Last month’s Consumer Sector Investment Report was built on a lively discussion between CohnReznick’s Margaret Shanley and Stephen M. Wyss about sector data collected by Pitchbook, and the trends they have seen both in the data and in their work advising those in the private equity and consumer spaces. We couldn’t fit all of their insights into the report but didn’t want to leave them on the cutting room floor. Read on for 10 perspectives, and feel free to reach out to discuss what they might mean for your firm or business’s next steps.

1. Specialty retailers are attracting investors.
   Shanley: There are a lot of specialty deals right now, especially in specialty beverages. Personal care, as well. Our clients are looking at different things. They still need big retail stores like Target, Ulta, Walmart, and all these different places to kind of really build volume irrespective of having their websites, they still get their scalability and their unit growth in retailers.
2. Creating customer loyalty is an expensive priority.
   Shanley: We see loyalty programs becoming more relevant, giving away more points for more purchases and paying the customer for their loyalty to the brand. And I think the more specialized the brand is, and the more unique the product is, the better it’s doing. There’s more competition than ever for the consumer. And there are costs associated with attracting customers. Customer acquisition costs have gone up as a result. Many companies are trying to build loyalty programs, feedback loops, and customer education programs, which are all designed to keep their customers. That is the goal. Outside of your payroll, what’s your next-biggest cost, as a consumer brand? It’s most likely your advertising, your marketing. I think that’s another area where we’re seeing a race to be the first to attract consumers and retain them. And that costs money, but the better brands are managing their data and can do that. There are a lot of loyalty programs out there, and brands are trying to educate their customers about their products and their mission. Those things matter to consumers now more than they ever did.
3. One of today’s biggest challenges is maintaining margins.
   Wyss: Maintaining margins is going to be critical for consumer brands, and it’s going to be challenging for consumers to help those brands get there. The key is for branded merchandisers to be able to develop that feeling that their customers believe that they’re unique and they’re willing to pay a little bit more to obtain that feeling.
4. Growth of convenience services may slow.
   Wyss: Consumers are going to stick with products that solve problems or provide a unique solution for them, whether it’s getting your liquor delivered, your food delivered, your meal prep delivered. All of that convenience comes at a pretty significant cost. Even for grocery shopping, there is an increased emphasis on how much these expenses cost the consumer. During the pandemic, those services saw a surge in usage, but there are also a number of consumers who have stopped using them because they realize how expensive they are. When fees are considered and people examine their food costs, just like subscription services, they may pull back from them if they don’t think they’re necessary anymore. These frictionless and high-quality delivery services have seen some deterioration because consumers are starting to make economic choices.
5. Investors should be mindful of complex revenue streams and cost structures.
   Shanley: A private equity investor or any other investor still wants to see growth in revenue – through volume, but not through sales prices, necessarily. We do this analysis called “price volume analysis.” And the last thing you want to see is that the company’s revenue is growing just through price increases; that the whole time, you were raising your prices, but you’re not really selling any more products. That’s obviously not good at all. So, the brands that are doing well are still maintaining growth in their unit sales and effectively passing price increases to their customers.
   Private equity buyers want to see growth in revenue volumes, recurring customers, and in-store sales, and how those things impact gross margins. They need to know where the company has potential, and whether too much attention is being paid to the wrong channels. Those kinds of adjustments can lead to increased purchasing power. They might be able to shave some percentages from their costs, too. Ultimately it can drive a few points in the margin of this company.
6. Private equity firms are making earlier investments.
   Wyss: I see a lot of private equity firms getting into the space earlier and becoming practically venture capitalists, looking at products they believe are unique solutions that have the potential for long-term growth. So that’s a great mechanism to be able to allow the talent to maintain control, take a bit of the upside and see if they can develop. It gives the private equity firm the ability to make an investment but not risk as much as they normally would, but still have that upside, especially if things are going well later on. Private equity firms are looking for brands and companies that can provide unique solutions to customer needs. These are companies and brands that are great at one thing rather than being just generalists, and they are very often first to market with a product strategy that will position themselves for long-term success.
7. Plan from Day 1 around exiting to a strategic.
   Shanley: An exit to large strategic is the main exit strategy for a lot of these brands, and that hasn’t changed. We reviewed all the deals completed in 2022, and strategics are well-represented. The minute that you invest, you need to be thinking of how you’re positioning the portfolio company for a sale to a strategic. That’s what they need to be thinking about on Day 1. With that in mind, what are the strategics looking for? That’s actually pretty good advice for investors: Start thinking like a strategic, because they’re going to be buying your portfolio companies. Most likely, these big strategic brands are looking for growth. They’re looking for gross margin lift. They’re looking to shake up their portfolios, as well.
8. Consumer companies are investing more and earlier into technology.
   Wyss: We’re seeing a real focus that’s being driven by private equity on investing in data analytics and cybersecurity, and making those investments much earlier than they did in the past. In years past, the company typically had to be pretty mature and be willing to make investments in those types of things once they’ve hit a certain level of maturity. We’re starting to see it earlier because the PE firms are investing earlier, and that’s what PE firms are looking for. They want to make sure that they’re leveraging as much data as they can and that they’re limiting exposure in areas like cyber risk. We’re seeing more of an appetite from companies to pay attention to, and invest in, their information systems. Those data points drive their marketing campaigns, and those data points make their way back to the private equity sponsors. Information has become more of a priority, but it’s a real challenge for emerging companies to decide where to invest because every dollar counts at that stage.
9. Data is crucial to align operations to customer segmentation.
   Shanley: Consumer companies are trying to squeeze the supply chain to get those orders out to customers faster. And they have to decide which customers they will serve first. A couple of clients have been asking us for recommendations for demand planning software. They can really map out demand planning by the customer and be able to fulfill orders in a more organized fashion, serving the more profitable customers first. Everybody wants data: They want insights from the data, they want dashboards of data, they want profitability trends and customer metrics and customer and unit buying trends. I’ve seen a lot of funds setting up dashboards across their portfolios and coming to portfolio companies to help with that. It’s all about the technology, to the point of having everything on your phone so that managers can look at it in real time and make decisions accordingly. It’s about analytics and having access to the software that generates those data points and insights. Around valuations, right now there seems to be an increased potential for valuation disputes, especially if there wasn’t a big earn-out component. How do we avoid disputes? Again, it’s important to set realistic forecasts around the numbers, and certainly meet them, at a minimum, if not surpass them.
10. Brands tapping consumer sentiment are on the rise.
    Wyss: COVID-19 has changed the way people interact with brands and their products. Those that are having success in selling their goods are providing some experience that the consumer values. It’s not just about the goods. It can tie back to how the company views diversity, equity, and inclusion, and what they do in their communities. There’s an experience that people are buying by interacting with those goods. I do think that experiences are going to see some mixed results. Everybody wanted to get outside, and experiences became hot. Consumers finally got out of the house, but now they’re adjusting to something more normal. I do think the post-pandemic world is going to look at experiential purchases differently than they did pre-pandemic, products that give us a sense of pride or that give us a real sense of experience when we shop in their stores. That’s the shift that I see, and it’s an experience associated with products that will drive additional product sales.

Contact

Margaret Shanley, Principal, Transaction Advisory Services Practice Leader

310.598.1669

Stephen M. Wyss, CPA, Partner, Consumer Industry Leader

646.625.5758