Baby Boom: 5 Baby-Related Industries Poised for Post-Recession Growth

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1 October October 2013 Baby Boom: 5 Baby-Related Industries Poised for Post-Recession Growth By Jocelyn Phillips Tech-savvy Generation Y parents are highly individualized consumers who expect informed and personalized customer service Falling unemployment and rising disposable income will lead to growth in the US birth rate As the global recession took its toll on the US economy, unemployment soared and disposable income levels plummeted. Consumer confidence tumbled accordingly and many Americans became reluctant to undertake major financial decisions. In addition to putting plans for costly purchases on hold, families also chose to postpone having children during the recession, according to recent US birth rate data. Generally, the national birth rate fluctuates with economic cycles; in the early 20th century the number of births fell dramatically during the Great Depression and subsequently skyrocketed in the economically flush postwar period. The recent recession prompted similar activity, with the annual number of births in the US falling at an annualized 1.3% over the past five years. Geographic data supports the correlation between economic confidence and birth rates: analysis for 2009 from the Pew Research Center shows that US states that suffered the largest economic decline in the early days of the recession were the most likely to sustain relatively large decreases in birth rate. In the depths of the recession, the number of births in the US dropped 2.8% and 3.2% in 2009 and 2010, respectively. A low birth rate is bad news for industries whose products and services cater to infants, pregnant women and families attempting to conceive. However, according to Pew Research, economically correlated declines in the birth rate generally represent women deciding to postpone childbirth, rather than forgo it altogether. Moreover, birth rate fluctuations generally lag behind other macroeconomic indicators, due to both the time it takes to successfully conceive and the length of a full-term pregnancy. Consumer confidence and disposable income levels have already begun to recover from their recessionary lows and, according to the National Center for Health Statistics, the number of births in the US remained stable from 2011 to 2012, marking the first year since 2007 that the national birth rate did not decrease. As unemployment falls and families see their discretionary purchasing power increase, IBISWorld expects the birth rate to stabilize and then steadily grow, with the number of births in the US increasing in the next five years at an annual average rate of 0.6%. This steady growth will likely mean more revenue for industries info@ibisworld.com

2 October offering baby- and family-oriented products and services. Generation Y (Americans born in the 1980s and 1990s) will account for a large portion of this new parent market, and with their revenue dollars will come unique consumer preferences and characteristics. Due to recessionary pressures and cultural preferences, this group has largely married (and subsequently had children) later in life than previous generations. Consequently, many of these new parents will have established careers and disposable income. Moreover, this generation has grown up during the digital age, and is accustomed to making data-informed decisions. Retailers have noted that Generation Y consumers are highly brand-conscious and tend to develop long-standing brand loyalties. These traits have shaped the average Generation Y individual into a highly informed, individualized consumer who expects similarly knowledgeable and personalized customer service. IBISWorld has queried its database of over 1,200 US industries and identified five industries that are particularly well-poised to respond to these consumer trends, and, as such, will likely encounter a growing market (with deepening pockets) in the five years to Women s Health Hospitals Women s Health Hospitals which, in addition to serving general female health needs, specialize in gynecology, family planning, fertilization, labor and childbirth services, have experienced weakened demand in the five years to Revenue growth slowed to an annualized 4.8% as decreases in disposable income levels limited women s access to health care. Moreover, as unemployment surged during the recession, women lost insurance coverage as they lost their jobs. Under these uncertain financial circumstances, women delayed basic medical services like gynecological check-ups. Demand for services necessitating longer-term financial commitments, including pricey reproductive procedures like in vitro fertilization, similarly dropped. However, the next five years represent a major opportunity for women s health hospitals. As disposable income levels rise and the employment rate increases, women will likely soon resume efforts to start a family within the next five years, due to the health risks associated with later-life pregnancies. Accordingly, IBISWorld expects total revenue for the Women s Health Hospitals industry to increase at an annual average rate of 6.1%. This growth rate will be further bolstered by a positive feedback loop in women s reproductive health care: as Industries Situated For Growth as the US Birth Rate Rises Industry Annualized Growth ( ) Annualized Growth ( ) Women s Health Hospitals Pregnancy Test Kit Manufacturing Maternity Wear Stores Children & Infant s Clothing Stores Online Baby & Infant Apparel Sales SOURCE:

3 October more women prepare to have a baby, they will pay more attention to their general health, increasing demand for nonreproductive industry services. Expanded medical insurance coverage through the Patient Protection and Affordable Care Act will further drive revenue growth in this industry, because more women will be able to afford health care services. As the public health care exchanges mandated by this act go into effect in 2014, an estimated 8.8 million people will gain medical coverage; IBISWorld expects industry revenue to grow 9.1% in that year alone. Because so many of the health care services that this industry provides are preliminary steps in the childbirth process, revenue growth for the Women s Health Hospitals industry will likely precede increases in the overall US birth rate. Pregnancy Test Kit Manufacturing Women who are looking to conceive (termed hopeful positives by the Pregnancy Test Kit Manufacturing industry) generate about 60.0% of downstream pregnancy test kit sales revenue. As such, any increase in the number of women attempting to become pregnant will likely correspond to an increase in industry revenue. As women delayed pregnancy efforts during the recession, industry revenue fell an annualized 3.8% from 2008 to Many women chose to forgo pregnancy testing, while some remaining consumers shifted their demand for industry products during the recession. Cash-strapped consumers replaced expensive digital and bloodbased pregnancy tests with lower-priced home pregnancy tests. More discretionary expensive products like these generally carry a higher margin for manufacturers, so industry average profit margins took a hit as consumers scaled back their purchases of those items. However, as economic confidence increases in the five years to 2018, IBISWorld expects margins to recover. In fact, the industry as a whole is poised for a recovery in the next five years: IBISWorld expects total Pregnancy Kit Manufacturing industry revenue to grow an annualized 1.5% in the five years to Demand for discretionary industry products (such as the expensive and high-tech tests which lost market share during the recession) will likely rebound as disposable income levels rise. Moreover, as women renew their efforts to conceive, the industry will benefit from greater demand for all family planning products. To support this increased demand and take advantage of the widening market, some industry manufacturers have already begun to diversify their product offerings. In 2012, biotechnology company ContraVac Inc. began marketing an at-home sperm count diagnostic test, capitalizing on the already-renewed demand for conception aids. Industry firms that can similarly develop new offerings for the broader market will be in the best position to remain competitive in the next five years. Maternity Wear Stores Maternity wear sales are correlated even higher with the national birth rate than pregnancy test kit sales or demand for women s health services, because maternity clothing is only purchased by or for women who have successfully conceived. Nonetheless, maternity apparel stores are still somewhat vulnerable to fluctuations in disposable income because these retailers offer specialized products and less expensive alternatives (such as used goods and value-priced apparel) do exist outside the industry (see IBISWorld reports 45331, Used Good Stores in the US, and 45211, Department Stores in the US). During the recession, consumers embraced these lower-priced

4 October alternatives, leaving maternity wear stores with excess inventories which they then offered at deep discounts. The overall effect of these discounts on industry profit was disastrous: the average industry profit margin dropped from 10.0% of revenue prior to the recession to a low of 3.1% in Large industry retailers weathered the storm of the recession due to their ability to provide differentiated products. Industry leader Destination Maternity operates stores through three different brands (Motherhood Maternity, which serves price-conscious markets; A Pea in the Pod, which sells mid- and high-priced apparel; and Destination Maternity, which sells both brands) and this flexible model buffered the company s revenue from major market fluctuations. As both the birth rate and disposable income levels rise in the five years to 2018, companies that are well-positioned to take advantage of increased demand will lead the industry in revenue growth. IBISWorld expects Maternity Wear Stores industry revenue to grow at an annual average rate of 2.0% in the five years to Profit margins will likely increase as well, as consumers regain confidence and opt for more expensive, higher-margin industry products. Diversified companies (like Destination Maternity) will be particularly wellpoised to take advantage of this trend, as they will be able to easily expand into luxury and aspirational niche markets designed to appeal to brand-conscious parents-to-be from Generation Y. Maternity stores will, however, face increasing competition from online retailers, who can often offer a wider variety of products. Children s & Infant s Clothing Stores For consumers, maternity wear is specialty wear. An expecting mother may save maternity clothing to wear during Births (Million) Birth Rate and Disposable Income Year Births Disposable Income 38,000 37,000 36,000 35,000 34,000 33,000 32,000 31,000 30,000 29,000 Disposable Income ($) SOURCE: another pregnancy, but by and large, the maternity apparel is no longer needed once the mother has given birth. Children s and infants apparel, however, represents a longer-term need; an average family will continue to purchase industry goods as long as they have children. As such, revenue for the Children s and Infants Clothing Stores industry is not entirely dependent on infants; the industry also includes retailers who cater to older children. Accordingly, the recession-fueled drop in the birth rate did not wreak havoc on this industry: revenue actually grew throughout the five years to 2013, albeit at the relatively modest rate of 1.1%. However, any decrease in the birth rate will have a significant impact on specific industry retailers. Because children outgrow clothing quickly and because apparel retail is generally competitive, many retailers carve out niche markets by specializing in clothing for a particular demographic. Retailers who specialize in baby and infant clothing will be hardest hit by a drop in the national birth rate. Moreover, many of these firms specialize in high-end brand names or expensive handcrafted apparel; the high prices associated with these offerings leave these retailers especially

5 October vulnerable during bad economic conditions. Although infant clothing is largely nondiscretionary, financially insecure consumers have a variety of lower-priced nonindustry alternatives to new products, including hand-medowns, used clothing and value-priced apparel from nonspecialty stores. Alternatively, in times of economic growth, specialized retailers are particularly well-positioned to take advantage of consumers increased confidence. As disposable income levels and the national birth rate both increase in the five years to 2018, IBISWorld expects the Children s and Infant s Clothing Stores industry s revenue to grow at an annualized 2.9%. Wellknown industry retailers (like Janie and Jack) will likely take advantage of their high-profile brand names to appeal to brand-conscious new Generation Y parents. In light of increased industry revenue and profit, these niche retailers will likely invest in enhancing their customer service offerings because consumers generally expect higher-end stores to offer high-quality customer service. This trend will further appeal to Generation Y consumers who greatly value personalized, knowledgeable customer service. Online Baby & Infant Apparel Sales Like their traditional brick-and-mortar counterparts, online baby and infant apparel retailers will inevitably be more affected by changes in the birth rate than other retailers. However, because consumers generally perceive online retail to offer more convenience, value and choice than traditional retail, the overall trend toward shopping online kept industry revenue growth afloat during the past five years. Even as the recession took its toll on the entire retail sector, total revenue for the Online Baby and Infant Apparel Sales industry grew at Births (Million) Birth Rate and Consumer Confidence Year Births Consumer Confidence Consumer Confidence Index SOURCE: an annual average rate of 3.5% from 2008 to In the next five years as unemployment falls, consumer confidence increases and the birth rate approaches its prerecession level, Online Baby and Infant Apparel Sales will likely perform even better. IBISWorld expects industry revenue to grow at an annualized 6.5% in the five years to Much of this growth will be spurred by industry firms embracing online retail technology trends; because new Generation Y parents are particularly tech-savvy, they expect online retailers to offer the most up-to-date online purchasing capabilities, such as mobile shopping apps, flexible delivery options and cloud-based shopping and wish lists. Industry retailers will still face competition from traditional brick-andmortar baby and infant apparel stores, as well as larger internet retailers (like Amazon) that sell, but do not specialize in, industry products. However, in this increasingly competitive environment, industry firms that embrace the latest retail technology will be best poised to take advantage of the growing online baby and infant apparel market. As the national unemployment rate continues to fall during the next five

6 October About IBISWorld Inc. Recognized as the nation s most trusted independent source of industry and market research, IBISWorld offers a comprehensive database of unique information and analysis on every US industry. With an extensive online portfolio, valued for its depth and scope, the company equips clients with the insight necessary to make better business decisions. Headquartered in Los Angeles, IBISWorld serves a range of business, professional service and government organizations through more than 10 locations worldwide. For more information, visit or call years, the public s economic confidence will likely rise and consumers will begin to undertake major financial endeavors that they delayed during the recession, including having children. The five industries mentioned above will not only be bolstered by the increase in the number of babies born (creating more demand overall), but will also benefit more generally from higher disposable incomes, which will allow new parents to buy more (and more expensive) products and services from babyrelated industries. In fact, the major threat companies in these industries will likely face in the next five years is not a lack of demand, but increased competition for market share in this booming sector. Additional Industries: Other industries that are poised to experience growth as a result of the stabilizing birth rate are Family Clothing Stores (IBISWorld report 44814), Online Baby Product Sales (IBISWorld report OD5695), Children s Specialty Hospitals (IBISWorld report OD5770) and Baby Stroller & Car Seat Manufacturing (IBISWorld report OD4981). Contact: Savannah Haspel VP, Public Relations IBISWorld Phone: savannahh@ibisworld.com

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