14Follow @curtwoodward

Sure, he’s in love with artful neck tattoos and outlandish facial hair right now. But that hipster at your favorite coffee bar down the street is going to get older, and a growing group of businesses are betting that his search for domestic bliss will be a profitable one.

A wave of e-commerce companies has started to take root just as a huge swath of Americans enters the big-spending years of middle adulthood, when young people settle down, find a mate, and start filling up gift registries for their new homes and babies.

These so-called millennials are the largest demographic chunk in America, accounting for some 80 million people born between the early 1980s and early 2000s. And if you’re running the cash register as those consumers start to earn more money—and spend it on big-ticket items—you could see a big payoff.

That’s more than just idle speculation. Online home-furnishings retailer Wayfair, for example, is counting on increased e-commerce spending by millennials as part of its long-term growth strategy.

In its recently filed IPO paperwork, the Boston-based company said its typical customer is “a 35 to 65 year old woman with an annual household income of $60,000 to $175,000.” That pool will obviously grow as younger people age, but consumers who grew up in the Internet age bring another boost: they’ve never known a world where people didn’t buy things online.

“We believe there are approximately 73 million millennials (which we define as individuals currently between the ages of 18 to 31) in the United States, many of whom are accustomed to purchasing goods online,” the company reports. “As millennials age, start new families and move into new homes, we expect online sales of home goods to increase.”

Wayfair isn’t the only growing company poised to capture an aging millennial demographic.

Zulily, which went public late last year, sells discounted mom and baby goods through daily email blasts. Care.com, which held an IPO earlier this year, operates an online marketplace for nannies and other caregivers. The Honest Company, an e-commerce brand dedicated to environmentally friendly diapers and other baby-care products, has just raised $70 million in private investment on its way to an expected IPO of its own.

A corporate bet on younger people spending more as they age might seem a bit more risky today than in years past, since the U.S. economy is still recovering from the Great Recession.

But even in an era of slow job growth, young Americans are still commanding a sizable amount of purchasing power. A study by the U.S. Chamber of Commerce estimated that millennials are responsible for $200 billion in direct annual spending and another $500 billion of “indirect spending, largely due to the influence on the spending of their mostly baby boomer parents.”

Consulting group McKinsey also says that millennial shoppers increased their spending about 3 percent per year between 2008-2013, despite the economic woes in those years. The firm has also estimated that millennial consumers will dictate about a third of all U.S. retail spending in 2020—and by that time, plenty of them will be in homemaker and family mode, much to the delight of companies like Wayfair, Zulily, Care.com, and Honest Co.

As they court an aging group of millennials, it’s no mistake that these companies are also focused almost entirely on digital commerce. Bricks-and-mortar retailers saw their foot traffic decline again this winter, leading to speculation that their business has entered a permanent downturn. National chains from Radio Shack to Abercrombie & Fitch have been busily closing down locations in response to slower demand.

So while online shopping is still a small part of the overall American retail sector—about 6.4 percent of all retail in the second quarter—it’s the area showing the most promise for expansion if you’re building a new company, with annual growth rates of 15 percent or higher compared to single-digit growth for retail overall.

“When I was growing up, you got a car when you were 16 and you went to the mall to hang out,” says Jason Stoffer, a partner at consumer-focused venture capital firm Maveron. “Now, fewer teenagers are getting into cars. They’re hanging out electronically, and they’re not hanging out at the mall as much. So what you’re seeing is the propensity of a younger generation to order more of their purchases online.”

Just being in business as millennials age into bigger-ticket purchases isn’t quite enough to guarantee success, of course. Like any generation, consumers in this group have their own quirks and preferences, which savvy businesses have to learn if they hope to get a bite of the pocketbook.

Stoffer, who previously served on Zulily’s board, says millennial consumers want a more authentic, personal relationship with the companies they patronize.

That’s apparent in many of the young companies that have found success marketing to millennials before they hit the home-and-baby years, with personal and professionally focused products like hip glasses from Warby Parker, fashion basics from Everlane, or monthly health and beauty shipments from Birchbox.

Retailers who hope to capture millennial dollars also have to deliver a good value for the price, Stoffer says—something you’d expect for a group entering the workforce after the worst recession in generations.

“People are saying, `I want quality stuff, but I want to get it at a value. I don’t want to pay full price,’” he says. “Millennials were impacted deeply by the recession of `08-`09 and the tough job market. … They’re not going to stop buying, but they’re going to look for a bargain.”

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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