The ‘hermit consumer’ is among the more interesting social trends to emerge after COVID-19 – and important for retailers and service providers. The trend describes people spending more time at home after the pandemic, and more of their income on products rather than services.

Consumer spending services as a share of total spending in rich countries is down on pre-COVID-19 levels. In absolute terms, rich-world consumers are spending about US$600 billion less on services, reports The Economist. Globally, we’re eating out less, downgrading holidays and delaying spending on personal services. In turn, we’re redirecting some of those savings into household products, clothes and food cooked at home.

Yes, social trends are never as clear-cut or homogenous as they sound. Also, the media often makes a big deal of statistical aberrations to extrapolate trends and make them sound stronger than they are.

For all the hype about hermit consumers, spending on services in rich countries is only a few percent below the 2019 peak, and slowly recovering.

Another problem is ascribing a single cause to complex trends. No doubt, COVID-19 doubt, broke some social bonds and encouraged people to spend more time at home. But several factors are at play with the rise of the hermit consumer.

The first is the cost of services. Air travel, accommodation, dining out, watching live entertainment, home-food deliveries … the list of pricey services is long and growing. I can’t recall travel or eating out feeling as expensive as it does now.

The second factor is the cost-of-living crisis. As high interest rates force homeowners to adjust spending patterns, services are an easier cut. Downgrading the overseas holiday to a domestic one, eating in rather than out, or watching a movie at home rather than at a cinema, are the usual responses.

The third factor is changing work patterns. The work-from-home boom will surely fade as employers demand more staff return to the office, and as staff realise spending too much time at home can be a career killer. But working at least a day from home each week will become the norm for many people,

Consider the implications of spending 20% less time at the office. Money saved on office commutes, work clothes and buying lunch in town can be redirected into grocery spending, everyday clothes or household products, to an extent.

I’m not convinced the long-term trend of higher growth in spending on services compared to products is ending. Or that spending on services as a share of total spending will not eventually recover to, and surpass, the 2019 high.

But as people spend more time at home, opportunities abound for companies that supply household products. Notice how Coles Group, for example, continues to provide more ready-made meals under its ‘Coles Finest’ brand – no doubt to appeal to those who have cut back on takeaways or work from home.

Supermarket stocks, such as Coles and Woolworths Group, are an obvious way to play this stay-at-home trend as people eat out less. But with price inflation abating, the supermarket giants will have to rely more on top-line sales growth, which will be harder as the cost-of-living crisis abates.

Here are two other stocks to consider. Both are well down from their 52-week high as the market frets about a slowing economy and its impact on consumer demand for discretionary items this year and next.

1. Breville Group (ASX: BRG)

I’ve written about the kitchen-appliances maker several times for this report over the years. Breville’s five-year annualised total return of 14% justified the optimism.

The bears argue that Breville will suffer as people cut back on new appliance purchases as cost-of-living pressures bite. That’s true. But Breville’s growth prospects are based on expansion into North America and Europe.

Breville’s premium brand position in those markets allows it to command a price premium over competitors. Also, Breville’s target market of more affluent consumers means it is relatively less exposed to living-cost pressures.

My interest in Breville stemmed from its strength in product design and innovation. The opportunity was to take this core strength into more markets overseas by supercharging the company’s product innovation cycle and sales.

Breville continues to take market share from competitors in the giant US market and in the United Kingdom and Europe through its Sage brand. Sage has allowed Breville to position its products at the premium end of those markets.

Pricing power is a precious commodity, particularly in a soft consumer market when competitors are forced to cut prices. Breville might have to do the same as retail sales slow, but I’d rather be at the premium end of kitchen appliances.

I can see more Breville customers who delay home renovations and extensions – or downgrade holidays – upgrading some kitchen appliances and other household goods. And others who are spending less time eating out – and entertaining more at home with family and friends – doing the same.

Breville reported 4.2% revenue growth in FY23 – a solid result against a subdued consumer backdrop. Breville notes that macro forces, such as increasing interest rates and cost-of-living pressures, are a headwind.

But it also has tailwinds from full employment, new product launches and market-entry strategies (its products will be stocked across 1,000 Target stores in the US). Growth in air fryers and premium coffee makers also bodes well for Breville.

A risk-averse market has focused more on Breville’s headwinds, judging by its share price. Breville has fallen from a 52-week high of $27.07 to $21.18.

A consensus of 12 broking analysts has a target price of $24.65 for Breville. That looks a touch optimistic as cost-of-living pressures bite, but the opportunity to buy Breville when it is almost a quarter below its 52-week high appeals.

Prospective investors will need patience. This is a tough market for retail-related stocks and further losses are possible as the market adjusts to the prospect of another rate cut this month and higher rates for longer.

Still, investors could put Breville on their watchlist in anticipation of better value. The next six months or so will be the time to buy high-quality retail-related stocks as we get closer to the first cut in interest rates (in the second half of 2024).

Chart 1: Breville Group

2. Endeavour Group (ASX: EDV)

The alcohol retailer has disappointed since its demerger from Woolworths in 2021. I wrote about Endeavour for this report in early 2022 when it was just above $7.

Endeavour has since fallen to $4.92, amid a high-profile board squabble and institutional concerns over the company’s performance. Ouch.

The easy option is cutting one’s losses on Endeavour and focusing on better opportunities elsewhere. It’s never a good look when key investors push for significant board change so soon after a company lists on ASX.

But my core interest in Endeavour remains. It has the dominant market position in alcohol retailing in Australia through Dan Murphy’s and BWS. This provides significant economies-of-scale advantages over competitors (which allow Endeavour to charge the lowest price).

Also, as cost-of-living pressures bite, it’s a no-brainer that more people will drink at home rather than at pubs and restaurants. After tax increases, the average cost of a schooner is $12, according to newspaper reports. As pub prices rise, drinking at home seems far more palatable.

The knock-on Endeavour is sluggish growth in its Dan Murphy’s chain. The alcohol retailing giant is growing, but not quickly enough for the market’s liking. There’s a feeling that one of Australia’s great brands has lost its mojo. That may be true, but Endeavour’s current valuation captures that risk and then some.

Morningstar’s fair value for Endeavour at $6.10 suggests the stock is undervalued at the current price. I agree, but a recovery will take time as Endeavour’s board issues are resolved and as the market pressures the company to lift its performance.

For all the recent challenges and market gloom. Endeavour has an enviable position in a reasonably defensive market. It looks better value than it did a year ago as the market overreacts to Endeavour’s recent challenges.

Chart 2: Endeavour Group

Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal investment advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 31 October 2023.