Event Recap: Investing in Retail & Consumer

August 2017

At last week’s PE Dealmakers Breakfast, our team led a panel discussion around investment opportunities in the retail and consumer industry. Alongside panelists from Duane Morris, First Republic Bank and Raymond James, industry colleagues exchanged insights on key trends, opportunities and challenges to help private equity firms make informed investment decisions in the retail and consumer products space. Read on for three takeaways from the event:  
Retail and consumer products are not synonymous.
While these two sectors operate under the same broad consumer business umbrella, their market dynamics are unique. In today’s environment, the primary issues facing consumer packaged goods (CPG) companies and manufacturers involve keeping pace with consumer behaviors and navigating supply chain changes amid the shift to online. In some cases, as with Unilever’s acquisition of the Dollar Shave Club, CPG’s are re-thinking their distribution strategies and opting to go direct to consumer.
Retailers, on the other hand, are facing a sea of changes that disrupt all areas of business—from real estate and labor, to marketing and inventory purchasing—as consumers look to buy experiences rather than products. Within retail, there are also differences between those that sell their own brand and those that sell third-party brands. As the market becomes increasingly saturated and consumers turn to options that offer the highest level of convenience, traditional brick-and-mortar retailers selling products that can also be sold in other stores and online face the greatest risk of becoming obsolete.
When weighing the risks and rewards of investing in consumer businesses, it’s important for PE investors to consider each segment distinctly and understand the unique challenges and trends shaping the business.
E-commerce has an equalizing effect.
The ubiquity of e-commerce means brands are more willing and eager to sell on online channels, while consumers in both urban and rural locations have greater access to receiving products at their doors.
Evidenced by conglomerate deals like Walmart/Jet.com and Amazon/Whole Foods, traditional consumer businesses across the board seek to partner with native online companies to expand their digital footprints and reach a broader customer base by capitalizing on their advanced technological capabilities and robust distribution networks. In some cases, companies that lack the resources to build new channels are so desperate to stay relevant that they express interest in investing in a product or company that falls outside their wheelhouse, so long as it has an infrastructure designed for e-tailing.
While having an online presence is table stakes to survive in today’s market, an optimized real estate portfolio is key to supporting the entire system. For instance, smart retailers are using malls and large format stores as distribution centers to make the last mile more efficient while still serving as a destination to woo in-store shoppers, particularly in suburban areas. E-commerce isn’t necessarily about being home-bound, it’s about having the option to start and end a purchasing journey anywhere.
Winners are solving problems before consumers recognize the problems exist.
Consider Amazon, the company that can miss its earnings target and still receive unwavering support from investors. That’s because its primary focus is on gaining a competitive edge, and its success is rooted its ability to innovate in response to anticipate consumer needs, rather than retroactively.
On the brick-and-mortar side, Saks Fifth Avenue is bucking the trend of widespread store closures by providing convenient, personalized shopping experiences. By selling wellness treatments through salt rooms, saunas and fitness bootcamps, the traditional retailer is adapting to consumers’ preferences toward buying experiences rather than products, while simultaneously leveraging brand power to boost foot traffic.
There’s a bifurcation in the consumer business industry, with an increasingly clear line between the ‘haves’ and the ‘have nots.’ Companies that innovate and adapt are coming out on top, and those that jump on the bandwagon may already be too late.