Financial Pacific: Demographic Dynamics (third party), August 16.2010

August 4, 2010

Demographic Dynamics:

A case study for equity investors

Demographic shifts offer robust investment opportunities

With the macroeconomic outlook still clouded, we turn investor attention

to one of our core long-term departmental themes – namely, identifying

and investing across demographic trends. We believe that we are sitting at

the intersection of three powerful, once-in-a-lifetime population shifts, each

of which holds material investment implications.

Baby Boomers begin to retire

The approaching retirement of the Baby Boomers (born 1946-1964) will

significantly alter the spending, saving and leisure patterns of the largest

generational cohort in US history. The economic and financial effects will

be far-ranging; we examine the investable consequences across the

healthcare, financial and consumer sectors. We pay special attention to

Allergan, Ameriprise, Brookdale Senior Living, Express Scripts,

Financial Engines, McKesson, Mylan, Pfizer, T. Rowe Price and Zimmer.

Investing in the “middle”

The Goldman Sachs economics team coined the notion of the “expanding

middle” to describe both a global shift toward middle-income economies

and the growth of the middle-class population within these economies. We

see continued growth in consumer and infrastructure demand driven by

the expanding middle and highlight Amazon.com, Banco Bradesco,

Bucyrus, Citigroup, Hypermarcas, Monsanto, News Corp., Petrobras,

Teck Resources and Visa as key beneficiaries.

Generational waves after the Baby Boom

As Baby Boomers begin to exit the US labor force, generational dominance

will shift in the United States for the first time in forty years. The rise of two

under-30 generational waves—the “Millennials” and “Generation Z”—to

economic prominence will have significant consequences, particularly

within the Consumer and TMT sectors. Companies exposed include AT&T,

Crown Castle International, Disney, Hasbro, Juniper, Mead Johnson

Nutrition, Progressive, Qualcomm and Urban Outfitters.

Introducing GSRHDEMO

We introduce a tradable basket of 42 names tied to these three

demographic themes: Bloomberg ticker GSRHDEMO.

RELATED RESEARCH

Global Economics Paper No: 170, “The

Expanding Middle: The exploding World

Middle Class and Falling Global Inequality”

by Dominic Wilson, et al. (July 7, 2008)

GS SUSTAIN, “Crossing the Rubicon: Our

investment framework for the next decade”

by Anthony Ling, et al. (February 26, 2010)

Global Markets Institute, “The Power of the

Purse: Gender Equality and Middle-Class

Spending” by Sandra Lawson and Douglas

Gilman (August 5, 2009)

Stock selections in this report are based on

individual analyst criteria.

Anthony Carpet

(212) 902-6758 [email protected] Goldman Sachs & Co.

Laura Conigliaro


Robert D. Boroujerdi


Thomas Craven, CFA


Michael Chanin, CFA


Deep Mehta


The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research

August 4, 2010 Americas

Goldman Sachs Global Investment Research 2

Table of Contents

Portfolio Manager’s Summary 3

Retiring Baby Boomers 9

Opportunity #1: An aging population provides a tailwind for the healthcare sector 13

Opportunity #2: Financial services are needed to address both pre-retirement and post-retirement needs 17

Opportunity #3: Baby Boomer spending declines and shifts from discretionary items to necessities 22

The expanding global middle class 25

Opportunity #1: Emerging markets are THE story in consumer staples for decades to come 30

Opportunity #2: Food, feed and fuel to drive agricultural demand growth 34

Opportunity #3: Increasing discretionary income to drive incremental demand across the TMT universe 37

Opportunity #4: While prosperity is rising, the highest growth regions remain financially underserved 41

Opportunity #5: Global infrastructure growth and rising commodity demand 43

Generational waves after the Baby Boom 49

Opportunity #1: Millennials are tech-savvy and connected 52

Opportunity #2: Millennials consume media differently 55

Opportunity #3: Millennial consumers embrace e-commerce 57

Opportunity #4: As Millennials become parents, Generation Z looms 61

Appendix 63

Analyst contributors

Source: Goldman Sachs Research.

Stephen Graham

+55(11)3371‐0831 | [email protected]

Goldman Sachs Brasil Bco Mult S.A.

Ingrid Chung

(212) 902‐2360 | [email protected]

Goldman Sachs & Co.

Marc Irizarry


Goldman Sachs & Co.

Robert P. Jones


Goldman Sachs & Co.

Chris Neczypor


Goldman Sachs & Co.

Noah Poponak, CFA


Goldman Sachs & Co.Andrew Sawyer, CFA


Goldman Sachs & Co.

Brian Singer, CFA


Goldman Sachs & Co.

Randall Stanicky, CFA


Goldman Sachs & Co.

Michelle Tan, CFA


Goldman Sachs & Co.

John T. Williams


Goldman Sachs & Co.



Portfolio Manager’s Summary

With the macroeconomic outlook still clouded, we turn investor attention to one of our core

long-term departmental themes – namely, identifying and investing across demographic

trends. We believe that we are sitting at the intersection of three powerful, once-in-a-

lifetime population shifts, each of which holds material investment implications. In this

paper we seek to leverage our own research with the work of our Goldman Sachs’s

economists, Global Markets Institute and colleagues in GS SUSTAIN to prosecute this

opportunity via single stock and sector selection. Specifically we identify three material

population trends and seek to provide investors with a roadmap to help navigate the

changing demographic landscape. The trends are as follows:

How retiring Baby Boomers will impact the economy and specifically companies in

our healthcare, financial and consumer stock universes.

How a global shift toward middle-income economies and the growth of the middle-

class population within these economies will impact consumption, energy and

infrastructure.

How the rise of two under-30 generational waves—the “Millennials” and

“Generation Z”—will have significant consequences within the TMT, financial and

consumer spaces.

While the list of names that are affected is far-reaching and ever growing, we identify the

companies in Exhibit 1 as those for which we see the most pronounced positive and

negative impacts over the next few years.

Exhibit 1: Stocks impacted by key demographic themes


Population shift #1: Retiring Baby Boomers

The “Baby Boomers”, those born in the United States between 1946 and 1964 and

currently accounting for 26% of the population, make up the largest and most influential

generational cohort in American history. Their childhood catalyzed the rapid growth of

suburbs and homeownership rates, while their adolescence and adulthood reshaped

consumption preferences—as well as social and political values—throughout the economy.

With the oldest Baby Boomers turning 65 in 2011, the next transformational economic

change in the United States will be precipitated by their retirement. We expect the impact

Population shift

Commodities &

Industrials Consumer Financials Healthcare TMT

Retiring Baby Boomers (‐) CHS, HOGAMP, BKD, FNGN,

TROW

AGN, ESRX, MCK,

MYL, PFE, SYK, ZMHWBMD

The expanding global middle class

BA, BRFS3.SA, BTU,

BUCY, FCX, JOYG,

MON, PBR, PCP, TCK

CL, HYPE3.SA, MJN,

NKE, PEP, PM

BBD, BLK, C,

CIEL3.SA

AMZN, CSCO, DTV,

JNPR, MA, NWSA,

QCOM, V

Generational waves after the Baby BoomDIS, HAS, MJN,

URBNPGR

(+) AMT, BRCM, CCI,

CSCO, JNPR, QCOM,

SBAC, T

(‐) CTL, FTR, Q, WIN



to be felt throughout the domestic economy, especially within the healthcare, financial and

consumer sectors, and note the following sub-themes to prosecute this view:

Opportunity #1: An aging population provides a tailwind to the healthcare sector that

helps offset secular headwinds including a lack of innovation and an increasingly

challenging reimbursement environment. We see significant opportunities for

companies exposed to an aging population that can also successfully navigate the

changing healthcare landscape, and highlight in particular Allergan, Brookdale Senior

Living, Express Scripts, McKesson, Mylan, Pfizer, Stryker, WebMD and Zimmer.

Opportunity #2: Opportunities exist for select financial services companies that can

help Baby Boomers meet their pre-retirement and post-retirement needs. We believe

Ameriprise, Financial Engines and T. Rowe Price are particularly well positioned to

meet increased demand for retirement savings solutions.

Opportunity #3: According to the Bureau of Labor Statistics, US household consumer

spending peaks between the ages of 55 and 64, dropping 17% after age 65. As the

Baby Boomer cohort moves from peak spending years into retirement its total

consumption will decline, and necessities will gain a greater share of expenditures

relative to discretionary items. As a result, we believe that last decade’s “Boomer

Buys” are this decade’s “Boomer Sells.” We expect companies like Chico’s FAS and

Harley-Davidson to suffer as Baby Boomers retire.

Population shift #2: The expanding global middle class

The concept of the “expanding middle” was coined by Goldman Sachs economists to

describe the global shift toward middle-income economies as well as the growth of the

middle-class population within these economies. The developing world has spent the last

fifty years industrializing, globalizing and westernizing, with the result that middle-income

economies are now poised to take the mantle of global economic leadership from nations

with higher per-capita wealth. The consequences across sectors are likely to be significant

as higher standards of living drive increased consumer demand, and significant

infrastructure and commodity investment is required to help meet that demand.

Opportunity #1: We see $10 trillion of potential growth between now and 2050 for the

consumer packaged good industry alone due to increased household penetration in

emerging markets. Consumer-facing multinationals exposed to rising middle-class

wealth include Colgate-Palmolive, Mead Johnson Nutrition, Nike, Philip Morris

International and in time PepsiCo. Local competitors are sure to compete for this

market as well; we highlight Hypermarcas as a local franchise poised to grow in Brazil.

Opportunity #2: As global consumption increases, we see food, feed and fuel

requirements combining to drive demand in the agricultural sector. We expect

Monsanto, the global leader in agricultural biotechnology, to benefit from the need for

increased yield as crop demand outpaces growth in arable land. Brasil Foods, the

largest producer of processed foods, pork, and poultry in Brazil, is likely to profit

directly from increased protein consumption as diets improve with higher incomes.

Opportunity #3: Higher discretionary income in emerging markets will similarly drive

incremental demand across the tech, media and telecom universe. Companies poised

to benefit include Amazon.com, DirecTV, News Corp. and Qualcomm.

Opportunity #4: We expect the world’s financially underserved population to

increasingly move into the global financial system as wealth increases in middle-

income countries. As a result, we see massive potential customer growth in banking,

lending and asset management. Highlighted US stocks include BlackRock, Citigroup,



MasterCard and Visa; in Latin America we see opportunities for Banco Bradesco and

Cielo.

Opportunity #5: Finally, global infrastructure growth and increased commodity

demand will be necessary to facilitate the increased consumption spending of two

billion additional middle class people aspiring to new standards of living over the next

twenty years. The effects will be felt throughout the global industrial and commodity

complex; we believe Boeing, Bucyrus, Freeport-McMoRan, Joy Global, Peabody

Energy, Petrobras, Precision Castparts and Teck Resources are particularly well

positioned.

Population shift #3: Generational waves after the Baby Boom

Less well understood than the Baby Boom but potentially equally important in the United

States are population peaks in the 16-29 and 0-4 age ranges (which we are calling

“Millennials” and “Generation Z,” respectively). While these generational waves are not as

large as the Baby Boom in absolute terms, they are larger than the low birth years between

1965 and 1980. As a result, the Millennials are poised to assume the country’s first new

demographic leadership in forty years as they enter the labor force and Baby Boomers

retire. We expect this to have a profound impact on US companies, particularly within the

TMT and consumer sectors.

Opportunity #1: Millennials came of age in the Information Era and are more tech-

savvy and connected than prior generations. This creates opportunities for the

enablers of connectivity, including American Tower, AT&T, Broadcom, Cisco, Crown

Castle International, Juniper, Qualcomm, and SBA Communications.

Opportunity #2: Millennials also consume content differently than prior generations,

creating disruptions for the media industry. We favor differentiated content producers

that are able to navigate changing media habits, such as Disney.

Opportunity #3: Given a high degree of awareness of consumer choices (aided by

online searches and reviews), preference for immediacy of service, and comfort

transmitting payment electronically, younger generations are more likely than their

forebears to make purchases online. We highlight apparel retailer Urban Outfitters

and auto insurer Progressive as companies whose e-commerce franchises are

particularly well positioned relative to evolving generational preferences.

Opportunity #4: As Millennials become parents, Generation Z (ages 0-4) looms as an

emerging demographic wave. While the ultimate size and economic impact of this

cohort remains unclear, the looming change in the under-18 demographic from a teen-

dominated group to one where children under age 9 will greatly outnumber those ages

10-18 in the United States will have significant consequences for companies that target

youth consumers and their parents. We expect Hasbro and Mead Johnson Nutrition

to be among the names affected.

Prosecuting the view

For diversified exposure to stocks we believe are positively exposed to each of the three

demographic themes outlined above, we introduce a 42-name tradable demographics

basket, Bloomberg ticker GSRHDEMO (see Exhibit 2).1

1 Note: The ability to trade this basket will depend upon market conditions, including liquidity and

borrow constraints at the time of trade.

August 4, 2010

Am

ericas

Goldm

an Sachs Global Investm

ent Research

6

Exhibit 2: Selected financial data for stocks mentioned in this report

Shaded entries are viewed as negatively impacted. Prices are as of the market close of August 3, 2010

Note: (1) For methodology and risks associated with price targets, please see analysts’ previously published research; (2) 2010 represents year ends from June 2010 to May 2011; 2011: June 2011 to May 2012.

Source: Goldman Sachs Research estimates.

Ticker Company Name Rating Last Close Target Upside to Target Price EBIT CAGR Sales CAGRPrice Price target (%) Period 2009-12 2009-12 2010 2011 2010 2011 2010 2011 2010 2011

Retiring Baby BoomersAGN Allergan, Inc. CL-Buy √ $63.48 81.00 28% 12 months 14% 9% 20.0X 17.3X 3.5X 2.9X 11.0X 9.8X 5% 6%

AMP Ameriprise Financial, Inc. Neutral √ $42.82 50.00 17% 12 months 29% 13% 10.2X 8.6X 1.1X 1.0X 5.3X 4.7X 12% 12%

BKD Brookdale Senior Living Inc. Buy √ $15.30 22.00 44% 12 months 50% 6% NM NM 1.7X 1.8X 11.8X 10.2X 18% 20%

CHS Chico's FAS, Inc. CL-Sell $9.03 8.00 -11% 6 months 24% 7% 13.8X 11.9X 1.5X 1.3X 5.3X 4.8X 6% 10%

ESRX Express Scripts, Inc. Buy √ $46.32 62.00 34% 12 months 28% 23% 18.7X 14.2X 2.9X 2.2X 5.6X 4.4X 17% 15%

FNGN Financial Engines, Inc. Neutral $15.24 17.00 12% 12 months 56% 24% 48.9X 41.6X 5.6X 4.8X 35.5X 21.1X 3% 5%

HOG Harley-Davidson, Inc. Sell $27.39 26.00 -5% 6 months 78% 4% 21.3X 12.1X 4.7X 3.3X 6.8X 4.7X 2% 9%

MCK McKesson Corp. CL-Buy √ $62.10 86.00 38% 12 months 6% 4% 12.7X 11.3X 2.4X 2.3X 5.9X 5.5X 8% 11%

MYL Mylan Inc. Buy √ $17.48 26.00 49% 12 months 10% 8% 10.9X 9.0X 2.1X 1.8X 6.5X 6.4X 16% 12%

PFE Pfizer Inc. Buy √ $16.34 18.00 10% 12 months 7% 6% 7.8X 7.4X 1.5X 1.4X 5.4X 5.4X 6% 12%

SYK Stryker Corp. Neutral √ $47.76 55.00 15% 12 months 11% 6% 14.8X 13.3X 2.5X 2.2X 7.2X 6.7X 10% 9%

TROW T. Rowe Price Group, Inc. Neutral √ $49.70 45.00 -9% 12 months 21% 14% 21.9X 19.1X 4.1X 3.8X 11.8X 10.5X 5% 5%

WBMD WebMD Health Corp. Neutral √ $46.68 47.00 1% 6 months 47% 17% 35.2X 29.6X 3.8X 3.6X 14.4X 11.9X 3% 4%

ZMH Zimmer Holdings, Inc. Buy √ $54.19 67.00 24% 12 months 7% 5% 12.7X 11.3X 1.7X 1.5X 6.6X 6.2X 9% 10%

The expanding global middle classAMZN Amazon.com Inc. CL-Buy √ $122.42 150.00 23% 6 months 35% 29% 35.7X 27.5X 7.6X 5.7X 19.6X 15.5X 4% 6%

BA The Boeing Company CL-Buy √ $69.54 84.00 21% 12 months 51% 4% 17.8X 13.8X 12.5X 47.3X 9.3X 8.4X -2% 6%

BBD Banco Bradesco (ADR) Buy $18.43 21.30 16% 12 months 28% 12% 12.3X 10.9X 2.7X 2.5X NM NM NM NM

BLK BlackRock, Inc. CL-Buy √ $160.84 173.00 8% 12 months 43% 29% 16.8X 14.6X 0.4X 0.4X 10.3X 9.0X 5% 7%

BRFS3.SA BRF-Brasil Foods S.A. Neutral R$24.26 25.70 6% 12 months 101% 12% 34.0X 17.4X 1.6X 1.5X 11.0X 8.3X 2% 5%

BTU Peabody Energy Corp. Buy √ $48.06 55.00 14% 6 months 23% 11% 16.0X 11.0X 2.9X 2.3X 7.8X 6.1X 5% 6%

BUCY Bucyrus International Inc. Buy √ $63.10 70.00 11% 12 months 23% 19% 15.3X 10.9X 2.7X 2.2X 9.4X 7.2X 11% 7%

C Citigroup Inc. Buy √ $4.13 4.50 9% 12 months NM 3% 14.0X 9.3X 0.8X 0.7X NM NM NM NM

CIEL3.SA Cielo Neutral R$16.02 18.80 17% 12 months -3% 3% 11.7X 12.8X 50.5X 36.5X 7.3X 7.8X 9% 7%

CL Colgate-Palmolive Company Neutral √ $78.14 86.00 10% 12 months 6% 4% 16.2X 15.0X 13.3X 12.5X 9.9X 9.5X 6% 7%

CSCO Cisco Systems, Inc. Neutral √ $23.82 25.00 5% 12 months 17% 12% 18.4X 16.0X 3.0X 2.9X 13.5X 11.7X 6% 8%

DTV The DIRECTV Group, Inc. Buy √ $37.24 46.00 24% 12 months 23% 8% 15.0X 12.1X 30.0X NM 6.3X 5.7X 8% 10%

FCX Freeport-McMoRan Copper & Gold Inc. Neutral √ $74.03 79.00 7% 6 months 13% 13% 9.8X 8.4X 2.9X 2.1X 3.7X 3.2X 11% 16%

HYPE3.SA Hypermarcas Buy R$22.95 27.10 18% 12 months 36% 35% 29.4X 23.1X 2.5X 2.3X 16.9X 12.4X 2% 6%

JNPR Juniper Networks, Inc. CL-Buy √ $28.02 32.00 14% 12 months 36% 20% 28.1X 20.8X 2.1X 1.8X 13.9X 10.6X 4% 7%

JOYG Joy Global Inc. Buy √ $60.29 65.00 8% 12 months 7% 5% 14.5X 12.7X 5.1X 4.4X 8.8X 7.9X 8% 6%

MA Mastercard Inc. Buy √ $200.91 250.00 24% 12 months 16% 9% 15.5X 13.0X 5.4X 4.2X 8.3X 7.1X 4% 5%

MJN Mead Johnson Nutrition Co. CL-Buy √ $53.30 61.00 14% 12 months 7% 9% 21.9X 19.0X NM NM 14.5X 12.9X 4% 5%

MON Monsanto Co. CL-Buy √ $59.00 65.00 10% 12 months -5% 3% 22.8X 20.0X 3.0X 2.8X 11.5X 10.0X 5% 4%

NKE Nike, Inc. CL-Buy √ $73.10 85.00 16% 6 months 10% 8% 16.6X 14.6X 3.4X 3.1X 10.5X 9.3X 6% 6%

NWS__A The News Corp. (A) Buy √ $13.63 17.00 25% 12 months 15% 3% 14.0X 12.4X 1.3X 1.3X 7.2X 6.6X 6% 8%

PBR Petroleo Brasileiro S.A. (ADR) Buy $38.18 47.00 23% 6 months 24% 18% 10.3X 8.4X 1.6X 1.4X 5.6X 4.5X -7% -2%

PCP Precision Castparts Corp. CL-Buy √ $124.16 140.00 13% 12 months 15% 12% 16.8X 14.1X 2.5X 2.2X 9.8X 8.4X 6% 7%

PEP PepsiCo, Inc. CL-Buy √ $65.77 76.00 16% 12 months 15% 14% 15.7X 13.9X 5.1X 4.8X 10.3X 9.4X 4% 6%

PM Philip Morris International Inc. Buy √ $52.15 58.00 11% 12 months 10% 7% 13.8X 12.0X 42.3X 124.5X 9.4X 8.5X 7% 9%

QCOM QUALCOMM, Inc. CL-Buy √ $38.46 44.00 14% 12 months 12% 11% 19.3X 16.6X 3.2X 2.9X 15.5X 13.5X 6% 7%

TCK__B.TO Teck Resources Limited Neutral C$37.25 41.00 10% 6 months 25% 15% 14.6X 8.2X 1.3X 1.2X 6.5X 4.6X 4% 12%

V Visa Inc. CL-Buy √ $73.00 93.00 27% 12 months 18% 15% 18.9X 15.3X 2.1X 2.0X 10.4X 8.9X 4% 6%

Generational waves after the Baby BoomAMT American Tower Corp. Buy √ $46.46 53.00 14% 12 months 21% 11% 49.2X 38.1X 5.7X 7.9X 18.5X 16.1X 4% 5%

BRCM Broadcom Corporation Buy √ $36.28 44.00 21% 6 months 93% 22% 16.9X 15.1X 3.9X 3.3X 13.6X 11.6X 6% 8%

CCI Crown Castle International Corp. CL-Buy √ $40.76 46.00 13% 12 months 23% 9% NM 47.2X 5.0X 5.8X 15.9X 14.1X 2% 4%

CSCO Cisco Systems, Inc. Neutral √ $23.82 25.00 5% 12 months 17% 12% 18.4X 16.0X 3.0X 2.9X 13.5X 11.7X 6% 8%

CTL CenturyTel Inc. Neutral $35.87 38.00 6% 12 months 13% 10% 10.1X 9.9X 1.1X 1.1X 4.9X 5.1X 15% 13%

DIS The Walt Disney Company Buy √ $34.21 42.00 23% 12 months 13% 4% 17.0X 13.7X 1.8X 1.7X 9.2X 7.7X 6% 8%

FTR Frontier Communications Corp. Neutral $7.67 7.50 -2% 12 months 3% -6% 16.8X 14.5X 27.5X 35.3X 2.5X 2.5X 23% 23%

HAS Hasbro, Inc. CL-Buy √ $42.43 55.00 30% 12 months 10% 4% 16.5X 12.1X 4.3X 4.2X 9.4X 7.9X 9% 9%

JNPR Juniper Networks, Inc. CL-Buy √ $28.02 32.00 14% 12 months 36% 20% 28.1X 20.8X 2.1X 1.8X 13.9X 10.6X 4% 7%

MJN Mead Johnson Nutrition Co. CL-Buy √ $53.30 61.00 14% 12 months 7% 9% 21.9X 19.0X NM NM 14.5X 12.9X 4% 5%

PGR The Progressive Corporation Buy √ $19.61 23.00 17% 12 months -1% 4% 13.5X 12.8X 2.0X 1.9X NM NM NM NM

Q Qwest Communications Intl. Neutral $5.65 5.75 2% 12 months -1% -3% 15.3X 15.4X NM NM 4.7X 5.0X 14% 21%

QCOM QUALCOMM, Inc. CL-Buy √ $38.46 44.00 14% 12 months 12% 11% 19.3X 16.6X 3.2X 2.9X 15.5X 13.5X 6% 7%

SBAC SBA Communications Corp. CL-Buy √ $36.03 43.00 19% 12 months 58% 12% NM NM 9.8X 11.6X 17.8X 14.9X -3% -1%

T AT&T Inc. Buy √ $26.69 34.00 27% 12 months 8% 1% 11.3X 10.4X 1.5X 1.5X 5.4X 5.2X 8% 10%

URBN Urban Outfitters Inc. Neutral √ $31.56 38.00 20% 6 months 25% 17% 18.9X 15.7X 3.4X 2.8X 8.8X 7.4X 5% 6%

WIN Windstream Corp. Neutral $11.50 10.50 -9% 12 months 4% 1% 13.8X 13.5X 8.8X 14.6X 6.1X 6.1X 14% 14%

FCF YieldGSRHDEMO basket

P/E P/B EV/EBITDA



How to read this report

For the benefit of the reader we note that this paper is broken down into three separate

sections, each focused on one of the larger demographic trends we have described above.

From there we frame each theme and provide several opportunity sets for investors to

prosecute a view across sectors and single stocks.





Retiring Baby Boomers



Retiring Baby Boomers

The “Baby Boomers”, born in the United States between 1946 and 1964 and currently

accounting for 26% of the US population, make up the largest and most influential

generational cohort in American history. Their childhood catalyzed the rapid growth

of suburbs and homeownership rates, while their adolescence and adulthood

reshaped consumption preferences—as well as social and political values—

throughout the economy. With the oldest Baby Boomers turning 65 in 2011, the next

transformational economic change in the United States will be precipitated by their

retirement.

Over the next twenty years the percentage of the population over age 65 in the United

States is expected to rise from 13% to nearly 20%, a net increase of 31 million retirement

age people (see Exhibit 3). This is the result of both a demographic bulge—the Baby

Boom—and increases in lifespan. The rapid growth in the number and proportion of the

population over age 65 will have material consequences throughout the economy. We

identify three investable opportunities in particular, highlighting companies affected in

Exhibit 4:

Increased healthcare demand as the largest generation in United States history

transitions into old age.

Meaningful opportunities for asset managers, financial advisors and insurers as Baby

Boomers look to self-fund the bulk of their retirement income.

Declining Baby Boomer consumption and a shift in household spending from

discretionary items toward necessities.

Exhibit 3: The over-65 age group is expected to grow steadily over the next 20 years

Estimated number in millions and percentage of US population over age 65

Source: US Census Bureau International Data Base.

Exhibit 4: Companies exposed to the retirement of the Baby Boomer generation


0%

5%

10%

15%

20%

25%

0

10

20

30

40

50

60

70

80

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Population over age 65 (left axis) % of population over age 65 (right axis)

Opportunity Impact Companies

Increased healthcare demand + AGN, BKD, ESRX, MCK, MYL, PFE, SYK, WBMD, ZMH

Retirement funding needs + AMP, FNGN, TROW

Declining Boomer discretionary spending ‐ CHS, HOG



The size of the Baby Boomer generation relative to adjacent cohorts is a function of

moderating fertility rates through the 1960s and 1970s and increases in life expectancy

over the past fifty years.

Fertility. Total fertility in the United States, as defined by the average number of

children per woman, fell from a peak of 3.7 between 1960 and 1965 to a trough of 1.8

between 1975 and 1980. This sharp decline was the result of changing social and

economic trends, including urbanization and rising incomes throughout the 1960s and

1970s, and was sparked in part by the introduction of the combined oral contraceptive

pill in 1960. Fertility rates in the United States have recovered over the past thirty years

to an estimated 2.1 children per woman in 2010. This recovery has given rise to the

Millennials and Generation Z discussed later in this report, though we note that fertility

rates have consistently stayed more than 40% below peak Baby Boom levels and are

likely to remain so for the foreseeable future (see Exhibit 5).

Longevity. Continuing advances in healthcare and living standards are contributing to

a shift of mortality to older ages. In the United States, life expectancy at birth increased

from 70 years in 1960 to an estimated 79 years in 2010. Life expectancy is forecast by

the United Nations to increase further to 83 years by 2045, emphasizing the need for

extended use of healthcare services and retirement planning.

Exhibit 5: Declining fertility and increasing longevity contribute to an aging population

Average number of children per woman and life expectancy at birth in the United States

Source: United Nations World Population Prospects: The 2008 Revision (Medium Variant Projections).

Immigration partially offsets aging trends

In framing this reality of an aging population driven we note that the United States does

not face a sharply declining workforce in absolute terms, as is currently the case in Japan,

Russia and Western Europe. This is due to higher rates of immigration and a generational

wave–the Millennials—now entering the workforce.

In terms of immigration trends we show, in Exhibit 6, that the majority of persons

obtaining legal permanent resident status in the United States are in the 20-44 age group.

40

60

80

100

1

2

3

4

1950‐55 1965‐70 1980‐85 1995‐00 2010‐15 2025‐30 2040‐45

Total fertility (children per woman) Life expectancy at birth (years)

The relative size of the Baby Boomer generation is a function of fertility and longevity trends



Partly as a function of their age, these immigrants have higher labor-force participation

rates than the broader domestic population, and for the first generation tend to have higher

fertility rates as well. With more than a million new residents in this category each year

and additional forms of immigration, legal and otherwise, new residents therefore have the

potential to partially offset the aging of the labor force caused by declining fertility and

increasing longevity (see Exhibit 7). However, the ultimate impact of immigration will

depend on policy choices and relative economic growth.

Exhibit 6: Most US immigrants are of working age Persons obtaining legal permanent resident status (“green

card”) in the United States by age, FY 2009

Exhibit 7: Legal US immigration trends remain positive Persons obtaining legal permanent resident status in the

United States, 1945-2009

Source: US Department of Homeland Security, US Census Bureau.

Source: US Department of Homeland Security.

0%

10%

20%

30%

40%

50%

60%

<20 20‐44 45‐64 65+

Immigrants Total population

More than half of new green card recipients are between the ages of 20 and 44.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

1945

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1966

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1972

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1978

1981

1984

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1996

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2005

2008



Opportunity #1: An aging population provides a tailwind for the

healthcare sector

As Baby Boomers live longer, they spend more on healthcare; as they spend more on

healthcare, they live longer. This feedback loop is the continuation of a decades-long trend

in the developed world, and is likely to continue as the massive Baby Boomer cohort

moves into its peak healthcare spending years.

The average life expectancy in the United States in 1945, when the first Baby Boomers

were born, was around 66 years. These oldest Baby Boomers, now age 65, can expect to

live an additional 18 years on average. This is a testament not just to actuarial survivorship,

but also in large part to the advances of medicine. As these advances continue their

decades-long trend of increasing life expectancy, younger Baby Boomers who reach age 65

will likely be able to expect to live even longer (see Exhibit 8).

Exhibit 8: Life expectancy continues to increase US life expectancy at birth (left-axis) and at 65 (right-axis)

Source: CDC/NCHS, National Vital Statistics System.

These increases in life expectancy come with a concurrent rise in medical costs, however.

As shown in Exhibit 9, healthcare spending increases rapidly after age 55, from an average

of $2,930 per year in the 45-54 age group to $3,825 in the 45-64 age group and $4,605 for

those older than 65. The increase is even more pronounced as a percentage of after-tax

income, which more than triples from 3.7% for those ages between 45 and 54 to 11.9% for

those older than the traditional retirement age of 65. At the same time, healthcare spending

among those over age 65 has been increasing, and is very likely to continue to do so as the

Baby Boomers move into this demographic. The number of treatment options available

increases as medicine advances and previously untreatable ailments are targeted by

expensive and specialized therapies. The steady increase in the average number

prescriptions filled for Americans over age 65 is indicative of this trend, as shown in Exhibit

10.

6

8

10

12

14

16

18

20

66

68

70

72

74

76

78

80

1950 1960 1970 1975 1980 1985 1990 1995 2000 2005

At birth (left-axis) At 65 (right-axis)

Medical advances over the lifetime of the Baby Boomers have driven a steady increases in life expectancy.

Healthcare spending increases rapidly after age 55



Exhibit 9: Healthcare spending increases sharply after

age 65… Average annual dollar and % income spent on healthcare

Exhibit 10: …and healthcare spending among the over-65

group has been increasing steadily over time Per capita prescriptions filled by Americans over age 65

Source: Bureau of Labor Statistics Consumer Expenditure Survey.

Source: Kaiser Family Foundation.

The positive demographic trend competes with secular headwinds in healthcare.

While we remain positive on the impact of an aging population for the healthcare complex,

we remind investors that the combination of an impending “patent cliff” in Major Pharma

and a challenging reimbursement environment in the United States will provide near to

medium term headwinds. The former, coupled with a lack of innovation, will pose the

most significant challenge to the industry’s ability to grow organically. With that said, we

do see unique opportunities for names leveraged to the impact of aging Baby Boomers in

the areas of both products and services and facilities.

Products

Within pharmaceuticals, companies with innovative drugs targeting diseases

that affect the older population stand to benefit most. For 2010 we estimate

that 43% of Buy-rated Pfizer’s sales are derived from drugs that target such

diseases, including cardiovascular, arthritis, osteoporosis, glaucoma, erectile

dysfunction and Alzheimer’s disease. This proportion will decline to 25% by 2015

as many of these drugs—including Lipitor, Celebrex and Viagra—lose patent

exclusivity. However, the company is still clearly levered to an aging population

over the long term, and its success will in large part be measured by its ability to

execute on the demographic opportunity before it. The patent exclusivity drop-off

is not a Pfizer-specific issue, but rather an industry-wide challenge (see Exhibits 11-

12).

As a record number of branded drugs go off patent in the next few years and

pressures to contain healthcare costs continue to mount, generics become an

increasingly important driver of revenue and earnings growth for a number of

companies. We expect Buy-rated industry leader Mylan to benefit from greater

prescription drug usage as the population ages, and see the company’s

positioning in follow-on biologics as providing another avenue of growth to

address the growing need for expensive biotech drugs at reduced costs.

0%

2%

4%

6%

8%

10%

12%

14%

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

0‐25 25‐34 35‐44 45‐54 55‐64 65+

Healthcare $ spent Healthcare % of after‐tax income

24

26

26

28

29

30

31

20

22

24

26

28

30

32

2003 2004 2005 2006 2007 2008 2009

On average, Americans over the age of 65 filled 31 prescriptions in

2009, up 28% from 2003



Exhibit 11: 51% of current branded sales are poised to go

generic within five years Estimated % of current branded sales to go generic

Exhibit 12: The next three years should see the greatest

generic launch activity $ billions

Source: IMS, company data, Goldman Sachs Research estimates.

Source: IMS, company data, Goldman Sachs Research estimates.

CL-Buy rated Allergan’s story is unique within specialty pharmaceuticals, offering

compelling long-term growth within a sector that has been squeezed by poor long-

term visibility. The company is not only exposed to an aging population via its

ophthalmology and medical aesthetics segments, but also to the secular trends of

rising obesity via its Lap-Band product and growth in emerging markets across its

franchise. These attributes position Allergan to succeed as a standalone company,

but also potentially make it a strategically valuable asset for other companies

seeking exposure to these positive trends.

For medical device manufacturers the biggest beneficiaries of people growing

older and living longer are the companies most exposed to artificial joints. Buy-

rated Zimmer is the market leader in the orthopedic device manufacturer market

with 73% of revenues concentrated in artificial hips and knees. The combination of

an aging population, increased prevalence of obesity (estimated at 30% in the

United States by the Centers for Disease Control) and demand by younger patients

to maintain activity levels should support accelerating volume growth. Neutral-

rated Stryker, the number three company in the space, is also positively exposed

to growth in the orthopedic device market.

Services and Facilities

Within the supply chain we believe that all of the major drug wholesalers stand to

benefit from increased volumes of drugs and medical supplies associated with the

aging population. We see CL-Buy rated McKesson as best positioned for this trend

given its concentrated exposure as the largest buyer of generics in the world. The

company has a diverse distribution network that covers both pharmaceuticals and

medical supplies and a sizable presence in the Healthcare IT sector that is set to

become increasingly important as the government becomes more involved in

reimbursement.

Buy-rated pharmacy benefit manager Express Scripts should also benefit from

increased prescription use driving both drug volumes and the need to manage

cost trends. In the context of the natural shift to greater volumes, Express Scripts

is poised to enjoy greater profitability as generics become more prevalent.

Increasing use of more complex and expensive specialty drugs to treat diseases

common among the elderly also increases the need to manage cost trends and

drive demand throughout the pharmacy benefit management industry.

0%

4%

8%

12%

16%

20%

24%

28%

32%

36%

40%

44%

48%

52%

56%

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

$140

$150

Cumulative expiring branded spend

% of 2009 branded pharma market

% of 2009 non-biotech pharma market branded

spend going

Over a third of current branded

spend will be generic in 3 years

$0

$1

$2

$3

$4

$5

$6

$7

$8

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$10

$11

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$13

$14

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LAUNCHES BY QUARTER (ANNUAL SPEND under exclusivity) LAUNCHES BY QUARTER (multi-sourced) 4-quarter rolling average

HISTORICAL PROJECTED



Beyond pharmaceutical needs, increases in the number of older people will drive

demand for senior living facilities of all types. Buy-rated Brookdale Senior Living

is the largest publicly traded owner/operator of senior living facilities in the United

States, with 564 facilities serving over 52,000 residents. The key to our Buy thesis

is compelling growth in the 75-plus age group over the next 5-10 years (4-5%

CAGR versus 1% currently). Brookdale’s current portfolio serves the gamut of

acuity needs from independent living to skilled nursing and memory care, and

over 95% of its revenues are derived from private pay rent and fees, as opposed to

Medicare reimbursement. As a result, we believe Brookdale is ideally positioned to

take advantage of rising occupancy and potential rental rate spikes as resident

demand begins to widely outstrip supply over the next three to five years (see

Exhibits 13-14).

Exhibit 13: Senior living supply growth is set to flatten ...As of 4Q2009

Exhibit 14: . . . as the 75-plus population grows Penetration rate = senior living units as % of 75+ population

Source: ASHA, NIC, Goldman Sachs Research estimates.

Source: US Census Bureau, ASHA, NIC, Goldman Sachs Research estimates.

Finally, as a provider of healthcare information Neutral-rated WebMD should also

see growth related to the aging Baby Boomer population. The Pew Internet &

American Life survey revealed that 78% of Baby Boomers use the internet and

social media to track down health-related information. WebMD meets this demand

with the largest consumer-focused online health information site on the web, with

over 70 million unique users. The company also operates MedScape, the dominant

continuing-education portal for physicians, and is in the very early stages of

capturing the offline-to-online shift in pharmaceutical advertising. We believe that

increasing time spent online, an aging population searching more often for health-

related information and increasingly difficult sales-related access to physicians

may allow WebMD to approach 10% of total pharmaceutical advertising spend

within 10 years, up from around 4% today.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

0

15,000

30,000

45,000

60,000

75,000

198

6

198

7

198

8

198

9

199

0

199

1

199

2

199

3

199

4

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199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9E

201

0E

201

1E

Construction vs. inventory

Units delivered

Units delivered (left) Construction vs. inventory (right)

NoteOur penetration analysis assumes ramp back to 35k units / year (long-term average) beginning in 2012

7%

8%

9%

10%

11%

12%

0

5

10

15

20

25

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

20

10E

20

15E

penetration rate75+ pop (mn)

US Census - population 75+ (left) Penetration rate (right)



Opportunity #2: Financial services are needed to address both pre-

retirement and post-retirement needs

With the oldest Baby Boomers next year turning age sixty-five, the traditional retirement

age in America, we see meaningful opportunities for providers of financial services. We

focus in particular on the opportunities presented by the pre- and post-retirement needs of

the Baby Boomer generation for asset managers, financial advisors and insurers.

The lay of the land

There are severe structural changes in the retirement landscape creating increased demand

for new retirement income sources as Baby Boomers approach retirement. A decline in

traditional benefits is eroding historical retirement patterns, with social welfare programs

facing long-term funding challenges and defined benefit pension plans having been

overtaken by defined contribution schemes in the early 1990s (see Exhibits 15-16). Defined

benefit assets under management as of year-end 2009 stood at $2.1 trillion compared to

defined contribution assets of $4.1 trillion. With life expectancy increasing, the average

Baby Boomer retirement may be as long as twenty to thirty years, requiring either greater

savings or acceptance of reduced standards of living.

Given the increased self-funding responsibility handed to retirees, the opportunity is clear

for companies that can position themselves to manage Baby Boomer investments and

provide retirement income vehicles that hedge against the new risks retirees face.

Exhibit 15: Social Security faces long-term challenges Revenue less outlays as a percentage of GDP

Exhibit 16: DC plan growth continues to outpace DB Assets in trillions

Source: Congressional Budget Office.

Source: Investment Company Institute.

We view the “runway” for retirement services as long. As Exhibit 17 shows, weak asset

returns and lengthening life expectancies have combined to push back expected retirement

ages over the past ten years. Given that contributions and use of planning and

administrative services ramp up in the years prior to retirement, the pipeline of employees

saving for retirement should remain steady through 2020.

(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

1985 1995 2005 2015 2025 2035 2045

Rev

enu

e -

Ou

tlay

s as

% o

f G

DP

DB

DC

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Ass

ets

in tr

illio

ns

... while DB assets have only grown 11%

DC assets have grown 58% since 1998...

Traditional retirement benefits are being replaced by self-funding



Exhibit 17: An increase in expected retirement age may “extend the runway” 2010 Retirement Confidence Survey: At what age do you expect to retire?

Source: Employer Benefit Research Institute.

With these trends in place, the growth of the pie appears certain. We project retirement

assets to increase by 40% over the next four years alone (see Exhibit 18). The question for

financial services providers then becomes one of how allocations will change going

forward. We focus on target date funds, annuities and IRAs as key areas of growth as the

Baby Boomers approach and enter retirement.

Exhibit 18: Retirement asset mix continues to shift; assets expected to increase over 40% in next few years

Source: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, Internal Revenue Service Statistics of Income Division, Cerulli Associates, and Goldman Sachs Research.

Target date funds are perceived as the “do it for me,” self-contained retirement portfolio

for average investors. Often named for the year an investor plans to retire, the funds are

designed to automatically shift to a more conservative asset mix as retirement time nears.

In 2006, the Pension Protection Act sanctioned automatic enrollment for defined-

contribution plans, and the Labor Department approved target-date funds as a default

option for company retirement plans. As of May 2010, target date funds amounted to $259

billion in total assets, a 41% cumulative annual growth rate since they were initially

introduced in the late 1990s (see Exhibit 19). Net new flows soared from $4 billion in 2002

to $56 billion in 2007 and remained positive through the downturn (see Exhibit 20).

2000 2010 2000 2010Less than 60 22% 9% 12% 2%Ages 60-64 22% 19% 28% 17%Age 65 28% 24% 20% 19%Age 66 or older 19% 33% 20% 42%Never retire 4% 9% 8% 10%Don't know/refused 5% 6% 13% 9%

All Workers Ages 55+

IRAs25.7%

Annuities9.7% Government

Pension Plans25.7%

Private DB Plans13.9%

Other DC Plans

7.9%

401(k) Plans17.1%

Today

?

??

?

? ?

2014

With retirement assets projected to grow over 40% in the next 4 years, the real question is this: How will retirement plan allocations change moving forward?

IRAs18.6%

401(k) Plans13.1%Other

DC Plans11.1%

Private DB Plans21.4%

Government Pension Plans

27.1%

Annuities8.6%

1995

Retirement Assets: $7.0tn Retirement Assets: $14.4tn Estimated Retirement Assets: $20.4tn

Target date fund assets have grown at a 41% CAGR since the late 1990s



Exhibit 19: Target date fund AUM continues to grow as

% of total mutual fund industry…

Exhibit 20: Flows into target date funds remained

positive through the downturn

Source: Simfund, Goldman Sachs Research.

Source: Simfund, Goldman Sachs Research.

Annuities are a financial contract issued by a life insurance company that offers tax-

deferred savings and a choice of payout options to meet an owner’s needs in retirement:

income for life, income for a certain period of time or a lump sum. As a retirement product,

demand has historically been weak for annuities, with proliferation of unique product types

occasionally outgrowing sales (see Exhibits 21-22). During the past 13 years annuities as a

percent of retirement assets has generally remained stable at 9%, despite the significant

expansion of products, declines in employer-sponsored defined benefit plans and

increased education among those approaching retirement age.

Exhibit 21: Annuity product innovation and changes

continue to take place

Exhibit 22: Market pressures weakened sales growth,

but beginning to see sales recovery

Source: Insured Retirement Institute.

Source: Morningstar, FactSet, and LIMRA.

Insurance companies can offer guarantees that differentiate their products from those of

other financial services providers. As a result, variable annuities offer protection against

the possibility of outliving assets. The Departments of Labor and Treasury have been

exploring the subject of allowing annuities to become the default option for guaranteed

income products, which could increase the uptake in election rates—as evidenced by the

increase in target date flows once the funds were allowed to be default options.

0.0%

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$0

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2004

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2010TD

AuM (in $ bn ‐‐ left axis) % of MF industry AuM (% ‐‐ right axis)

CAGR: 41%

2 1 24 4

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34

56

41 39

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19992000

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(40%)

(20%)

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20%

40%

60%

250

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1,000

1,250

1,500

199

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Annuities as a percentage of retirement assets has remained stable at around 9%



IRA growth is set to accelerate as Baby Boomers retire and rollover. As Baby Boomers

begin to retire, IRA rollovers are poised to accelerate and further increase the product’s

presence in the retirement market. IRAs are already the fastest growing segment of the

retirement market in the United States, with about $4.0 trillion in assets. This represents

over 26% of total retirement assets and is more than double the 10% represented by IRAs

in 1985. According to Cerulli Associates IRA growth is expected to continue, with assets

reaching $5.8 trillion by 2014, up about 60% from current levels. This growth largely driven

by rollovers, as shown in Exhibit 23.

Exhibit 23: Rollovers have been the largest source of IRA growth and are set to increase as more baby-boomers retire

US traditional IRA asset growth components (data in $ trillions); Baby Boomer retirement progression

Source: Investment Company Institute data, Cerulli, US Census Bureau, Goldman Sachs Research estimates.

Moreover, the importance of professional financial advice is becoming more critical during

post-retirement years, particularly among mass-affluent investors. Mass-affluent investors

are defined as those with greater than $200,000 in investible assets, a group whose

holdings comprise the highest share of IRA assets (see Exhibits 24-25).

Exhibit 24: Mass-affluent investors comprise the largest

percentage of IRA assets… IRA ownership by annual household income, $ thousands

Exhibit 25: …with more seeking professional advice

before making withdrawals Type of advice by percentage used

Source: Investment Company data, Goldman Sachs Research

Source: Investment Company data, Goldman Sachs Research

Neutral-rated Ameriprise should benefit from these trends through its advice-driven

wealth management services, high exposure to the fast-growing IRA category and suite of

-

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Professional FA

Rollovers may help drive IRA asset growth from $4.0 trillion to $5.8 trillion by 2014



asset management and annuity products. Over 40% of the company’s $300 billion asset

base is tied to retirement products, the majority of which are IRAs. With more mass-

affluent investors (the company’s primary client base) seeking professional financial advice

when it comes to retirement, Ameriprise is also well positioned to capture a higher share of

retirement dollars through its 12,000 financial advisory force (the fourth-largest in the

United States) and broad product suite ranging from traditional mutual funds to

alternatives to annuities.

We likewise believe that Neutral-rated T. Rowe Price, among the largest publicly traded

asset managers, stands to benefit from continued growth in the defined contribution/401K

market. The company manages over $100 billion in defined contribution assets and is

particularly well-positioned for the growth of target date fund products. As of May, T. Rowe

Price managed $43 billion in target date fund assets, accounting for 17% of the industry.

Given the “sticky” nature of target date funds, the firm is well positioned to deliver

continued organic growth strength despite the recent market volatility.

Finally, Neutral-rated Financial Engines, which provides a platform for automatically

managed 401K accounts with a focus on workers approaching age 50, is in a particularly

good position to benefit from increasing 401K contributions. Average contributions

increase 17% from $2,945 per year between the ages of 40 and 49 to $3,432 per year

between 50 and 59. As more Baby Boomers enter this “red zone” prior to retirement,

Financial Engines benefits from their escalating account contributions. The company is also

developing a platform to manage assets during retirement, extending its relevance as Baby

Boomers enter retirement.



Opportunity #3: Baby Boomer spending declines and shifts from

discretionary items to necessities

Over the past decade the Baby Boomer generational wave drove rapid population growth

in the 55-64 year age bracket, the highest-earning and highest per-capita spending

demographic among US households according the Bureau of Labor Statistics. The growth

in 55-64 year olds is now set to decelerate sharply as the Baby Boomer wave approaches

retirement years and population growth in the 65 and older demographic accelerates (see

Exhibit 26).

Exhibit 26: Aging Baby Boomers drive a dramatic shift in population growth trends

Year-over-year growth in population

Source: US Census Bureau, Bureau of Labor Statistics, Goldman Sachs Research

The Bureau of Labor Statistics Consumer Expenditure Survey shows that household

spending per capita grows as the head of household ages and earnings increase. However,

this positive relationship between aging, earning and spending peaks between the ages of

55 and 64, and then declines sharply in retirement age (65-plus). As Exhibit 27 illustrates,

income per capita falls by 32% and household spending by 17% when the head of

household moves from the peak earning ages between 55 and 64 to the 65-plus age group.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Population growth ‐ ages 55‐64 Population growth ‐ age 65+

Population growth of 55‐64 year olds poised to decelerate sharply...

...as population growth of 65+ retirees accelerates

Spending peaks between ages 55 and 64



Exhibit 27: The positive relationship between aging, earning and spending peaks between

the ages of 55 and 64, and then declines sharply in retirement years (65+) Spend and income per household, divided by the average number of persons in the household

Source: Bureau of Labor Statistics Consumer Expenditure Survey; Goldman Sachs Research.

This decline in spending as consumers age is not uniform across categories, and

discretionary spending is particularly hard hit. A greater proportion of total spending is

directed toward basic necessities like healthcare and food at the expense of more

discretionary goods such as vehicles, alcohol, dining out and apparel (see Exhibit 28). For

these categories, 65-plus households spend 25% less per person than 55-64 year olds (see

Exhibit 29).

Exhibit 28: Healthcare and necessities gain significant wallet share at the expense of discretionary categories post-65

Spend per household, divided by the average number of persons in the household

Source: Consumer Expenditure Survey; Goldman Sachs Research.

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Under 25 years

25‐34 years 35‐44 years 45‐54 years 55‐64 years 65 years and older

Avg annual household expenditures divided by avg number of consumers per household

Avg household pre‐tax income divided by avg number of consumers per household

Household spending per person peaks at 55‐64, consistent with the peak in

per person household income

65 and over spending is 17% lower, driven by 32% less income

Spend per

person

Share of

Total

Spend per

person

Share of

Total

Change in Wallet

Share

Healthcare 1,821 7% 2,709 12% 5.5%

Food at home 1,767 7% 1,809 8% 1.6%

Vehicle purchases (net outlay) 1,428 5% 884 4% ‐1.4%

Food away from home 1,260 5% 951 4% ‐0.4%

Household furnishings and equipment 902 3% 726 3% ‐0.1%

Apparel and services 772 3% 642 3% 0.0%

Personal care products and services 300 1% 301 1% 0.2%

Alcoholic beverages 250 1% 148 1% ‐0.3%

Tobacco products and smoking supplies 169 1% 95 0% ‐0.2%

Reading 75 0% 84 0% 0.1%

55‐64 years 65 years and older

When consumers retire, there is not a dramatic shift in terms of largest vs. smallest

buckets of spend

But overall wallet share increases for necessities

like healthcare and food at home, at the expense of

more discretionary categories

After age 65, healthcare spending increases at the expense of discretionary



Exhibit 29: In the retirement years, spending is higher on necessities and 25% lower on

key discretionary categories Average household spend per person; household ages 65-plus versus ages 55-64

Source: Consumer Expenditure Survey; Goldman Sachs Research.

Last decade’s discretionary Boomer Buys are this decade’s Boomer Sells

As Baby Boomers age from their peak earnings years into retirement, demographics go

from a driver to a drag for companies that cater to the pre-retirement cohort. As such, we

see many of the same stocks that were demographic buy ideas last decade as downside

plays over the coming years. Two Sell-rated names that fit this category are motorcycle

manufacturer Harley-Davidson and apparel retailer Chico’s FAS.

For Harley-Davidson we key off of average vehicle purchases, which fall 35-40% for

consumers aged 65-plus versus those aged 55-64 years old. This further supports our

thesis that end-market demand for heavyweight motorcycles will lag other big ticket

consumer items. We believe that high sales levels over the course of the past decade have

led to new bike saturation. It is our view that even if a bike market recovery is in the offing,

an increasing proportion of the demand may be met through the used market, leaving new

sales weak for a prolonged period.

Spending on apparel, Chico’s FAS’s primary product category, likewise drops 15-20% for

consumers aged 65-plus versus those in the 55-64 year old cohort. With a target

demographic of women in their 50s, slowing population growth in the segment and the

drop in apparel spending post-retirement represent notable headwinds. The company has

recently executed an impressive turnaround, but expectations are now elevated and

momentum appears to be cresting.

‐38%

‐25%

‐19%

‐17%

0%

2%

12%

49%

Vehicle purchases (net outlay)

Food away from home

Household furnishings and equipment

Apparel and services

Personal care products and services

Food at home

Reading

Healthcare

Change in dollars spent per person ‐ Households ages 65+ vs. 55‐64

Dollar spending on necessities and reading is higher post retirment

age...

...while dollar spending on key discretionary items is lower







We expect global consumer, infrastructure and commodity demands to continue to

rise sharply due to the twin forces of (1) economic growth shifting to emerging

middle-income economies and (2) the number of middle-income people increasing

within these countries. As the world’s economic center of gravity shifts towards the

“expanding middle” over the coming decades, we believe that multinationals have a

once-in-a-lifetime opportunity to position themselves for the growth of the global

middle class.

While one could write volumes on the impact of this profound global change, we have

chosen in this report to focus on the investable consequences in the following areas:

The $10 trillion of potential growth between now and 2050 in the consumer packaged

goods industry as household penetration rises in emerging markets.

The impact of rising food, feed and fuel demand on the agricultural sector as protein

consumption increases with prosperity.

Incremental demand for multinationals across the tech, media and telecom universe.

Additional banking, lending and asset management clients as incomes rise and more

people become customers of the global financial system.

Increased infrastructure investment and rising demand throughout the commodity

complex to meet the growing needs of the expanding middle class.

Exhibit 30: Companies exposed to the expanding global middle class


Globalization continues to take hold

Leveraging off the work of our colleagues in Economics Research, we project that the

BRICs and the “Next 11” emerging economies will have a combined GDP of $37 trillion in

2020, on par with the GDP of the G7 countries.2 As seen in Exhibit 31, BRICs and N-11

economies currently have younger demographic profiles, lower per capita income, and

higher rates of growth than their developed market peers.

2 The “Next 11” economies are Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan,

Philippines, Turkey and Vietnam.


Consumer staples growth in emerging markets + CL, HYPE3.SA, MJN, NKE, PEP, PM

Food, feed and fuel drive global ag demand + BRFS3.SA, MON

Increased discretionary income drives TMT demand + AMZN, CSCO, DTV, JNPR, NWSA, QCOM

More customers link into the global financial system + BBD, BLK, C, CIEL3.SA, MA, V

Global infrastructure growth and rising commodity demand + BA, BTU, BUCY, FCX, JOYG, PCP, TCKb.TO

For more discussion, please refer to Global Economics Paper No: 170, “The Expanding Middle: The exploding World Middle Class and Falling Global Inequality” by Dominic Wilson, et al. (July 7, 2008) as well as our previous report “The Day After Tomorrow, v1.0: The changing face of the consumer” (October 1, 2008)



Exhibit 31: Emerging market economies are set to outgrow their developed market peers Social and economic measures, grouped by current wealth bands

Source: World Bank, UN Population Division, CIA World Factbook, GS SUSTAIN.

A prolonged period of high economic growth in these countries will transform the shape of

the global economy. Today, just two of the BRICs (and none of the N-11) rank among the

world’s largest ten economies. However, our economists forecast the landscape to be

much different in 2050, with all four BRICs and three of the N-11 economies among the top

ten (see Exhibit 32).

Population Median age Labor forceGDP per capita

Total, mn2009

YearsTotal, mn

2009Real US$

2009CAGR 09-

20E

Bangladesh 164 23.3 76 512 7.5%Pakistan 170 20.8 59 948 5.6%Vietnam 90 27.4 44 969 9.7%India 1,203 25.3 457 1,083 8.4%Nigeria 155 19.0 47 1,228 7.0%Philippines 91 22.5 38 1,805 7.2%Egypt 78 24.8 25 1,850 6.5%Indonesia 237 27.6 106 2,081 6.5%China 1,344 34.1 731 3,117 11.0%Iran 73 27.0 29 4,800 7.1%Brazil 197 28.6 93 7,427 5.6%Mexico 109 26.3 43 9,280 5.8%Turkey 77 27.7 24 9,869 6.3%Russia 141 38.4 63 10,575 6.5%Korea 49 37.3 21 22,631 5.1%Japan 128 44.2 49 34,564 1.2%Italy 59 43.3 19 36,781 1.5%Germany 82 43.8 32 41,739 1.4%France 62 39.4 23 42,631 1.9%Canada 33 40.4 16 45,011 2.1%United States 312 36.7 139 46,626 2.2%United Kingdom 61 40.2 26 47,164 2.0%

GDP growth

Under US$2k

US$2-5k

US$5-10k

US$10-20k

Over US$20k

Wealth level

Country

0% 5% 10% 15%



Exhibit 32: The GDP of the BRIC and N-11 economies is set to be on par with the G7 by

2050 GDP of the world’s largest 25 economies in 2009 and 2050E ($ trillions)

Note: Figures are only shown for the largest 25 economies for each year.

Source: International Monetary Fund, Goldman Sachs Economic Research.

Exhibit 33 further illustrates the trend: In 2007, the United States was the largest economy

in the world and was ranked ninth on a per-capita GDP basis. By 2030 we estimate that

China will have the largest economy in aggregate, but will have a per-capita GDP rank of

49th. India and Brazil are likewise projected to be among the five largest economies, yet to

have per capita GDP rankings of 63rd and 47th, respectively. In just twenty years the world’s

GDP will likely be dominated by countries in the “middle-income pack” and not by rich

nations, as it is today.

Exhibit 33: By 2050, the world’s biggest economies should be largely “middle-income”

economies The top seven economies and their respective GDP per capita rank, by year

Source: Goldman Sachs Economic Research estimates.

Economic and demographic factors in these middle-income economies will simultaneously

increase the size of the middle-class population worldwide. We estimate that the middle-

class cross-section of the world’s population, which our Economics team defines as those

0 10 20 30 40 50 60 70 80

AustraliaBelgium

NetherlandsNorwayPoland

SpainSweden

SwitzerlandVenezuela

VietnamThailand

South AfricaSaudi Arabia

IranKorea

ItalyCanada

PhillipinesNigeria

GCCGermany

FranceJapan

TurkeyUK

MexicoIndonesia

RussiaBrazilEU-5India

USChina

2009 GDP 2050E GDP

SeveralEuropean countries will be replaced in the top 25 list by developing economies.

By 2050, China's economy will be over 10 times larger than it was in 2009 and 4 times the size of the 2009 US economy.

GDPRank

GDP Per CapitaRank

GDPRank

GDP Per CapitaRank

GDPRank

GDP Per CapitaRank

GDPRank

GDP Per CapitaRank

US 1 12 US 1 9 China 1 49 China 1 45Japan 2 19 Japan 2 22 US 2 12 US 2 15Germany 3 17 Germany 3 16 India 3 63 India 3 61France 4 9 China 4 56 Japan 4 29 Brazil 4 46UK 5 18 UK 5 10 Brazil 5 47 Russia 5 28Italy 6 21 France 6 17 Russia 6 35 Indonesia 6 60Canada 7 15 Italy 7 20 Germany 7 22 Mexico 7 44

16 21 37 43

2007 2030 2050

Average GDPPer Capita Rank

1980



with incomes between $6,000 and $30,000 in purchasing power parity (PPP) terms, is

currently growing at 90 million per year and is expected to increase from an estimated 1.9

billion people today to approximately 3.6 billion over the next twenty years (see Exhibit 34).

The scale of the change is substantial. We expect 70% of China’s population will fit the

middle class definition by 2020, and believe that by 2030 incomes in China and India will be

close to the global average.

Exhibit 34: The world’s middle class population is growing

People with incomes between $6,000 and $30,000 (people in millions, income in 2009$)

Source: Goldman Sachs Economics Research.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1960 1970 1980 1990 2000 2010 2020 2030

World

World ex China and India

China

India



Opportunity #1: Emerging markets are THE story in consumer

staples for decades to come

For multinational consumer packaged goods (CPG) and select retail companies the

emerging market opportunity will likely dwarf all other drivers for the next several decades.

Household penetration remains low for most basic CPG categories outside of the

developed world, and over the past five years emerging market growth has averaged 10-

12%. Our top-down analysis points to an opportunity for sustained 8-10% nominal dollar

growth in emerging markets for the next forty years. This would take the market size from

$1-2 trillion today to over $12 trillion by 2050 as income levels converge towards developed

market averages—a $10 trillion long-term growth opportunity.

As shown in Exhibit 35, the average American spends $2,000 per year on consumer

packaged goods, consistent with spending levels in other developed markets like Western

Europe and Australia. The average emerging market consumer spends only $200 on

consumer packaged goods, and the number is an even lower $100-$150 per year in

emerging Asia and Africa.

Exhibit 35: Retail sales for consumer packaged goods could climb 10-fold as emerging markets become wealthier

Summary of retail sales and per capita spending by region

Source: Euromonitor, Goldman Sachs Research estimates.

We expect a strong and steady increase in spending on CPG categories as incomes rise

and improved purchasing power spurs lifestyle changes that increase staples use. As

examples, parts of the emerging middle class will start buying packaged beverages for first

time rather than using well water or home-brewing tea, and more people will begin

brushing with toothpaste and using mouthwash rather than using green tea, twigs or salt

to clean their teeth.

Our analysis shows a clear relationship (R2 = 0.86) between per capita spending on CPG

categories and per capita GDP (see Exhibit 36). Every $1,000 increase in per capita GDP

drives an average increase in per capita spending on CPG products by $40 a year.

% of Global % of Global Spending in Segment Per Cap Index (Developed Mkt Avg = 100) $ per CapPopulation Pkgd. FoodSoft Drinks HHPC Staples Pkgd. Food Soft Drinks HHPC Staples Staples

Developed MarketsW. Europe 7% 31% 25% 28% 29% 100% 78% 94% 94% $1,918

N. America 5% 20% 26% 20% 21% 94% 115% 94% 99% $2,011

Japan 2% 10% 12% 11% 10% 118% 147% 138% 129% $2,623

Australasia 0% 2% 1% 2% 1% 97% 66% 95% 90% $1,830

----- ----- ----- ----- ----- ----- ----- ----- ----- -----

Developed Markets 14% 62% 63% 61% 62% 100% 100% 100% 100% $2,041

Emerging MarketsAsia ex Japan 54% 12% 14% 15% 13% 5% 6% 6% 6% $114

Mideast/Africa 18% 5% 6% 5% 5% 6% 7% 6% 7% $135

Latin America 9% 12% 13% 13% 12% 32% 34% 37% 33% $682

E. Europe 5% 8% 5% 6% 7% 39% 21% 30% 33% $678

----- ----- ----- ----- ----- ----- ----- ----- ----- -----

Emerging Markets 86% 38% 37% 39% 38% 10% 10% 11% 10% $207----- ----- ----- ----- ----- ----- ----- ----- ----- -----

Global 100% 100% 100% 100% 100% 23% 23% 24% 23% $471

Emerging market consumers buy

1/10th as much Staples product at

roughly $200 per year versus $2,000

per year in developed markets.

Emerging markets are 86%

of global population but less

than 40% of packaged goods

consumption.

The consumer packaged goods market could grow as much as $10 trillion by 2050



Exhibit 36: Rising incomes for the emerging middle class should drive meaningful growth in CPG spending Per capita GDP versus per capita spending on consumer packaged goods (CPG) for top 80 population countries, 2009

Source: Euromonitor.

Driven by this relationship, emerging markets have already been outpacing developed

markets by a wide margin over the past half-decade. Growth in Latin America, emerging

Asia and Eastern Europe has averaged 10-12% over the past five years, well ahead of the

3% developed market average (see Exhibit 37).

Exhibit 37: Significant 800-900 bp growth rate gap for CPG industry in emerging markets relative to developed markets 5-year dollar sales CAGR for CPG industry by region, 2004-2009

Source: Euromonitor.

We expect this wide growth gap to persist, and not just in the intermediate term. There are

literally decades of strong growth potential at these levels in these countries. Exhibit 38

highlights the scale. The global CPG industry currently generates $3.2 trillion in retail sales,

including $1.2 trillion from emerging markets. Our economists expect emerging market

incomes to rise to $25,000-$30,000 per capita by 2050, which should push per capita

spending on consumer packaged goods to full penetration levels that roughly match

current developed market norms. This category development would add $10 trillion to CPG

industry sales, in constant dollars. Under this scenario, nominal growth for the CPG

industry in emerging markets could average 8-10% for the next four decades.

China

Japan

Poland

Russia

Brazil

USA

Portugal

Spain

y = 0.04x + 248.36R² = 0.86

$0

$500

$1,000

$1,500

$2,000

$2,500

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000

CP

G P

er

Cap

ita S

pen

din

g

Per Capita GDP

Per capita spending on CPG categories rises

by $40 for every $1,000

of additional income.

12%

12%

11%

9%

6%

5%

3%

3%

2%

0.0% 3.0% 6.0% 9.0% 12.0% 15.0%

LatAm

Emerging Asia

E. Europe

Mideast/Africa

World

Australasia

N. America

W. Europe

Japan

Emerging markets CPG sales growing low double-digits

versus low single digits in

developed markets



Exhibit 38: $10 Trillion in retail sales growth potential over the decades Current retail sales for CPG categories vs potential emerging market sales if per capita levels reach developed market averages

Source: Euromonitor, Goldman Sachs Research estimates.

We prefer consumer companies with well-established emerging market franchises.

Most companies in the retail-consumer universe are already pursuing an emerging market

strategy. In light of this intense competition, we strongly prefer businesses that have well-

established franchises to those that are still in the nascent stages of development. In our

view, consumer companies with an existing emerging market presence have two key

advantages:

Business models are already profitable. Higher market share positions support more

profitable growth, and companies that are new to emerging markets often operate at a

loss until scale is achieved.

Per capita-driven growth rather than reliance on market share gains. Some newer

entrants may have success in penetrating the key emerging markets. However, we are

more comfortable investing behind franchises with already strong market share

positions that are highly likely to participate in the per capita consumption growth we

envision.

Against this backdrop, our top consumer picks for exposure to the growth of the expanding

middle include CL-Buy rated Nike and Mead Johnson Nutrition , Buy-rated Philip Morris

International and Neutral-rated Colgate-Palmolive. Collectively these companies generate

an average of 50% of sales from emerging markets (see Exhibit 39), and each is a leader in

its respective product categories. Colgate has a 45% share of global toothpaste and Mead

Johnson is the number two competitor in infant formula. Colgate, Mead Johnson and

Philip Morris also have existing emerging market margin structures that are at or above

those of the developed markets.

$1,992,029

$1,205,291

$3,197,320

$11,874,231

$0 $4,000,000 $8,000,000 $12,000,000

Developed Markets - Today

Emerging Markets - Today

Global CPG Sales - Today

Emerging Market "Potential"

Emerging market sales are $1.2 trillion in a $3.2 trillion global

CPG industry today.

Emerging markets could reach $12 trillion in constant dollars

once fully penetrated.

Established players benefit from scale as emerging markets grow



Exhibit 39: MJN, PM, and CL all generate around half of sales from emerging markets today, while NKE also ranks

highly on this metric even against the multinational CPG companies Percent of sales generated from emerging markets, 2009

Source: Company data, Goldman Sachs Research estimates.

On the rise

For investors who prefer a name that is not currently an emerging market leader but has

the potential to grow into one if it can gain share, we believe the strategies undertaken by

CL-Buy rated PepsiCo could reap major rewards if successfully executed. Twenty percent

of the company’s 2009 revenues were generated from emerging markets, with China

accounting for less than 3-4%, but we see the potential for that to increase to 25-30% over

the next five years. PepsiCo has stepped up its commitment to emerging markets with $1

billion invested in 2010 and another $2.5 billion planned for the next three years in China

alone. The company has been active in both beverages and snacks, and its Frito-Lay brand

has the potential to become a dominant snacking franchise globally.

Direct exposure

As the middle class expands in middle-income nations, emerging “domestic champions”

will increasingly challenge multinationals. The consumer-oriented companies that we see

gaining the most in these regions over the next few year offer inexpensive ways to

participate in a middle class lifestyle, whether by consuming branded food and drink, using

cosmetics or a good shampoo, or simply being able to afford basic household products.

In the “sweet spot” for consumer upgrades as the middle class expands in Brazil is Buy-

rated Hypermarcas, the country’s leading consumer products company. The self-styled

“Procter & Gamble of Brazil,” Hypermarcas receives 80% of its revenue from brands that

are either number one or two in their category. The company focuses on middle-to-low

income consumers, with over 170 brands in diverse categories including sweeteners,

antiseptics, nasal decongestant, condoms, nail polish, moisturizer, flu medicine and

laxatives.

0% 10% 20% 30% 40% 50% 60% 70%

AVPMJNPM

TUPCL

NKEKOPG

ENREL

KMBPEPACV

KCLXJAHKFT

NWLBFBDPSGISSLEFO

CPBCHD

Domestic companies will compete for share as markets grow



Opportunity #2: Food, feed and fuel to drive agricultural demand

growth

Fundamental changes in the diet of the expanding middle class are set to place increasing

demands on the global agricultural complex in the decades to come. According to the

International Policy Council’s 2007 Food and Agricultural Trade report, population growth,

increased protein consumption in developing countries and the use of agricultural output

in biofuel production will combine to double world agricultural demand by 2050.

Population growth necessitates agricultural growth. The US Census Bureau’s

International Data Base projects world population to grow by 35% over the next forty years,

from an estimated 6.9 billion people in 2010 to 9.3 billion in 2050. This expected growth will

come almost exclusively from what are classified as “less developed” regions, where

projected growth of 40% is an order of magnitude higher than the 4% growth foreseen in

more developed countries.3 Population growth is itself a function of increasing life

expectancy, higher standards of living and better diets.

As people become more prosperous they look to improve their diets with higher-

quality foods. With more available disposable income, people tend to consume more

protein in the form of beef, pork and poultry. While per-capita protein consumption has

risen rapidly in developing countries over the past forty years, it still has room to more

than double before reaching developed country levels (see Exhibits 40-41). Between 2009

and 2018 the UN’s Food and Agriculture Organization expects developing country

consumption grow by more than 16%. We believe Neutral-rated Brasil Foods, the largest

producer of processed foods, pork, and poultry in Brazil and the fifth-largest protein

company in the world, is well-positioned to benefit.

Exhibit 40: Meat consumption has risen rapidly in

developing countries over the past forty years… Developing countries daily caloric intake per person

Exhibit 41: …but remains less than half that of developed

countries Developed countries daily caloric intake per person

Source: FAO, Potash Corp.

Source: FAO, Potash Corp.

Increased protein consumption also creates a multiplier effect for agricultural demand due

to the amount of grain required to produce a unit of meat. Depending on the protein, it

takes between two and seven pounds of grain to produce one pound of meat (7 lbs per

pound of beef, 4 per pound of pork and 2 per pound of poultry). As a result, more than 40%

of globally harvested grain is consumed as animal feed.

3 Less developed regions are defined as Africa, Asia ex-Japan, Latin America and the Caribbean,

Melanesia, Micronesia and Polynesia. More developed countries are defined as those in Europe and

North America, plus Australia, New Zealand and Japan.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1960's 1980's 2000's

Cal

orie

s/P

ers

on/D

ay

Meat, Eggs, Fish Fruits & Vegetables Cereals Other

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1960's 1980's 2000's

Cal

orie

s/P

erso

n/D

ay

Meat, Eggs, Fish Fruits & Vegetables Cereals Other

Protein consumption increases with income



Biofuel production competes with food and feed for acreage. Biofuels made from

agricultural inputs such as sugarcane and corn continue to receive government subsidy

and support. In Brazil the government requires gasoline to contain between 20% and 25%

ethanol, and in the United States the Renewable Fuels Standard (RFS) in the Energy

Independence and Security Act of 2007 targets a more than four-fold increase in renewable

fuel use from 2008 levels by 2022. Although the RFS also sets out a schedule for advanced

biofuels (primarily cellulosic ethanol) to reach more than half of mandated 2022 volume,

corn ethanol will remain the primary biofuel in the near term, competing with food and

feed for acreage.

With rising demand, agricultural supply will have to increase via either more arable land or

higher crop yields. Due to ongoing urbanization and the environmental considerations that

go into agricultural conversion, we do not anticipate any meaningful increase in arable

land. Indeed, global arable land acreage per person has been on a downward trend for

decades, suggesting arable land growth alone is not enough to keep pace with demands of

population growth, let alone changing diets and biofuels (see Exhibit 42). As a result,

continued increases in crop yields will be imperative to ensure adequate food supply.

Exhibit 42: Arable land growth has not kept pace with population Acres of arable land per person

Source: International Fertilizer Association.

We see yield improvements driven by biotech and hybrid adoption in developing regions

as a likely source of increasing agricultural output. As seen in Exhibit 43, developed regions

enjoy corn yields of nearly twice the world average. This is due to a combination of factors

including better-performing seeds, superior fertilizer application, investments in irrigation,

more advanced equipment, and viable credit and agricultural commodity markets. Each of

these is transferable to developing regions over time, and as a result we see opportunity

for companies that sell products that enhance yield.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1970 1980 1990 2000 2010E

Acres of arable land per person

Arable land growth has not kept pace with population, requiring increases in yields



Exhibit 43: Developed market corn yields lead globally Shaded regions have accelerated biotech and hybrid penetration

Source: Informa, Goldman Sachs Research estimates.

As the global leader in agricultural biotechnology, CL-Buy rated Monsanto sits in an

enviable position to help solve the grain productivity challenge. The company believes it is

possible to double US corn yields during the 30-year period from 2000-2030 with traditional

breeding gains, improved agronomic practices and—most significantly—the benefits of

biotechnology (see Exhibit 44). This should help drive continued adoption of its high-tech

seeds and traits and ensure a growth path for its extensive pipeline of next generation yield

technologies worldwide. Key potential growth markets include corn and soybeans in South

America, cotton in India and rice in China.

Exhibit 44: Monsanto plans to double US yield via breeding, agronomic and biotech gains US corn yield

Source: Monsanto, Goldman Sachs Research estimates.

Country Acreage (mn acres) Production (bn bu) Yield (bu/acre)US 77 12.0 154China 73 6.3 85Brazil 35 2.2 63EU 21 2.3 108Mexico 18 0.9 52Argentina 6 0.7 117World 386 30.9 79

120

140

160

180

200

220

240

260

280

300

2000 2005 2010 2015 2020 2025 2030

Historic yield gain

Agronomic practice improvements

Breeding improvements

Biotech improvements

US Yield Target (corn):2030 double 2000 baseline of 137 bushels per acre



Opportunity #3: Increasing discretionary income to drive

incremental demand across the TMT universe

As income levels rise, people in emerging economies increasingly begin to consume

technology, media and telecom in ways similar to those in developed markets (see Exhibit

45). Household penetration of personal computers continues to ramp, enabling online

shipping and browsing as well as additional media consumption. We expect that next-

generation smartphone and data services will also be adopted as the telecom infrastructure

rises to meet a growing population, and increased availability of financial services will lead

to more credit and debit transactions to process.

Exhibit 45: Projected total middle class consumption, 2009-2030, top 10 countries (2005 PPP$)

Consumption is expected to shift into emerging, nascent markets for TMT products and services.

Source: Wolfensohn Center for Development at Brookings.

One consequence of shifting consumption caused by the expanding middle class in middle

income countries is increased demand for internet connectivity worldwide. According to

the ITU World Telecommunications database, developed market internet access

penetration was approximately 5X that of developing markets as of 2008 (see Exhibit 46).

As of 2009 current internet penetration was by far the lowest in Africa, the Middle East, and

Asia Pacific—regions that encompass twelve of the fifteen BRIC + N-11 nations we see

driving global growth through 2050 (see Exhibit 47).

Exhibit 46: Proportion of households with internet access Exhibit 47: Internet user penetration by region, 2009

Source: ITU World Telecommunication/ICT Indicators database.


We expect that increasing demand for internet connectivity will necessitate service

provider capital expenditures to keep pace with global internet traffic growth. Neutral-rated

Cisco forecasts a 34% cumulative annual growth rate in global IP traffic through 2014, and

in our view 2009 was a year of massive underinvestment in core routing capacity, with

2009 2020 2030

1 U.S 4,377$ 21% China 4,468$ 13% India 12,777$ 23%

2 Japan 1,800 8% U.S 4,270 12% China 9,985 18%

3 Germany 1,219 6% India 3,733 11% U.S 3,969 7%

4 France 927 4% Japan 2,203 6% Indonesia 2,474 4%

5 U.K 889 4% Germany 1,361 4% Japan 2,286 4%

6 Russia 870 4% Russia 1,189 3% Russia 1,448 3%

7 China 859 4% France 1,077 3% Germany 1,335 2%

8 Italy 740 3% Indonesia 1,020 3% Mexico 1,239 2%

9 Mexico 715 3% Mexico 992 3% Brazil 1,225 2%

10 Brazil 623 3% U.K 976 3% France 1,119 2%

0%

10%

20%

30%

40%

50%

60%

2002 2003 2004 2005 2006 2007 2008

Developed Developing World

8.8%

18.4% 19.3%

35.7%

48.3%

62.9%

0%

10%

20%

30%

40%

50%

60%

70%

Africa Arab

States

Asia &

Pacific

CIS Americas Europe



supply growth lagging demand by 25%. In addition to Cisco, we expect Buy-rated Juniper

to substantially benefit from these trends as service providers invest more to meet rising

capacity needs, as Juniper has the most direct exposure to service provider routing spend

in our coverage at about 60% of sales.

Coincident with increased internet penetration, the Goldman Sachs internet team expects

e-commerce to grow by 21% yoy in 2010—with global e-commerce penetration of retail

spending jumping to 5.0% (from 4.4% in 2009) on the heels of a 6% yoy increase in

spending per buyer. Globally, we expect e-commerce sales to grow to over $1 trillion in

2012 from $667 billion currently, driven primarily by continued worldwide adoption of the

online channel (see Exhibit 48).

Exhibit 48: Global e-commerce revenue, 2007-2012E US$ billions

Source: Forrester Research, company data, Goldman Sachs Research estimates.

As faster GDP growth in emerging markets like China, India and Brazil drives expanding

purchasing power among a growing middle class, and as internet and electronic payment

penetration improve toward developed market levels, we see opportunity for skilled e-

commerce merchants such as CL-Buy rated Amazon.com. We expect Amazon to benefit

from price, selection and fulfillment advantages sharpened by years of experience in the

world’s largest economies. The company’s China business has the potential to add $1

billion per year to revenue growth from 2011, and may contribute as much as 10% of

global revenue by 2015. We forecast 20%-plus revenue, operating income and free cash

flow growth for the next several years, and believe the company’s share price can

compound in line with FCF growth.

Mimicking the growth of internet penetration and e-commerce in developing markets, we

expect a shift to next-generation handsets and smartphones to provide the next wave of

growth for mobile hardware providers in heretofore untapped global markets. The

migration from 2G to 3G and beyond will likely be accompanied by a meaningful uptick in

data traffic as users scale up their monthly usage and consume more bandwidth-intensive

multimedia content (see Exhibits 49-50).

$465.1$525.4

$580.4$657.7

$722.8$787.1

$125.1

$141.3

$156.1

$176.9

$194.4

$211.7

$0

$200

$400

$600

$800

$1,000

$1,200

2007 2008 2009E 2010E 2011E 2012E

Glo

bal

On

line

Sal

es (

$ b

n)

ROW US Online Sales



Exhibit 49: Expect more rapid adoption of next-

generation handsets as the middle class expands Global handset mix, 2006-2012E

Exhibit 50: As users migrate to higher-end devices, data

usage grows exponentially Estimated monthly data usage, in MB



Developed market cell phone penetration rates are already high, with more cell phone

subscriptions than people (see Exhibit 51). While developed market mobile broadband

penetration is much lower in absolute terms, the rate is still more than 10X that of

developing nations, where rapid growth has not yet begun to inflect (see Exhibit 52).

Exhibit 51: Mobile cellular telephone subscriptions per

100 inhabitants

Exhibit 52: Mobile broadband subscriptions per 100

inhabitants



We believe that greater penetration of mobile technology into the emerging middle class

will increase smartphone adoption as hardware becomes more affordable and new

consumers “leapfrog” trailing-edge devices. Among chipset providers, Buy-rated

Qualcomm should benefit the most, given that it has the broadest smartphone platform

offering and is the leading vendor for the Android operating system, which we see as a

massive global share gainer through the smartphone disruption. While double-digit

declines in smartphone ASPs will be a drag on Qualcomm’s royalty business, increased

adoption in emerging markets as affordability increases and infrastructure comes online

should help offset the impact.

Greater penetration of communication technologies like mobile and internet will also

accelerate the opening of middle-income economies to global media companies. We view

Buy-rated News Corp. as the name most exposed through its ownership of cable networks

located in international markets where the middle class is growing the fastest. Over the

past several years News Corp. has launched new cable networks in emerging markets such

70% 67% 63% 57% 52% 48% 44%

30% 33% 37% 43% 48% 52% 56%

0%

20%

40%

60%

80%

100%

120%

2006 2007 2008 2009 2010E 2011E 2012E

2G 3G‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Feature phone Multimedia phone

Smartphone 3G data card 4G data card

115.3%

57.9%

68.2%

0%

20%

40%

60%

80%

100%

120%

140%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


39.9%

9.7%

3.1%



as Asia, Eastern Europe and Latin America, where growth in disposable income is driving

higher pay television penetration. This benefits cable networks in the form of higher

subscriber fees and advertising. Today, News Corp.’s international cable networks account

for only 10% of operating income, but we estimate a 16% cumulative annual growth rate

over the next three years, accounting for nearly one quarter of total operating income

growth.

Buy-rated DirecTV is another name that should benefit from growth in the middle class,

particularly in Brazil. Brazil is the company’s fastest growing market and contributes an

estimated 7% of the company’s consolidated revenues. We expect the pay television

penetration in the country to increase substantially from 14% currently, with DirecTV

benefitting from both an expanding customer base as well as greater premium service

uptake given increased middle class spending.



Opportunity #4: While prosperity is rising, the highest growth

regions remain financially underserved

According to a 2008 McKinsey study, 2.5 billion people—or more than 50% of the world’s

adult population—do not use formal or semi-formal financial services. Nearly half that

unbanked population resides in East and South Asia, Sub-Saharan Africa and Latin

America. We view this disconnect as a substantial opportunity for increased financial

services penetration. For consumer facing businesses it means increased growth in bank

accounts, adoption and acceptance of plastic payments, and growth in consumer lending

and asset management clients as disposable incomes grow over time. Institutionally,

global investment banks stand to gain from both growing credit demand and expanding

capital and hedging needs.

Given their existing geographical footprints, infrastructure and financial institution

relationships, we believe that CL-Buy rated Visa and Buy-rated MasterCard are among the

best positioned companies to capitalize on the expanding growth (in terms of both dollars

and transactions) and increasing financial connectivity of the global middle class. As the

proportion of worldwide consumers entering or interacting with the banking system

increases over the next several years, we believe that the Visa and MasterCard networks

will be at the heart of that process, participating via increased demand deposit account and

debit card penetration, revolving credit issuance, prepaid and gift card usage, remittances

and emerging payments such as online, peer-to-peer and mobile. For Asia Pacific, Africa,

Latin America and the Middle East we expect double-digit combined cards-in-force growth

through 2012 (see Exhibit 53).

Exhibit 53: We expect card growth to be strongest in financially underserved regions

Visa and MasterCard cards-in-force growth (yoy), 2007-2012E

Source: Company reports, Goldman Sachs Research estimates.

For direct exposure, we expect Neutral-rated Brazilian merchant acquirer Cielo to benefit as

well. Although Brazil has the most developed card market in Latin America, the use of

cards for 23% of private consumption expenditure is well short of Spain (30%), the United

States (34%), France (40%), and the United Kingdom (42%). Cielo accounted for 48% of

total card transaction value in Brazil in 2009, and with a network of 1.7 million merchants

the company is exposed to both increased consumer spend as incomes rise and increased

credit card penetration as card usage approaches developed market levels.

Exposed to both consumer and commercial trends in middle income economies, Buy-rated

Citigroup has a client footprint that covers over 140 countries. Through its core franchise

of Citicorp, the company has an extremely strong emerging markets presence and is well

‐10%

‐5%

0%

5%

10%

15%

20%

25%

30%

2007 2008 2009 2010E 2011E 2012E

V AP+CEMEA MA APMEA V Latin America MA Latin America

More than half of the world’s population does not yet use financial services



positioned to benefit from faster-growing products and geographies. Emerging market

economies accounted for 46% of both Citicorp revenues and net income in 2009. Owing to

its long-established presence and relationships, Citigroup estimates that over 55% of

potential revenue growth over the next three years will stem from these regions.

Buy-rated Banco Bradesco, the largest insurance company and third-largest bank in Brazil,

is also well positioned to benefit. The company has nearly 3500 branches in Brazil and

US$110 billion in loans. With its Postal Bank franchise Bradesco offers financial services

into all of the country’s 5000+ municipalities, exposing it directly to the areas with the

fastest growth in new members of the middle class. As the leading underwriter in the

developing life and health insurance segments, the company should be able to provide a

full suite of financial services to those newly able to afford them as the middle class

expands in Brazil.

The rise of the global middle class is also likely to drive incremental supply of assets for

asset managers. With GDP per capita growing and a favorable ratio of savers (35-44 years

old) to total population, we expect the uptake of asset management products in emerging

economies to rise. These secular underpinnings stand in contrast to the rapidly maturing

US asset management market, which must address a growing retiree population and

relatively slower economic output. As it stands today, over half of worldwide assets under

management are outside the United States (see Exhibit 54). While competition for assets

has been increasing internationally, the opportunity remains large for US-listed asset

managers (see Exhibit 55).

Exhibit 54: Most of Global AUM now resides outside USGlobal AUM composition by client domicile

Exhibit 55: Public managers have been growing presence

outside US

Source: BCG, Goldman Sachs Research.


We believe CL-Buy rated BlackRock is among the US names that will benefit from the

secular trend of emerging market asset growth driven by the expanding middle class.

BlackRock manages over $3 trillion in assets, 40% on behalf of clients domiciled outside the

United States. The firm’s current geographic reach is extensive, spanning over 100

countries with significant growth in several emerging asset management markets. In Latin

America the company now manages over $21 billion in assets, up 83% from the prior year.

In the Asia Pacific region alone the company manages over $350 billion in assets, and has

formed joint ventures in China and India. We also note that the BlackRock’s institutional

business includes sovereign wealth fund clients, relationships that may help the firm tap

into several underdeveloped retail fund markets in the years to come.

48.1%

51.9%

U.S. Rest of the WorldSource: GS Research; total AuM mkt-to-mkt = $51.8 trillion

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2006 2009Rest of the World U.S.Source: Company data; cross-boader asset managers include AB, BEN, BLK



Opportunity #5: Global infrastructure growth and rising commodity

demand

A richer and larger middle global middle class will have an effect beyond consumer-facing

industries. Increased infrastructure investment will be needed to meet the growing

consumption demands of two billion additional middle class people aspiring to new living

standards over the next twenty years. The Goldman Sachs Global Economics team expects

fixed investment spending in BRIC countries to grow 9.0% and 8.8% per annum in 2010 and

2011, respectively, consistent with historical periods of industrialization and urbanization in

OECD countries. Infrastructure investment is both a cause and a consequence of economic

growth, and investments in local roads, highways, rail and utilities are necessary to

support the long-term growth of the expanding middle class.

As an example, the Brazilian Growth Acceleration Programs (PACs) provide a glimpse as to

the magnitude of recent and upcoming infrastructure investment in a rising nation. The

first program (PAC 1) was launched in 2007 by the federal government to coordinate over

$240 billion in public and private development financing. Its March 2010 follow-up (PAC 2)

totals $727 billion and is scheduled to spend half of its funds by 2014—the same year Brazil

will host the World Cup. Taken together, the PAC programs will result in over $1 trillion in

planned development spending, including over 75,000 km of roads, 89 power plants, 21

ports, 14 air terminals and four new metropolitan subway systems.

The impact of such massive investment spending on a global scale would likewise be felt

throughout the commodity complex, as production capacity struggles to keep pace with

rising demand. In this report we highlight investable consequences for companies in the oil,

metals, mining and aerospace sectors.

In contrast to developed markets, history has shown that increasing per capita GDP

in emerging markets drives higher per capita oil consumption. As the middle class

expands in middle income economies, we consequently expect an increase in per capita oil

demand to drive total demand growth. Brazil, China and India are all at present well below

the OECD’s per capita oil consumption levels, suggesting that—even accounting for

efficiency gains—potential demand growth is not only significant but sustainable. To

illustrate the scale of potential growth, the United States, Japan, and Europe currently

consume about 22, 12, and 10 barrels per person each year, respectively; Brazil, China, and

India consume just 5, 3, and 1 (see Exhibit 56).

Given our expectation for flat OECD demand through 2013, our bullish global oil demand

view is driven entirely by strong non-OECD growth, in large part due to increases from

Brazil, India, and China. In our view the expected non-OECD strength, coupled with our

outlook for constrained non-OPEC oil supply growth, will necessitate a return to demand

rationing prices by 2012. That is, as oil inventories draw down and OPEC spare capacity

dwindles, oil prices will have to increase in order to accommodate robust non-OECD

demand growth, likely via “rationing” of OECD oil demand growth (see Exhibits 57-58).

Non-OECD countries will drive oil global oil demand



Exhibit 56: Per-capita oil consumption rising for Brazil,

India and China but still well below OECD Oil consumption per capital per year, barrels

Exhibit 57: Non-OECD is key driver of oil demand growth Global oil demand, thousand barrels per day

Source: IEA, IMF, Goldman Sachs Economic Research.

Source: IEA, Goldman Sachs Research estimates.

Exhibit 58: Strong non-OECD demand + falling non-OPEC supply = higher oil prices Growth in oil supply and demand and WTI oil price path

Source: IEA, Bloomberg, Goldman Sachs Research estimates.

For exposure to the “B” in BRICs, Petrobras remains a favorite. In addition to having

substantial exposure to sizeable Brazilian offshore oil resources, Buy-rated Petrobras is

also a large component of the Ibovespa—the main Brazilian equity market index. The

company generates nearly all of its revenues and earnings in Brazil’s domestic market and

is highly leveraged to strength in the Real (BRL) versus the US dollar. As Brazil’s middle

class helps to drive Brazil GDP and oil demand growth, we expect Petrobras to benefit

accordingly.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2005 2006 2007 2008 2009 2010E 2011E 2012E 2013N

Brazil China India OECD

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2005 2006 2007 2008 2009 2010E 2011E 2012E 2013N

'000

bb

ls/d

OECD Other Non-OECD Brazil India China

(3.0)

(2.0)

(1.0)

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2007

2008

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2014

E

2015

E

Gro

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(mn

b/d

)

OECD demand Non-OECD demandGlobal oil demand Non-OPEC supplyWTI oil price (indexed to 1)

Non-OECD accounts for overwhelming majority of

expected growth in 2010-2015.



Petrobras already dominates Brazil’s significant offshore resources in the Campos, Santos,

and Espirito Santo basins and will eventually have a minimum 30% working interest and

operatorship over all future pre-salt leases assuming passage of the country’s proposed

new pre-salt laws (for additional details see the February 21, 2010 report, “‘Crunch time’ on

new pre-salt oil laws nears; assessing risk/reward” by Arjun Murti and team). We see the

Brazilian deepwater as a global “win” zone due to substantial opportunity for oil

production growth.

Like oil, copper is supply-constrained, and China and other emerging economies still

consume far less than developed economies on a per-capita basis. In our view,

renewed GDP growth in these regions should cause a significant acceleration in per capita

copper consumption. Copper is an important metal for growing economies and its demand

accelerates dramatically when a country, like China, enters a significant developmental

stage.

World GDP is currently sitting in the “sweet spot” of the copper consumption curve, or the

area in the curve in which copper consumption increases the fastest per increase in GDP

per capita. As the world economy recovers, copper metals consumption is poised to

sharply increase. In addition, two large population masses – China and India – are nearing

the “sweet spots” of their own consumption curves, which we believe will dramatically

increase world demand (see Exhibits 59-60).

While all base metals exhibit the S-shaped curves, copper and aluminum stand out as the

metals that are nearest maximum slope of their own curves. Copper, unlike aluminum, has

limited spare supply to meet this growing demand, which sets the stage for strong price

appreciation, in our view.

Exhibit 59: Rising GDP/capita for BRICs… Expected GDP per capital for Brazil, China, India, Russia

Exhibit 60: … puts copper in sweet spot of demand curveMetals consumption/capital at various levels of GDP/capita


Source: Brook Hunt, Rio Tinto, Goldman Sachs Research estimates.

We see opportunities for Neutral-rated pure-play Freeport-McMoRan not only because of

its copper exposure, but also because of the company’s potential to grow its business

through brownfield expansions and continued successful execution of its growth projects.

As discussed above, we believe copper will separate from other base metals as we see

rapid acceleration in demand (primarily driven by emerging markets) and a supply-side

hurdle in the exploration and commissioning of new projects. In the immediate term,

copper is the metal whose price most tends to anticipate or reflect market expectations for

world economic growth.

$0

$5,000

$10,000

$15,000

$20,000

$25,000 Brazil Russia India China

70%

131%

127%

235%

2008 2010 2015 2020 2008 2010 2015 2020 2008 2010 2015 2020 2008 2010 2015 2020

0%

5%

10%

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20%

25%

30%

35%

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Aluminum

Nickel

Zinc



Beyond oil and copper, the need for new infrastructure drives strong global demand for

steel, iron ore, zinc and metallurgical coal. We see metallurgical coal as most supply

constrained, despite strong growth expected out of Australia. We also expect electricity

demand growth in Asia will remain strong, leading to increased demand for natural gas

and thermal coal.

We see Neutral-rated Teck Resources as the name that is most levered to broader

emerging market metals demand growth. Teck is a well-run company with a proven track

record, attractive assets and exposure to a structural theme to which we subscribe –

namely, that emerging markets demand coupled with supply constraints will drive

commodities higher. Teck has combined three of the most China-levered commodities—

iron ore, metallurgical coal (see Exhibit 61) and zinc—and has constructed a portfolio that

has lower volatility than any of the constituent commodities on a standalone basis. The

end result is a diversified mining portfolio that is not only highly levered to China growth,

but also deserves a premium multiple for its relative stability.

Exhibit 61: China has become a major player in the seaborne metallurgical coal market

Global seaborne met coal supply-demand, MM MT unless otherwise noted

Source: McCloskeys, Goldman Sachs Research estimates.

Among coal stocks, we favor Buy-rated Peabody Energy for its unique Australian assets

that provide growth and exposure to both global metallurgical coal and Pacific Basin

thermal coal. Peabody has more organic growth projects in the development or evaluation

phases than any other coal company under coverage, pursuing opportunities in Asia, the

Illinois Basin and Powder River Basin. At its recent analyst meeting, Peabody introduced a

goal of reaching 100 million metric tons (MM MT) of annual coal sales out of Asia in the

next 10 years (vs 20 MM MT in 2009), to be driven by Australian organic projects, JVs in

China, India and Indonesia and an expanding trading platform. While some investors have

avoided Peabody’s shares due to the perception it is negatively levered to potential China

slowdown, we actually see less downside risk to Peabody’s met coal volumes and pricing

from China tightening, as it is North American volumes that are more marginal due to

quality and distance. We expect Peabody to outperform on continued strong Pacific Basin

thermal coal prices driven by demand that is ultimately caused by the growth of the middle

class India and China.

As a result of the same end demand, we expect mining capex growth to meaningfully

outpace overall economic growth. This is consistent with prior periods of tight commodity

fundamentals (see Exhibit 62). In our view, Buy-rated Bucyrus and Joy Global are uniquely

positioned to benefit given that they operate in a duopoly market with high entry barriers.

2004 2005 2006 2007 2008 2009 2010E 2011E 2012ESeaborne imports China (net) (0) (0) (2) 1 (0) 30 35 42 50 Japan 56 55 52 54 54 45 48 50 51 Korea 15 12 12 16 19 15 19 21 22 India 0 21 22 24 25 25 27 31 34 Europe 51 51 54 59 61 41 53 57 58 South America 11 11 12 14 16 12 15 19 22 Other 42 50 40 42 43 31 35 41 44Total 174 200 192 211 217 199 233 260 280

Seaborne exports Australia 117 125 124 137 134 134 143 160 177 USA 20 21 20 26 35 31 42 45 44 Canada 22 25 23 25 25 21 27 34 36 Other 15 29 24 23 23 13 21 22 23Total 174 200 192 211 217 199 233 260 280

Asia hard coking coal, CY ($/MT) $58 $108 $118 $103 $250 $172 $195 $213 $175



Exhibit 62: Mining capex should meaningfully outpace overall economic growth US commodity investment spending vs. US GDP vs. inflation-adjusted oil prices

Source: BEA, Goldman Sachs Research estimates.

Aerospace is also a secular grower in emerging markets. Aerospace companies should

benefit as air travel penetrates emerging economies and for the first time becomes

affordable for members of the expanding middle class. Because air travel as a regularly

utilized method of transportation has far from fully penetrated the emerging economies at

present, we expect to see a multiplier effect as the size of the global middle class grows

along with the percentage of the population that flies.

Exhibit 63 shows that GDP and air traffic are correlated. A growing global middle class will

drive demand for air travel, which will in turn generate demand for new aircraft,

particularly in emerging economies.

We highlight CL-Buy rated Precision Castparts as a company that is uniquely positioned

to benefit from growth in the global middle class. Precision Castparts is a high-quality

aerospace supplier that is levered to the large commercial original equipment market of

Boeing and Airbus. The company also supplies similar parts to industrial gas turbine

manufacturers and produces seamless extruded pipe, both of which are largely driven by

emerging economies—particularly China, in the case of the latter.

$10

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0

200

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19

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00

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02

20

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20

06

20

08

20

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E

Oil

pri

ce -

infla

tion

ad

just

ed

Mining & oilfield machinery spending (left axis)

Nominal GDP (left axis)

Oil - inflation adjusted (right axis)

1986-2002:15+ years of commodity underinvestment driven by low commodity prices

1972-1982:Strong commodity infrastructure investment cycle driven by oil supply constraints

No

min

al G

DP

an

d C

om

mo

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inve

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ent

spen

din

g,

ind

exe

d a

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00 in

197

2

2003 - 2008Strong commodity prices drive commodity infrastructure capacity increases



Exhibit 63: Airline flights per capita vs. GDP per capita As emerging economies grow they will require substantially more aircraft

Source: OAG, IMF.

As Boeing operates in a duopoly with Airbus, it also stands to be a major beneficiary of the

secular penetration of air travel in emerging economies. Exhibit 64 illustrates that Boeing’s

current backlog is predominately derived from geographies outside of the traditional

westernized markets that had dominated the backlog for decades.

Exhibit 64: Traditional western markets are no longer the majority of Boeing’s backlog Boeing commercial airplane backlog by region/segment

Source: Boeing.

India

China

Russia

Brazil

USA

0.01

0.1

1

10

0 10,000 20,000 30,000 40,000 50,000

Tri

ps

pe

r c

ap

ita

(2

00

9)

GDP per Capita (2009)

Leasing & Gov't22%

ME, Central & S. Asia12%

Europe16%

China, East & SE Asia18%

Asia Pacific 13%

L. America & Africa7%

North America12%







Less well understood than the Baby Boom but potentially equally important in the

United States are population peaks in the 16-29 and 0-4 age ranges (which we are

calling “Millennials” and “Generation Z,” respectively). While these generational

waves are not as large as the Baby Boom in absolute terms, they are larger than the

low birth years between 1965 and 1980. As a result, the Millennials are poised to

assume the country’s first new demographic leadership in forty years as they enter

the labor force and Baby Boomers retire. This transition will have a profound impact

on US companies, particularly within the TMT and consumer sectors (see Exhibit 65).

Exhibit 65: Opportunities created by generational waves after the Baby Boom


Like the Baby Boomers, the Millennial cohort is larger than the generations immediately

older and younger, defined as “Generation X” and “Generation Y” in Exhibit 66. In

contrast, the Millennials are smaller in number than their parents’ generation—the Baby

Boomers—and as a result they have not been the dominant age group in the economy to

date. However, as Baby Boomers exit the work force through a combination of retirement

and mortality, the Millennials will become increasingly important in the labor force.

Further, as the Millennials enter peak childbearing years the Census Bureau projects US

births to continue to recover. We identify an additional emerging cohort in the 0-4 age

range, which we are calling “Generation Z.” While it is too soon to predict this group’s

ultimate size or impact, we do see near-term implications for youth-oriented companies.


Millennials are tech‐savvy and connected + AMT, BRCM, CCI, CSCO, JNPR, QCOM, SBAC, T

‐ CTL, FTR, Q, WIN

Millennials consume media differently + DIS

Millennial consumers embrace e‐commerce + PGR, URBN

Retirement funding needs + HAS, MJN



Exhibit 66: Younger generational waves are poised to become more significant US population by age (thousands), June 2010 estimate

Source: US Census Bureau, Population Division.

More educated, tech-savvy and connected

As education leads income, Millennials are a group to be watched. Older Millennials

(age 25-29) are more likely than their counterparts in the earlier generations to have

completed high school and college (see Exhibit 67). Younger Millennials (age 16-24) look

set to continue this trend, as evidenced by the college enrollment rate of recent high school

graduates reaching an all-time high of 70.1% in October 2009 (see Exhibit 68).

Exhibit 67: Older Millennials have higher education

levels… Education levels for 25-29 year olds over the decades

Exhibit 68: …and younger Millennials are all set to follow

suit College enrollment rate of high school graduates (age 16 -24)

Source: US Census Bureau.

Source: Bureau of Labor Statistics.

Higher levels of educational attainment generally delay entry into the labor force. However,

as illustrated in Exhibit 69, after joining the work force higher education levels have also

historically translated into higher incomes. Assuming this relationship continues to hold,

0

1,000

2,000

3,000

4,000

5,000

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100+

Millenials (16‐29) and Generation Z (0‐3) are gaining economic signficance...

...while Baby Boomers (46‐64) are progressinginto retirement.

Baby BoomersMillennialsGen Z GenerationXGenerationY

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1969 1979 1989 1999 2009

Completed 4 Years of High School or more Completed 4 Years of College or more

20%

30%

40%

50%

60%

70%

80%

1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009

College enrollment rate



the Millennial generation looks well positioned to become an economic force in terms of

both numbers and wealth.

Exhibit 69: If history is a guide, higher education levels will translate to higher incomes Mean Earnings (in $) of Workers 18 Years and Over, by Educational Attainment

Source: US Census Bureau, Current Population Survey.

Opportunity #1: Millennials are tech-savvy and connected

Millennials came of age in the Information Era and use technology much more extensively

than older generations. According to the Pew Research Center, 93% of the 18-29 year old

age group in the United States is online, versus 74% for all adults (see Exhibit 70).

Exhibit 70: Internet usage is much more widespread among younger adults Percentage of US population that goes online by age, 2009

Source: Pew Internet & American Life Survey, 2009.

Results of the Goldman Sachs 2010 Internet Usage Survey, conducted in January 2010,

indicate that the 18-29 age group uses the internet for a wide range of activities as well (see

Exhibit 71). Millennials leverage the internet as a means of communication above and

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Less than High School High School/Associate's degree

Bachelor's degree or higher

74%

93%

81%

70%

38%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

All Adults 18+ 18-29 30-49 50-64 Adults 65+

Per

cen

tag

e o

nlin

e



beyond e-mail, interacting via instant messaging and social networking as well. More than

70% of the 18-29 year olds surveyed use social networking versus fewer than 50% of

respondents older than 30. The 18-29 year old demographic is also 1.75X as likely to own a

smartphone as the average US adult.

Exhibit 71: Millennials are more active online than older generations Percent of respondents who spend time on the activity online in an average week

Source: Goldman Sachs Internet Usage Survey.

As a result, as members of the Millennial generation gain greater purchasing power not

only will they buy information, equipment and software—they will also have the financial

means to upgrade more frequently as technology progresses.

To take advantage of increased technology use and connectivity, we prefer the pipes

and enablers. Hardware and software companies seeking to meet consumer tastes as

technology and trends evolve will have to execute well in a competitive and ever-changing

market, but the need for bandwidth will be a constant for all data-intensive communication.

As a distributor of bandwidth, we believe Buy-rated AT&T will be among the biggest

beneficiaries. We estimate average revenue per user (ARPU) for smartphone users to

be 2.5X that of feature phone subscribers, and as a result the Millennial preference for

better and more data-enabled mobile devices should be a tailwind for wireless

revenues.

Exposed to the same tailwind are the tower stocks, including CL-Buy rated Crown

Castle International and SBA Communications and Buy-rated American Tower. As

greater bandwidth usage strains networks, the most direct ways for carriers to improve

network capabilities are via cell site additions and amendments, both of which directly

benefit tower operators.

Conversely we believe the RLEC (rural local exchange carrier) industry, including

Neutral-rated Centurylink, Frontier Communications, Qwest and Windstream, should

suffer from the Millennials’ preference for wireless voice services over wireline.

According to our Internet team’s Internet Usage Survey from Feb 2010, only 56% of

online consumers ages 18-29 have a landline phone, versus an 84% respondent

average. In addition, we estimate total wireless-only homes now comprise 26% of US

households with annual growth of 4-5 percentage points, and believe further wireless

substitution will occur as Millennials age and grow in proportion among homeowners.

This should put further pressure on voice revenues, disproportionately impacting

RLECs given their greater exposure relative to more diversified telcos that have

enterprise and wireless segments.

Categories 2009 2010 2009 2010 2009 2010 2009 2010 A18-29 A30-49 A50+

Email 96% 97% 95% 96% 95% 98% 96% 98% 1.0x 1.0x 1.0xReading news, sports, entertainment 69% 75% 67% 76% 70% 77% 69% 73% 1.0x 1.0x 1.0xShopping/buying 58% 59% 58% 65% 61% 60% 56% 56% 1.1x 1.0x 0.9xSocial networking 30% 45% 61% 71% 34% 52% 17% 33% 1.6x 1.2x 0.7xHealth-related research 39% 39% 34% 34% 38% 38% 43% 41% 0.9x 1.0x 1.1xPlaying casual games 38% 38% 31% 39% 40% 40% 38% 36% 1.0x 1.1x 0.9xCreating/watching UGC 20% 27% 32% 41% 25% 31% 12% 21% 1.5x 1.1x 0.8xChatting via instant messenger 28% 25% 44% 40% 30% 30% 21% 18% 1.6x 1.2x 0.7xMaking travel arrangements 16% 19% 17% 19% 15% 18% 17% 20% 1.0x 0.9x 1.1xWatching TV shows 15% 15% 24% 29% 17% 19% 10% 10% 1.9x 1.3x 0.7xClassroom/educational activities 13% 15% 24% 24% 12% 16% 11% 12% 1.6x 1.1x 0.8xWatching streamed movies/DVDs 14% 13% 27% 23% 15% 19% 9% 7% 1.8x 1.5x 0.5xBlogging 11% 12% 20% 22% 15% 16% 5% 6% 1.8x 1.3x 0.5xPlaying massively multiplayer games 12% 9% 22% 14% 15% 11% 7% 6% 1.6x 1.2x 0.7xDating services/online personals 6% 7% 8% 11% 8% 9% 5% 4% 1.6x 1.3x 0.6xOther 27% 48% 22% 43% 27% 46% 29% 50% 0.9x 1.0x 1.0x

A50+ Age IndexTotal A18-29 A30-49



In semiconductors, we believe that CL-Buy rated Qualcomm and Buy-rated Broadcom

offer attractive exposure to the theme. Increased smartphone adoption benefits

Qualcomm in three ways: (1) higher handset ASPs, on which Qualcomm earns a

royalty; (2) better chipset ASPs and margins, and (3) greater chipset market share as a

result of the company’s close alignment with Android, the fastest growing smartphone

operating system.

For Broadcom, over 40% of revenue is derived from sales of semiconductors moving

information over wireless networks, and the company’s technology is likely to enable

future wireless communication growth as well. Broadcom components are used in

everything from traditional PCs and handsets to emerging form factors such as

smartphones, tablets, e-readers, and connected televisions.

Given the corresponding increase in internet traffic growth that will be necessary to

enable such connectivity, we see CL-Buy rated Juniper and Neutral-rated Cisco as

long-term beneficiaries as well. To the extent that service providers benefit from

increased bandwidth demand, more capital spending will be needed to meet rising

capacity needs. Juniper is the name within our coverage most directly exposed to

service provider routing spend (approximately 60% of sales). Cisco, as the largest

player in routers and switches with a potential secular growth engine in its unified

communications segment, is clearly well-positioned for future technology usage trends

as well.



Opportunity #2: Millennials consume media differently

The Kaiser Family Foundation conducts a national survey of the media consumption habits

of over 2,000 teenagers (defined as 8- to 18-year olds) every five years. The inaugural study

was conducted in 1999 and the results from the 2009 study were published earlier this year.

In addition to providing a snapshot of the current youth media consumption, the survey

documents a decade of media evolution.

The current snapshot shows that American teenagers are consuming more media than at

any point in the past ten years. Average daily media consumption for teenagers is over 7.5

hours, and when multitasking is included approaches nearly 11 hours. Total consumption

(inclusive of multitasking) is up 25% from 2004, with compound annual growth of 5%.

In terms of media, the growth since 2004 has been driven by (in rank order): music,

television, computers, and video games (see Exhibit 72). In terms of devices, the growth

has almost exclusively been driven by increased use of portable devices, such as cell

phones, iPods and handheld game players (see Exhibit 73).

Exhibit 72: Youth media consumption continues to growTeenager average daily media consumption (in minutes)

Exhibit 73: Portable devices drove most of the growth. Teenager average daily media consumption (in minutes)

Source: The Kaiser Foundation, Goldman Sachs Research analysis.


Millennial media habits are not simply affecting the amount of content consumed, but also

the ways in which media is experienced. The proportion of media consumption that

incorporates multitasking rose from 16% in 1999 to 26% in 2004 and 29% in 2009 (see

Exhibit 74). Multitasking generated most of the media consumption growth between 1999

and 2004, and about half from 2004 to 2009. Simultaneous consumption of multiple media

is most prevalent while listening to music, watching TV, and using a computer (see Exhibit

75).

227 231 269

108 104

151 27 62

89

26

49

73

43

43

38

18

25

25

0

50

100

150

200

250

300

350

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450

500

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1999 2004 2009

Tee

nag

er D

aily

Med

ia C

on

sum

pti

on (m

ins.

)

Movies

Print

Video Games

Computer

Music

Television

449

514

645



Exhibit 74: Multitasking is nearly one-third of media

consumption Teenager Average Daily Media Consumption (in minutes)

Exhibit 75: Multitasking is most common with music, TV

and computers Teens that use another medium “most”/“some” of the time



The very nature of television viewership is also evolving, with teenagers watching 14% less

live television than they did in 1999, but total consumption up 18% over the same time

period thanks to new platforms and time shifting (DVR) technology. Print media

consumption has meanwhile suffered from internet substitution among young people, with

magazine readership falling from 47% to 35% while newspaper consumption fell from 42%

to 23%.

Against this backdrop of changing distribution, we favor differentiated content

producers. For companies that own or can create differentiated multiplatform content,

there will be an opportunity to monetize brands regardless of how media consumption

habits evolve. As devices such as DVRs and iPads facilitate watching TV and movies on a

delayed or portable basis overall entertainment consumption increases, adding value for

producers of content. Technology changes such as cheaper satellite television (e.g., in

India) and better 3D theatrical experiences (e.g., in Russia) likewise help US entertainment

companies expand more swiftly to address a global audience. While technology changes

also have the potential to disrupt the entertainment ecosystem, the industry’s proven

ability to capture value in multiple formats—including Netflix payments, Hulu advertising,

and iTunes revenue sharing—suggests that the current challenge is one of measured

evolution, not looming extinction.

In particular, we highlight Buy-rated Disney, which owns a collection of brands—including

not just Mickey Mouse and Winnie the Pooh, but ABC, ESPN, Marvel and Pixar—that have

proven profitable across numerous platforms. Because many of its products are youth-

oriented, we believe Disney is far ahead of peers in understanding how younger

generations interact with media and consumer brands. Beyond demographics, we view

Disney as the media sector’s leader in size and scope, structurally differentiated by its

dominance in categories such as consumer products, parks and televised sports.



Opportunity #3: Millennial consumers embrace e-commerce

Given a high degree of awareness of consumer choices (aided by online searches and

reviews), preference for immediacy of service, and comfort transmitting payment

electronically, one of the most significant generational differences between Millennials and

their forebears is in the propensity to make purchases online. This has significant

implications for consumer-facing companies ranging from the retail and internet

companies examined in our dotCommerce franchise to insurance providers competing in

the direct to consumer channel.

The transition to a more internet-driven consumer economy is already well underway and

is likely to continue at a rapid pace. Over the next ten years we project that online will grow

at five times the rate of traditional retailing. At this rate online consumer dollar growth will

exceed off-line growth by 2019 (see Exhibit 76). An analysis of penetration by end market

shows room to grow, as current online penetration remains low for most consumer

categories (see Exhibit 77). We highlight apparel in particular as a segment where relatively

low online penetration and a very large market size combine to form an attractive long-

term growth driver.

Exhibit 76: Online consumer dollar growth to eclipse off-

line by 2019 Year-over-year change in sales by channel ($ mn)

Exhibit 77: Online penetration remains low for most

categories Online penetration by market


Source: Forrester Research, Goldman Sachs Research.

As part of our aforementioned Internet Usage Survey we polled shoppers on their comfort

level buying apparel online. Not surprisingly, we found that younger shoppers were most

comfortable buying clothes online, with nearly two-thirds of respondents in the 18-29

demographic stating they were very or somewhat comfortable buying apparel online

versus just over half of respondents over age 50. We also found that 26% of surveyed

shoppers indicated that they are becoming more comfortable buying online, a trend

validated by strong online growth across our coverage.

Based on our dotCommerce framework for apparel companies, the full details of which

were published in our May 24, 2010 report “dotCommerce: Online shifts apparel’s center of

gravity,” a multi-channel strategy is the best approach for reaching technically adept

Millennial consumers. We define a multi-channel strategy as one that incorporates stores,

web and catalog distribution. Integrating these channels not only increases long-term

customer loyalty by improving the customer experience, it also enhances profitability and

returns. Online apparel sales are growing faster than traditional retail, and that growth is

margin accretive for multi-channel operators because of lower operating costs online. We

estimate the online business within a typical multi-channel model generate a margin that is

around 1200 bp higher than retail store margins, as detailed in Exhibit 78.



Exhibit 78: Economics are most compelling for traditional retailers that also operate an online business P&L for three different apparel retail models based on sector average

Source: Company data, Goldman Sachs Research.

In our view, the true test of a retailer’s online commitment is the online customer

experience. To determine who is most aggressively embracing the long-term online

opportunity, we evaluate retailer websites in our dotCommerce research using our

proprietary Experience Scorecard based on the key drivers of where consumers shop

online (shipping costs, ease of use, etc.).

A leading example of a retail apparel multi-channel strategy with a commitment to online

user experience using this framework is Neutral-rated Urban Outfitters. The company has

been an early adopter of social networking and many key functionalities like user reviews

and product suggestions, as illustrated in Exhibit 79. Urban’s online business now accounts

for 17% of sales (well above the peer average of 10%) and is growing much faster than

total sales (+40% in 1Q2010). It is no coincidence that the company targets customers in

their teens through their late 20s, a demographic that overlaps directly with the 16-29 year

old Millennial wave.

Online Only Model

Traditional Retail Model

Overall

Online within Traditional

Retail Model

Revenue 100% 100% 100%

Product CostsMerchandise Costs 54% 45% 45%Distribution & Freight 1% 2% 1%Buying Costs 5% 6% 6%Shipping Income -6% 0% -6%Shipping Costs 6% 0% 6%

Total Product Costs 60% 53% 52%

Store/Website Costs:Occupancy (Rent etc) 0% 9% 0%Staffing & Other Store Exp 0% 17% 0%Online Costs

Fulfillment 10% 0% 10%Other Selling 5% 0% 5%Fees (Outsourced) 0% 0% 0%

Total Store/Website Costs 15% 26% 15%

Other:Advertising 8% 1% 1%Corporate 8% 6% 6%D&A 2% 4% 4%

Total Other Costs 18% 11% 11%

EBIT 7% 10% 22%

Apparel Retail Overall P&L

+ Multi-channel model winsEither double or triple profitability of alternative models as blends best of both worlds

+ for Traditional retailers Higher mix of proprietary brands means higher merchandise margins (both online and offline)

+ for Online only players Stores carry higher operating costs than online

+ for Traditional retailersStores provide valuable marketing vehicle



Exhibit 79: Advanced retail apparel websites include key features to facilitate the shopping experience urbanoutfitters.com rates highly on our Experience Scorecard

Source: urbanoutfitters.com; Goldman Sachs Research.

The generational preference for e-commerce has far-ranging consequences outside of

traditional retail consumer markets as well. In the insurance industry, for example, there is

an ongoing secular change in the way that people find and buy personal auto policies. The

direct-to-consumer channel, which consists of business sold via the internet and over the

phone, has grown from 5% share in 1989 to 17% in 1997 and 25% in 2008. As shown in

Exhibit 80, this growth has coincided with the increase in the driving population born after

1975. Given Millennial consumption preferences, we expect further increases in direct-to-

consumer penetration as the generation of connectivity and consumer choice makes up an

increasing proportion of the labor force over the coming years.

In addition to being well positioned for changing consumer preferences, the economics of

direct-to-consumer auto insurance are compelling as well. By selling directly, without

traditional agents, branch offices or commissions, carriers can underwrite policies with

lower overall expenses and leverage the fixed costs of web hosting and call centers as they

increase in scale. We see Buy-rated Progressive as having the most direct exposure

among the companies we cover. Progressive is currently achieving profitable growth and

taking market share via its structural low cost advantage and favorable demographic

exposure. Further, as auto insurance prices increase consumers tend to shop more, which

may provide a near-term benefit for lower cost direct platforms such as Progressive as well.

6) Site suggests similar products shoppers might

like

1) Multiple views lets shoppers see item from various angles

3) Return shipping is free

4) “Ask & Answer” gives details on sizing and fit

5) “Details” function describes fabrication and size

2) Shoppers can rate & post feedback on items



Exhibit 80: Direct channel market share has increased with the number of young drivers Number of licensed drivers born after 1975 and direct channel market share

Source: Company filings, US Census Bureau, Federal Highway Administration, Haver Analytics, Goldman Sachs Research.

0%

10%

21%

31%

36%

40%

49%

58%

0%

10%

20%

30%

40%

50%

60%

70%

1990 1995 2000 2005 2008 2010 2015 2020

Dri

vin

g A

ge

Po

pu

lati

on

Bo

rn A

fter

197

5

1989

1997

2007

2008

19952000

2005 2008

2010

0%

5%

10%

15%

20%

25%

30%

0% 10% 20% 30% 40%

% M

arke

t S

har

e T

ota

l D

irec

t C

han

nel

& P

GR

Driving Age Population Born After 1975 as % Licensed Drivers

Total Direct Channel Market Share

PGR Market Share

YearLicensed Drivers

Driving age population born after

1975

Driving age population born after 1975 as % licensed drivers

Historical1990 167,015 0 0%1995 176,628 18,374 10%2000 190,625 39,348 21%2005 200,665 61,633 31%2008 208,321 73,970 36%Forecasts2010 210,855 85,367 40%2015 221,273 108,891 49%2020 232,452 134,078 58%

As the percent of the population born after 1975 increases to almost 60% of licensed drivers--

and thus the online/direct buying trends of the last decade continue-- Progressive's direct policy count could increase significantly



Opportunity #4: As Millennials become parents, Generation Z looms

According to the Pew Research Center, 75% of babies are born to mothers in the 20-34 age

range, with birth rates peaking among women in their late 20s. The Millennial cohort will

fully overlap the 20-34 age range in five years, and the “echo” effect on births is likely to

shift what is currently a barbell population distribution in the 0-18 range (see Exhibit 81) to

a much more lopsided grouping where children under age 9 will far outnumber those ages

10-18. We are calling this emerging cohort, which we see beginning with children born in

2006, “Generation Z”.

Given that Millennials are still transitioning into peak childbearing years and the US Census

Bureau is projecting a sustained recovery in the birth rate, the ultimate size and economic

impact of the Generation Z cohort remains unclear. However, in the near term we see

significant consequences in the changing makeup of the youth population for companies

that sell to the under-18 demographic.

Exhibit 81: The youth demographic will skew younger in coming years

US residents by age (thousands), June 2010 estimate

Source: US Census Bureau, Population Division.

Recovering US births are a boon for companies that sell to the parents of infants

Sales for companies that sell to new parents in the United States have risen since births

bottomed in the late 1990s, though both 2008 and 2009 saw a 1-2% decline against the

trend as economic weakness was factored into family planning decisions. Looking forward,

the Census Bureau is projecting a recovery in 2010 and 1% average annual growth in US

child births over the coming decade (see Exhibits 82-83). This should provide a better

support for the industry than the 0.5% average growth seen from 2000-2010.

Among names we expect to benefit, CL-Buy rated Mead Johnson stands out as the

company most directly exposed to US birth trends. Mead is the manufacturer of Enfa

brands, including Enfamil instant formula, and is the world’s largest pediatric nutrition

company in the 0-12 month segment. While emerging markets are the principal revenue

driver for the company—they represent in aggregate nearly 60% of sales—the United

3,700

3,800

3,900

4,000

4,100

4,200

4,300

4,400

4,500

4,600

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

The under‐18demographic in the US is dominated by Generation Z...

...and by Millennials moving into adulthood.



States remains the company’s largest single market. Global sales growth could accelerate

to 10-12% as economic growth in the United States returns to positive territory.

Exhibit 82: We expect an upward trend in child-births

over the next decade Number of births in the US, millions

Exhibit 83: The number of births could climb sharply over

the next few years coming off of a low 2008/2009 base % change in birth, year-on-year

Source: US Census Bureau, Goldman Sachs Research.

Source: US Census Bureau, Goldman Sachs Research.

Youth preferences drive parent dollars

According to Cotton Incorporated’s 2004 audit of the children’s apparel market, children

have considerable say in what is bought for them. Fully 70% of mothers surveyed indicate

that they purchase items specifically requested by their children. However, a child’s impact

is strongly correlated to its age: 56% of 13-15 year-olds select all or most of their own

clothing versus 30% of those aged 10-12 and only 15% of those in the 6-9 age group. We

believe that increased media engagement and dotCommerce will amplify youth-directed

expenditures across all ages over time, as it is becoming easier both to market to youth

demographics via targeted advertising and for young people to identify specific products

for their parents to buy.

Toy sales have already accelerated, outpacing GDP growth during both the strong

economy of 2006-2007 and the tough backdrop of 2008-2009. Currently over 70% of toy

sales are targeted to children aged 0-9. With the Census Bureau projecting this age cohort

to grow 7% to 44.3 million by 2020, ahead of the more moderate 4-5% growth in the 0-9

age group over the past decade, toy company sales should see a meaningful benefit. We

view CL-Buy rated Hasbro as the best direct play on toy and game spending. Beyond

demographics the company is poised to see accelerating sales growth from its strategy of

leveraging toy brands in TV and movies, and the stock is supported by attractive valuation

and an aggressive share repurchase program.

3.500

3.600

3.700

3.800

3.900

4.000

4.100

4.200

4.300

4.400

4.500

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010E

2012E

2014E

Expect a steady climb in child-births as the Millennials move into their 20's and 30's.

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010E

2012E

2014E

We see a sharp birth rate recovery of f low

2009 base



Appendix



Exhibit 84: Previously published research addressing demographic themes


Equity Basket Disclosure

The Equities Division of the firm has previously introduced the basket of securities

discussed in this report. The Equity Analyst may have been consulted as to the

composition of the basket prior to its launch; however, the views expressed in this research

and its timing were not shared with the Equities Division.

Retiring Baby Boomers The expanding global middle class Generation waves after the Baby Boom"The Day After Tomorrow, v1.0: The changing

face of the consumer" by Anthony Carpet and

Laura Conigliaro, et al. (October 1, 2008)

Global Economics Paper No: 170, "The Expanding

Middle: The exploding World Middle Class and

Falling Global Inequality" by Dominic Wilson, et

al. (July 7, 2008)

"dotCommerce: Online shifts apparel's center of

gravity" by Adrianne Shapira et al. (May 24,

2010)

"Follow the Flows: Potential policy implications

for retirement services" by Christopher Neczypor,

et al. (January 27, 2010)

Global Markets Institute, "The Power of the

Purse: Gender Equality and Middle‐Class

Spending" by Sandra Lawson and Douglas Gilman

(August 5, 2009)

"Independent Insight: Eighth Annual Internet

Usage Survey, 2010" by James Mitchell, CFA, et

al. (February 22, 2010)

"The three stages of a sector recovery ‐ is an

inflection point in R&D upon us?" by Jami Rubin,

et al. (January 20, 2010)

Global Economics Paper No: 166, "Building the

World: Mapping Infrastructure Demand" by

Sandra Lawson, et al. (April 24, 2008)

GS SUSTAIN, "Crossing the Rubicon: Our

investment framework for the next decade" by

Anthony Ling, et al. (February 26, 2010)

"Sector challenges but stock opportunities; CL‐

Buy AGN, Buy ENDP, and Sell KG" by Randall

Stanicky, et al. (April 19, 2010)

"Investing in Brazil's New Middle Class" by

Stephen Graham et al. (April 26, 2010)

"The Rise of the iPad and tablet: Assessing

winners and losers in the global TMT ecosystem"

by James Covello and Jim Schneider, et al. (July

12, 2010)



Reg AC

We, Anthony Carpet, Laura Conigliaro, Robert D. Boroujerdi, Thomas Craven, CFA, Michael Chanin, CFA and Deep Mehta, hereby certify that all of

the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also

certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this

report.

Investment Profile

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market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites

of several methodologies to determine the stocks percentile ranking within the region's coverage universe.

The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate

of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend

yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.

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in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.

Disclosures

Coverage group(s) of stocks by primary analyst(s)

Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this

compendium can be found in the latest relevant published research.

Company-specific regulatory disclosures



Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe

Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 31% 53% 16% 47% 44% 34%

As of July 1, 2010, Goldman Sachs Global Investment Research had investment ratings on 2,814 equity securities. Goldman Sachs assigns stocks as

Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for

the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.

Price target and rating history chart(s)



Regulatory disclosures

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See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager

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The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts,

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Ratings, coverage groups and views and related definitions

Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy

or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as

a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a

global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage

group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment

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Return potential represents the price differential between the current share price and the price target expected during the time horizon associated

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on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12

months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following

12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the

following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.

Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an

advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman

Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for

determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and

price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended

coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information

is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

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