The author is an analyst at NH Investment & Securities. She can be reached at [email protected] — ed.
According to Maslow’s hierarchy of needs, individuals must first satisfy their lower needs before they turn to higher ends (ie, one must secure food before one attends to taste). In contrast, the so-called lipstick effect indicates that consumers will still spend money on small indulgences even in a recession. Additionally, many Millennials and Gen Zers seem willing to restrict their diet in order to pursue their desires. For them, hobbies are the driving force.
Among these motivators, K-pop artists hold particular appeal, attracting fans who prefer their favorite artists’ merchandise over more important needs. In Japan, where the fandom culture is referred to as “otaku,” the idol market has evolved regardless of economic conditions.
Despite concerns about the economic slowdown, companies with artists who have strong followings should do well in 2023. In particular, those who are primed to continue building their fandom momentum or have strategies to increase spend per fan should stand out. We highlight the companies with customers who are undeterred by economic cycles and present a bright outlook for the entertainment and casino industry.
I. Taste matters even in times of recession
In times of economic slowdown, consumers tend to cut spending on consumer items. However, the lipstick effect remains in play. We’re finding that the lipstick effect is taking a slightly different shape with the MZ generations, as consumers are willing to buy expensive luxury items that offer greater long-term satisfaction than cheap deals that offer instant gratification. Fans in particular seem more than willing to spend money on their favorite artists these days. Accordingly, we predict that fandom-based sectors like K-Pop as well as casinos will survive even during a recession.
II. Entertainment: Fandom chooses artists over the essentials
In recent years, K-pop has grown exponentially. However, doubts have also arisen about the future growth prospects of the market. And those doubts have only increased in the face of the recent recession. However, we note that the Japanese idol-based industry continued to experience double-digit growth during the 2010s recession due to inelastic fandom demand. Characterized by robust inelastic demand, the K-pop market has secured a variety of revenue streams, and a new platform for K-pop fans is set to launch next year. We are positive about the strong growth potential of the K-pop industry.
III. Casino: Doing Better Despite Forex Worries
After seeing hopes and disappointments regarding economic reopening amid the repeated spread of Covid-19, casino operators will finally do well. Revenue is recovering on the release of pent-up demand from Japanese VIPs, which we attribute to improving customer access to Korean casinos thanks to the visa-free policy between Korea and Japan and an increase in flights between the two countries. While some are concerned about unfavorable macro conditions (e.g. yen depreciation), the casino industry still boasts of inelastic customer demand, evidenced by the strong influx of Japanese visitors following the reinstatement of the visa-free policy. While it should take time for accessibility for Chinese customers to improve, given that China’s zero-Covid policy remains in effect, it’s only a matter of time before the pent-up demand is released.
IV. Best Choice
We remain positive on the entertainment/casino sector and expect to deliver strong growth, supported by inelastic demand, even during economic downturns. With economic reopening effects concentrated in 2H22, reopening-driven earnings growth is expected to continue into 1H23. We recommend HYBE and Paradise as top picks, citing HYBE’s debut with promising new artists and improving earnings structure (driven by platform business), as well as Paradise’s potential for audience growth (crowd, high roller).