What is Consumer Discretionary?
561 reads · Last updated: December 5, 2024
Consumer discretionary is a term that describes goods and services that consumers consider non-essential but desirable if their available income is sufficient to purchase them.Examples of consumer discretionary products and services can include durable goods, high-end apparel, entertainment, leisure activities, and automobiles. Companies that supply these types of goods and services are usually either called consumer discretionaries or consumer cyclicals.The consumer discretionary sector of the economy encompasses various industries, the companies of which produce consumer discretionary products. Individuals can focus their investing on this sector by buying consumer discretionary stocks, mutual funds, and ETFs.
Definition
Consumer discretionary refers to goods and services that consumers consider non-essential but desire to purchase if their disposable income is sufficient. Examples include durable goods, luxury clothing, entertainment, leisure activities, and automobiles. Companies providing these goods and services are often called consumer discretionary companies or cyclical companies.
Origin
The concept of consumer discretionary originated from economic studies on consumer behavior, particularly during economic booms when consumers tend to increase spending on non-essential items. As economics evolved, this concept was used to describe and analyze market changes related to consumer disposable income.
Categories and Features
Consumer discretionary can be categorized into durable goods (like cars and appliances), luxury items (such as high-end fashion and jewelry), and entertainment and leisure services (like travel and dining). These categories share the characteristic of demand being closely tied to economic cycles: demand increases during economic growth and decreases during recessions. The advantage of consumer discretionary products is their high profit margins, but the disadvantage is the significant demand fluctuation.
Case Studies
A typical case is Apple Inc., whose products like iPhones and MacBooks are considered consumer discretionary items. Apple often sees significant sales growth during economic booms. Another example is Nike Inc., whose high-end sneakers and apparel see increased demand during prosperous economic times. Both companies illustrate how consumer discretionary products perform well in economic cycles.
Common Issues
Investors in consumer discretionary stocks may face issues such as the impact of economic cycles and market demand fluctuations. A common misconception is that these products maintain stable demand under any economic conditions, whereas their demand often varies with economic circumstances.
