The baby boomer generation has long been a driving force behind our consumerist economy. Now, many members of that big demographic group appear to be going bust -- a shift could take down several iconic companies and brands.
Lowering the boom on the economy
According to The Wall Street Journal, the baby boomer generation, known for being a large, affluent, optimistic, and spendthrift group, faces a daunting scenario as more boomers approach retirement. The current economic climate paints a far different picture than many boomers perceived when bubbles inflated Americans' sense of wealth.
Boomers are earning less on their investments, have less ability to work because of the poor job market, and struggle with stagnating house values, all of which adds up to economic hardship.
The article pointed to estimates from the nonpartisan Employee Benefit Research Institute: If things don't start looking up soon, three out of every five baby boomers face a serious risk of running low on funds in their retirement.
There are 78 million baby boomers, a powerful, affluent demographic that helped sustain our bubbly economy for years. Given the generation's huge size, any drop in their spending could hurt a lot of consumer-facing companies. In 2008, boomers alone spent $2.65 trillion.
Investors should consider which companies could take a lethal hit from a massive reduction in boomers' discretionary spending, and avoid those stocks.
Of fashion, fear, and frumpiness
Here's one example. The Wall Street Journal recently reported the plight of iconic consumer-goods company Liz Claiborne (NYSE: LIZ ) . Under current CEO William McComb, Liz Claiborne has tried to back away from a reliance on baby boomers and expand its appeal to younger folks. The company bought up brands like Kate Spade and Juicy Couture, and hired expensive designer Isaac Mizrahi away from Target (NYSE: TGT ) . So far, Liz Claiborne's business and stock price have both languished, racking up years of losses and confused customers. That turmoil led Macy's to end its relationship with Liz Claiborne, which now has a new, exclusive deal to distribute through discount department store J.C. Penney (NYSE: JCP ) .
Talbots (NYSE: TLB ) is another name that springs to mind, having spent years trying to transform a fashion image that many had started to call "frumpy." Even CEO Trudy Sullivan admitted as much two years ago. Talbots continues its attempts to evolve, through initiatives such as hiring supermodel Linda Evangelista. Still, investors should temper any enthusiasm with the realization that many consumers remain cash-strapped, with boomers possibly among the hardest hit.
Even retailers that seem relatively stable face risks from boomers' budgetary brush with reality. Chico's (NYSE: CHS ) pulled off a turnaround in its boomer-oriented business, but competition will only grow fiercer if baby boomers slash their spending.
Think twice about investing in retailers or consumer-brands companies that rely too heavily on the baby boomer set, or have struggled to bring customers in the door in general. Turnarounds and brand transformations are a tall order in economically troubled times.
The boom's no balm
Boomers' busted budgets could impact many stocks in industries beyond the retail sector.
Consider that in 2008, boomers spent $135.6 billion on eating out. Since meals out at places like Cheesecake Factory (Nasdaq: CAKE ) and Ruth's Hospitality (Nasdaq: RUTH ) are easy to cut from tightened budgets, a beleaguered boomer generation could starve many restaurateurs' future growth.
Companies and brands that specifically target baby boomers' discretionary spending pose a particularly shaky situation for investors at the moment. The young people who comprise Gen Y are also a large demographic, but they're not known for their financial stability at present. And even as they increasingly come into their own financially and buy up consumer goods and services of all kinds, it'll be a while before they're ready to patronize the same brands now catering heavily to boomers.
Is the frightening notion of budget-minded baby boomers overrated? Or do you agree that the prospects of broke boomers could be chilling for retailers? Chime in with your thoughts on the topic, and your recommendations for the best and worst stocks to play this trend, in the comments box below.
Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy. Try any of our Foolish newsletter services free for 30 days.