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Consumer discretionary goods represent wants rather than needs. They are goods that people can do without should their financial circumstances necessitate it.
The demand for consumer discretionary goods is much more vulnerable to economic pressures than the demand for consumer staples goods, which are products that consumers need.
This elastic demand means that the companies that supply consumer discretionary goods can see their sales drop suddenly in response to widespread decreases in consumers' incomes or increases in prices. Not surprisingly, their stocks' share prices usually follow on this pattern.
Key Takeaways
- Consumer discretionary refers to non-essential goods and services.
- People can cut back on them, replace them with cheaper substitutes, or eliminate them when times are tough.
- Cars, household appliances, specialty items, luxury goods, and leisure are considered part of the consumer discretionary sector.
- Demand for these goods tends to rise when the economy is strong.
- Well-known companies in the sector include Disney, McDonald's, Nike, and Starbucks.
What Is the Consumer Discretionary Sector?
The consumer discretionary sector is comprised of businesses that sell non-essential goods and services.
These are products that consumers can usually live without and don't necessarily need in their day-to-day lives. They can cut back on them or forego them altogether without any major consequences to their well-being.
Some common types of consumer discretionary items include:
- Fast food
- Specialty food
- Furniture and appliances
- Vacation and leisure activities
- Apparel
- Vehicles
Some of the companies that fall into the consumer discretionary sector include McDonald's (MCD), Starbucks (SBUX), La-Z-Boy (LZB), Whirlpool (WHR), Walt Disney (DIS), Carnival Corp. (CCL), Nike (NKE), and Tesla (TSLA).
Factors That Weigh on the Sector
Consumer confidence plays a central role in the consumer discretionary sector. The University of Michigan's consumer sentiment index is an important gauge of U.S. consumer optimism related to the state of the U.S. economy.
Economists, businesses, investors, and others monitor the index to predict the spending habits of consumers and the consequences for companies in the consumer discretionary sector.
Trends that affect consumer spending power, such as higher or stagnant wages or widespread changes in the prices of essential goods, usually change the prospects for consumer discretionary companies.
Rising interest rates and cutbacks in consumer spending after recessionary periods tend to negatively affect these companies.
Longer-term trends, such as the continued shift to online shopping and the pursuit of healthier lifestyles, can create headwinds in the sector.
Consumer staples are not discretionary. These are goods and services that people continue to buy regardless of the economic cycle because they need and use them regularly. They include food, clothing, personal hygiene products, and household products.
Here's an overview of some of the industries within the consumer discretionary sector.
Auto Components Industry
The auto components industry is highly competitive and consists of many companies, large and small. These companies supply the auto parts used in the manufacturing, repair, and maintenance of cars. The parts include airbags, transmission systems, car seats, electrical circuits, and exhaust systems.
The car manufacturing industry is cyclical, creating fluctuating demand for auto parts. That makes profitability in the sector highly volatile. There is added volatility in the industry due to fluctuating costs in the needed raw materials, such as copper and steel.
One leader in this sector is Magna International (MGA). Headquartered in Aurora, Ontario, Canada, the company designs and manufactures automotive parts and supplies. It builds entire vehicles and has separate divisions to build various vehicle parts, including exterior, interior, and under-the-hood components.
Automobile Industry
The automobile industry designs, produces, and markets cars, SUVs, trucks, buses, and other types of vehicles for private, public, and commercial use. The industry is one of the most capital-intensive, as it requires billions of dollars to build plants and acquire the technology and the expertise that are needed for production.
Because demand is highly sensitive to economic cycles, the automobile industry's profitability margins can show high degrees of volatility. Many of its expenses remain fixed throughout the business cycle.
The largest global vehicle manufacturers as measured by revenue are Volkswagen (VOW3), Toyota Motor Corporation (TM), and Stellantis (STLA).
Distributor Industry
Distributors are the middlemen of industry. They buy wholesale quantities of a wide range of consumer equipment products, apparel, replacement parts, consumer electronics, and food products, repackage them, and then sell them on to retailers or to more specialized distributors.
Some distribution companies have their own manufacturing facilities and buy raw materials to turn into finished goods.
Successful companies in the industry develop networks of dealers and distributors.
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 to the public ranging from education to home security, legal advice, interior design, and consumer auctions. Most provide specialized services that are not classified elsewhere.
Examples of diversified consumer services companies include H&R Block (HRB) and Graham Holdings Company (GHC). H&R Block provides tax preparation, tax advice, and planning services. Graham Holdings is a diversified education and media company with well-known brands such as Kaplan and The Slate Group.
Hotels, Restaurants, and Leisure
The hotels, restaurants, and leisure industry is perhaps the most obvious example of a consumer discretionary sector. Companies that operate hotels, chain restaurants, resorts, casinos, or cruises could be the first to notice when consumer spending begins to lag due to economic stress.
Many companies in this industry do not own their real estate properties but act as operating companies and sign lease agreements. Many hotel and restaurant companies pursue franchise business models rather than direct ownership of their brands.
Examples of restaurant, hotel, and leisure companies include McDonald's and Carnival Corporation, the cruise vacation company.
Household Durables
The household durables industry manufactures products that are bought infrequently and last for years. Examples include lawn and garden equipment, home and office furnishings, appliances, photographic equipment, and sporting goods.
Tempur Sealy International (TPX) is one example of a household durables company. It manufactures and distributes bedding products.
Leisure Products
Leisure goods include camping equipment, toys, all-terrain vehicles, golf carts, swimming pools, and many other products that people use when enjoying downtime.
Companies that make and sell leisure products include toymaker Mattel (MAT) and Topgolf Callaway Brands (MODG).
Media
The media industry creates, markets, and delivers 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.
The Conference Board releases its Consumer Confidence Survey each month. The report focuses on public sentiment and attitudes about financial well-being. The survey also outlines what consumers expect in the near future in terms of key metrics such as inflation, interest rates, and stock prices.
Retail
Several retail industry categories fall under the umbrella of the consumer discretionary sector. The following are among the most common.
Internet and Catalog Retail
Internet and catalog retail have been among the most rapid growth industries within the consumer discretionary sector, as consumers have shifted to purchasing goods online.
The industry includes companies that operate online marketplaces or individually branded online stores that sell a wide variety of consumer products.
Amazon (AMZN) is a dominant player in this industry with billions in annual sales. The company reported a quarterly profit of $9.9 billion in the third quarter of 2023.
Multiline Retail
The multiline retail industry includes operators of department stores and other storefronts that sell general merchandise, such as hypermarkets and large-scale supercenters.
An example of a multiline retailer is Macy's (M), which operates Macy's, Bloomingdale's, and Bluemercury stores and websites.
Specialty Retail
The specialty retail industry includes companies that sell 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 (HD) and Best Buy (BBY).
Textile, Apparel, and Luxury Goods
The textiles, apparel, and luxury goods industry includes manufacturers of clothing, footwear, and accessories such as handbags, sunglasses, and travel-related goods.
Examples of companies operating in this industry include Under Armour (UA) and Coach (TPR).
Is Starbucks a Consumer Discretionary Stock?
Yes, Starbucks is considered a consumer discretionary company and stock. Coffee may be a staple, but it's a lot cheaper to make it at home than to buy it already made. As such, the café model of Starbucks falls in the specialty foods category.
Are Consumer Discretionary Stocks Cyclical or Defensive?
Consumer discretionary stocks are considered cyclical. That is, they are susceptible to changes in consumer spending. Rising and falling interest rates, wage growth, unemployment, and inflation all affect consumer spending. Consumers are less likely to spend on goods that are non-essential when economic conditions worsen. On the other hand, they are likely to open their purse strings when conditions improve (the cycle evolves).
Defensive stocks (like electricity and water) are relatively unaffected by economic volatility. Most people will spend much the same on them regardless of economic pressures. They generally offer investors regular dividends and stable earnings regardless of the state of the economy.
What Is the Difference Between Consumer Discretionary and Consumer Staples Goods?
Consumer discretionary goods are not essential. Many consumers will cut back on them to save money when times are bad. Such goods include luxury items, new vehicles, vacations, fast food, furniture, and appliances.
Consumer staples are the basics that consumers cannot forgo even when economic conditions turn sour. They include food and personal care products.
The Bottom Line
The consumer discretionary sector is made up of companies that produce and sell non-essential goods and services. These are things people don't necessarily need and can do without when times get tough.
That means that the stocks of companies in the sector are relatively volatile, falling in bad economic times and rising fast when conditions get better.
Investors shouldn't necessarily omit these companies entirely from their investment portfolios. Many consumer discretionary companies do very well during bull markets—especially when interest rates are low.
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