By Bernard Baruch
Since the Industrial Revolution there has been a trend toward personalization in products and services. The Industrial Revolution allowed for goods especially to be created at a far cheaper cost by standardizing the production process through assembly lines. This allowed for the growth of a more homogonous middle class that for the first time could afford to buy goods such as automobiles previously reserved for the very wealthy and household goods that were largely made at home. What households bought was more similar...in part because we were more similar culturally, but also because the range of products and services available was so narrow as a result of the economies of scale required to produce the cheaply. Since then improvements in technology and the move toward digitization reduced the cost of personalizing goods and services to better match the unique preferences of consumers. That process...toward personalization...was already in play, but appears to have been accelerated by the pandemic.
Personalization is evident across many industries that dominate how households spend money as proxied by the consumer price index (CPI). The CPI is meant to, "measure the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services." Housing related goods and services (such as rental equivilant of home values) is the largest at around 40%. Food plus Beverages and Transportation make up the next two largest categories at around 15%. Medical care is next at around 10% although much of this is subsidized by the US government. Many examples of personalization accelerated by the pandemic could be used, but let's look at these four to help make the point.
Home prices were already rising before accelerating during the pandemic. One reason why was the recognition that many households and businesses could source labor from anywhere with an internet connection. This has put pressure on copper and lumber prices, but also allowed for the construction of homes in geographic areas with lower land prices. Most importantly, it allowed for personalization of location within the housing market to a degree that is entirely unprecedented. Food and Beverage demand has been personalized as well by the ability to cheaply order food on mobile phones and allow those that wish to continue new habits of cooking at home to do so and eat what they wish to cook. Transportation is trending toward a service model in which those that so desire can avoid buying a car and instead us apps such as Uber or rent using Turo. Healthcare has seen a shift toward virtual care that can be sourced from anywhere. Moreover, genomics technologies accelerated by the pandemic and genome sequencing is allowing for increasingly personalized diagnostics that account for ones unique genetic risk factors.
Inflation remains a concern even as some of the ramp up in commodity prices may have been driven by transient forces like double ordering during the reopening. However, regardless of how CPI measures play out it may be worth considering a change in how we interpret CPI and inflation as a concept. The CPI was created to measure "average price changes" for a representative "basket" of goods and services. Personalization is making this basket ever more differentiated such that the "representative household" looks less and less like a homogenous middle class. More of the consumer choices we make are driven by a freedom to choose from a wider range of goods and services that better fit our individuality. As a result, it seems harder to know precisely just what a generally rise in prices really means for the economy.
There are two key investing implications from the Personalized Economy.
Inflation is becoming more about choice, all else equal.
Companies and individuals positioned for personalization are more likely to succeed.
Inflation is increasingly a choice because so much of what we need to live successful and happy lives is cheap. We can choose to buy larger homes, go to expensive colleges, and eat fancy food. We can also choose to live in smaller homes in inexpensive parts of the world so long as we have an internet connection. Cost of living is actually falling...even as the cost of living the high life is rising.
Companies and individuals that recognize the increasingly personalized economy are going to find increasing opportunities. It's a big world out there...but you can access it with the click of a button. All one needs to start the iterative process toward success is find 100 people in the world that love your crappy MVP and make them increasingly love your product or service. For the innovators that understand this...the world is their ouster.
By Bernard Baruch
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