A few years ago, and before the COVID pandemic, I was very focused on the consumer space in general for various reasons. I remember saying to my CIO at the time that there has never been a better time to be a consumer.

Cast your mind back, if you can, to pre-pandemic life, we had low inflation, near max-employment, low but consistent growth, and an absolute plethora of new tech enabled “hyperscalers” cutting each other’s throat for our attention, eyeballs, and discretionary expenditure.

If you have not heard that term before, in short, a “hyperscaler” is a (usually tech-led) company that purposefully burned through cash to dramatically scale their offering – in a lot of cases either offering it for free or considerably subsidising the service, unbeknownst to the consumer. The benefits of a tech-led product offering is the ability to reach billions of consumers, and it’s an extreme winner takes all mentality where the gap between first and second can be striking.

One could live a busy life using the free social media services offered to you, taking discounted UBER taxis to get you from party to party, and have food delivered to said party from your favourite fast food joint that was nowhere near by; the fun did not have to end.

All you had to do was instead of exchanging your hard-earned money; you had to give up your data. Data became the hot commodity, and a handful of companies excelled at centralising and collecting that data for resale – and you in return got a much cheaper lifestyle.

The consumer may not have known it, but we were directly benefitting from ultra-accommodative monetary policy and Private Equity (PE), Venture Capital (VC’s), hedge funds and even institutional allocators absolute wanton chasing of the next BIG thing.

These “hyperscalers” had money thrown at them, and not just a small bit of money – billions and billions were handed over without many questions being asked. These billions went a long way to underwriting the consumer experience and making things very affordable, if not free.

When I think of the “economy”, it’s obviously a very broad term to describe the many different interactions that are going around the world that combines to create value or momentum. But in very simple terms, it goes nowhere unless the consumer is in good shape. There are plenty of indicators for this, which do not need rehashing, but the thing that stood out the most to me was the backdrop in which the consumer was operating felt to me like the cheapest in a long time, allowing for more and more consumption. It was a great time for consumers, there is no doubt about it.

A Shift in the Winds: Post-Pandemic Reality Check

Fast forward the clock to present day and I’m not as confident for the consumer. I was, but as time has passed, I have become less so. Exiting the pandemic, I was a bull in a china shop for the consumer, as the build-up in savings and the very obvious feel in the air of “revenge spending” could only means good things for consumer related names.

However, as we have progressed, there are a number of structural macro-backdrops falling one by one to dampen that consumer enthusiasm.

I won’t dwell on the elephant in the room, which is that inflation has obviously reared its ugly head, as we have all heard about ad-nauseum. But a far more noticeable point to me is that the “hyperscalers” are no longer the free-ride they once were. These growth stocks all endured a huge sell-off in 2021 and suddenly, they had to focus on pesky things like costs and actually creating a profitable business.

The Blue Tick and the End of Freemium

The “hyperscalers” that survived have and are increasing prices, this has been a slow creep that suddenly became a rolling stone. UBER is not nearly as cheap anymore, food delivery the same, Netflix is altering its pricing structure and going down a route previously ruled out with advertising. Delivery charges on Amazon tend to cost more than the goods themselves as the economics of last mile logistics gets passed back to the consumer.

This was likely always the plan i.e. secure TAM (Total Addressable Market) and then raise prices, but really it has come from the realisation they cannot keep selling a $1 product for $0.90 cents and survive. The final nail in the coffin for me was when Elon Musk took over Twitter and started charging for the “blue tick”.

Elon tried to charge $8 a month for existence on Twitter in its first iteration and has since (to be fair) added value to this offering by introducing gen AI services, “Grok”, but the price tag is now in the $20-$30 range. You will find your experience on Twitter (or X as it is now named) is now throttled in a very noticeable but hard to describe way if you are not on the premium plan and sticking to the rather more palatable “freemium”.

Social media has been the one thing you could count on to be “freemium.” A relatively cut-throat niche amongst competitors where ‘adapt to survive’ is obvious. But the deal was, we give you our eyeballs and data and you give us whatever it is that they give us – call it frivolous entertainment and communication mediums I suppose.

If Musk can make this switch from “Freemium” to “Premium” stick (and I think it will), then it’s the last nail in coffin for a free ride for the consumer to me and it is hard to see an easy way back to the good old days of pre-pandemic life.

The Importance of Brand Strength in a New Era

What does this mean for consumer related companies? Well, you are not dealing with a carefree and wistful consumer anymore. Consumers are fed up with higher prices with no obvious signs of added value or extra benefit to their lives. I often bore people with this comment, but the “barbell” strategy is in play – consumer activity will likely stay firmly in place for both extreme ends of the spectrum – the very low end and the very high end. That is generally true whether we go into a recession or not (which I don’t believe we are or headed to soon). However, as is often the case in life, it’s the players in the middle that get tossed around by shifts in demand and it usually comes down to strength of brand.

Going forward only the best consumer products, brands and services will thrive and survive – it will be a rather rapid fall for the rest. I am already seeing signs of a consumer pushback against products that have raised prices, but certainly not raised their added value. They often say the cure for high prices is indeed high prices, and we are entering a period where the consumer has had enough and is starting to allocate their hard-earned capital rather more intentionally.

Look through your consumer related names and ask yourself the hard questions – is my product adding value? Does it deserve the price premium, or can it sustain the price increase? Rate the brand strength against competitors. If you find it stacking up in the middle, then it’s likely you as a consumer have already consciously or unconsciously pulled back.

If you find yourself lacking in answers to this, then it’s time to look elsewhere, I believe. The party is well and truly over for the consumer and the hangover is rapidly approaching.