Our analysts Adam Jonas and Alex Straton discuss how tech-savvy
young professionals are influencing retail, brand loyalty,
mobility trends, and the broader technology landscape through
their evolving consumer choices.
Read more insights from Morgan Stanley.
----- Transcript -----
Adam Jonas: Welcome to Thoughts on the
Market. I'm Adam Jonas, Morgan Stanley's Embodied AI and Humanoid
Robotics Analyst.
Alex Straton: And I'm Alex Straton, Morgan
Stanley's U.S. Softlines Retail and Brands Analyst.
Adam Jonas: Today we're unpacking our
annual summer intern survey, a snapshot of how emerging
professionals view fashion retail, brands, and mobility – amid
all the AI advances.
It is Tuesday, August 26th at 9am in New York.
They may not manage billions of dollars yet, but Morgan Stanley's
summer interns certainly shape sentiment on the street, including
Wall Street. From sock heights to sneaker trends, Gen Z has
thoughts. So, for the seventh year, we ran a survey of our
summer interns in the U.S. and Europe. The survey involved more
than 500 interns based in the U.S., and about 150 based in
Europe.
So, Alex, let’s start with what these interns think about fashion
and athletic footwear. What was your biggest takeaway from
the intern survey?
Alex Straton: So, across the three
categories we track in the survey – that's apparel, athletic
footwear, and handbags – there was one clear theme, and that's
market fragmentation.
So, for each category specifically, we observed share of the top
three to five brands falling over time. And what that means
is these once dominant brands, as consumer mind share is falling
– and it likely makes them lower growth margin and multiple
businesses over time. At the same time, you have smaller brands
being able to captivate consumer attention more effectively, and
they have staying power in a way that they haven't necessarily
historically. I think one other piece I would just add; the
rise of e-commerce and social media against a low barrier to
entry space like apparel and footwear means it's easier to build
a brand than it has been in the past.
And the intern survey shows us this likely continues as this
generation is increasingly inclined to shop online. Their social
media usage is heavy, and they heavily rely on AI to inform, you
know, their purchases.
So, the big takeaway for me here isn't that the big are getting
bigger in my space. It's actually that the big are probably
getting smaller as new players have easier avenues to
exist.
Adam Jonas: Net apparel spending intentions
rose versus the last survey, despite some concern around
deteriorating demand for this category into the back half. What
do you make of that result?
Alex Straton: I think there were a bit
conflicting takes from the survey when I look at all the answers
together. So yes, apparel spending intentions are higher
year-over-year, but at the same time, clothing and footwear also
ranked as the second most category that interns would pull back
on should prices go up.
So let me break this down. On the higher spending intentions, I
think timing played a huge role and a huge factor in the results.
So, we ran this in July when spending in our space clearly
accelerated. That to me was a function of better weather, pent up
demand from earlier in the quarter, a potential tariff pull
forward as headlines were intensifying, and then also typical
back to school spending.
So, in short, I think intention data is always very heavily
tethered to the moment that it's collected and think that these
factors mean, you know, it would've been better no matter what
we've seen it in our space.
I think on the second piece, which is interns pulling back spend
should prices go up. That to me speaks to the high elasticity in
this category, some of the highest in all of consumer
discretionary. And that's one of the few drivers informing our
cautious demand view on this space as we head into the back
half.
So, in summary on that piece, we think prices going higher will
become more apparent this month onwards, which in tandem with
high inventory and a competitive setup means sales could falter
in the group. So, we still maintain this cautious demand view as
we head into the back half, though our interns were pretty rosy
in the survey.
Adam Jonas: Interesting. So, interns
continue to invest in tech ecosystems with more than 90 percent
owning multiple devices. What does this interconnectedness mean
for companies in your space?
Alex Straton: This somewhat connects to the
fragmentation theme I mentioned where I think digital shopping
has somewhat functioned as a great equalizer in the space and big
picture. I interpret device reliance as a leading indicator that
this market diversification likely continues as brands fight to
capture mobile mind share.
The second read I'd have on this development is that it means
brands must evolve to have an omnichannel presence. So that's
both in store and online, and preferably one that's experiential
focus such that this generation can create content around it.
That's really the holy grail.
And then maybe lastly, the third takeaway on this is that it's
going to come at a cost. You, you can't keep eyeballs without
spend. And historical brick and mortar retailers spend maybe 5 to
10 percent of sales on marketing, with digital requiring more
than physical.
So now I think what's interesting is that brands in my space with
momentum seem to have to spend more than 10 percent of sales on
marketing just to maintain popularity. So that's a cost pressure.
We're not sure where these businesses will necessarily recoup if
all of them end up getting the joke and continuing to invest just
to drive mind share.
Adam, turning to a topic that's been very hot this year in your
area of expertise. That's humanoid robots. Interns were
optimistic here with more than 60 percent believing they'll have
many viable use cases and about the same number thinking they'll
replace many human jobs. Yet fewer expect wide scale adoption
within five years.
What do you think explains this cautious enthusiasm?
Adam Jonas: Well actually Alex, I think
it's pretty smart. There is room to be optimistic. But there's
definitely room to be cautious in terms of the scale of adoption,
particularly over five years. And we're talking about humanoid
robots. We're talking about a new species that's being created,
right? This is bigger than just – will it replace our job?
I mean, I don't think it's an exaggeration to ask what does this
do to the concept of being human? You know, how does this affect
our children and future generations? This is major generational
planetary technology that I think is very much comparable to
electricity, the internet. Some people say the wheel, fire, I
don't know.
We're going to see it happen and start to propagate over the next
few years, where even if we don't have widespread adoption in
terms of dealing with it on average hour of a day or an average
day throughout the planet, you're going to see the technology go
from zero to one as these machines learn by watching human
behavior. Going from teleoperated instruction to then fully
autonomous instruction, as the simulation stack and the compute
gets more and more advanced.
We're now seeing some industry leaders say that robots are able
to learn by watching videos. And so, this is all
happening right now, and it's happening at the pace of
geopolitical rivalry, Sino-U.S. rivalry and terra cap, you know,
big, big corporate competitive rivalry as well, for capital in
the human brain.
So, we are entering an unprecedented – maybe precedented in the
last century – perhaps unprecedented era of technological and
scientific discovery that I think you got to go back to the
European and American Enlightenment or the Italian Renaissance to
have any real comparisons to what we're about to see.
Alex Straton: So, keeping with this same
theme, interns showed strong interest in household robots with 61
percent expressing some interest and 24 percent saying they're
very or extremely interested. I'm going to take you back to your
prior coverage here, Adam. Could this translate into demand for
AI driven mobility or smart infrastructure?
Adam Jonas: Well, Alex, you were part of my
prior coverage once upon a time. We were blessed with having you
on our team for a year, and then you left me…
Alex Straton: My golden era.
Adam Jonas: But you came back, you came
back. And you've done pretty well.
So, so look, imagine it's 1903, the Wright Brothers just achieved
first flight over the sands at Kitty Hawk. And then I were to
tell you, ‘Oh yeah, in a few years we're going to have these
planes used in World War I. And then in 1914, we'd have the first
airline going between Tampa and St. Petersburg.’ You'd say,
‘You're crazy,’ right?
The beauty of the intern survey is it gives the Morgan Stanley
research department and our clients an opportunity to
engage that surface area with that arising – not just the
business leader – but that arising tech adopter. These are the
people, these are the men and women that are going to kind of
really adopt this much, much faster. And then, you know, our
generation will get dragged into it eventually. So, I think it
says; I think 61 percent expressing even some interest. And then
24 [percent], I guess, you know…
The vast majority, three quarters saying, ‘Yeah, this is
happening.’ That's a sign I think, to our clients and capital
market providers and regulators to say, ‘This won't be stopped.
And if we don't do it, someone else will.’
Alex Straton: So, another topic, Generative
AI. It should come as no surprise really, that 95 percent of
interns use that tool monthly, far ahead of the general
population. How do you see this shaping future expectations for
mobility and automation?
Adam Jonas: So, this is what's interesting
is people have asked kinda, ‘What's that Gen AI moment,’ if you
will, for mobility? Well, it really is Gen AI. Large Language
Models and the technologies that develop the Large Language
Models and that recursive learning, don't just affect the
knowledge economy, right. Or writing or research report
generation or intelligence search.
It actually also turns video clips and physical information into
tokens that can then create and take what would be a normal
suburban city street and beautiful weather with smiling faces or
whatever, and turn it into a chaotic scene of, you know, traffic
and weather and all sorts of infrastructure issues and
potholes.
And that can be done in this digital twin, in an omniverse. A CEO
recently told me when you drive a car with advanced, you know,
Level 2+ autonomy, like full self-driving, you're not just
driving in three-dimensional space. You're also playing a video
game training a robot in a digital avatar.
So again, I think that there is quite a lot of overlap between
Gen AI and the fact that our interns are so much further down
that curve of adoption than the broader public – is probably a
hint to us is we got to keep listening to them, when we move into
the physical realm of AI too.
Alex Straton: So, no more driving tests for
the 16-year-olds of the future...
Adam Jonas: If you want to. Like, I tell my
kids, if you want to drive, that's cool. Manual transmission,
Italian sports cars, that's great. People still ride horses too.
But it's just for the privileged few that can kind of keep these
things in stables.
Alex Straton: So, let me turn this into
implications for companies here. Gen Z is tech fluent, open to
disruption? How should autos and shared mobility providers
rethink their engagement strategies with this generation?
Adam Jonas: Well, that's a huge question.
And think of the irony here. As we bring in this world of
fake humans and humanoid robots, the scarcest resource is the
human brain, right? So, this battle for the human mind is – it’s
incredible. And we haven't seen this really since like the
Sputnik era or real height of the Cold War. We're seeing it now
play out and our clients can read about some of these signing
bonuses for these top AI and robotics talent being paid by many
companies. It kind of makes, you know, your eyes water, even if
you're used to the world of sports and soccer, . I think
we're going to keep seeing more of that for the next few years
because we need more brains, we need more stem. I think it's
going to do; it has the potential to do a lot for our education
system in the United States and in the West broadly.
Alex Straton: So, we've covered a lot
around what the next generation is interested in and, and their
opinion. I know we do this every year, so it'll be exciting
to see how this evolves over time. And how they adapt. It's been
great speaking with you today, Adam.
Adam Jonas: Absolutely. Alex, thanks for
your insights. And to our listeners, stay curious, stay
disruptive, and we'll catch you next time. If you enjoy Thoughts
on the Market, please leave us a review wherever you listen and
share the podcast with a friend or colleague today.
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