5 IDEAS YOU MISSED – ACG PRIVATE EQUITY: Consumer and Retail Conference

Earlier in November, we attended ACG’s Private Equity ‘Consumer and Retail Conference’ event. Here are five of our top takeaways from the panel, which focused on investments consumer retail industry by Private Equity firms. Prepared by TresVista

US an attractive market for investments in the Consumer & Retail industry: 2016 included significant M&A activity in the Consumer & Retail industry with more than 70% being strategic acquisitions in search for growth. Activist investors are seen as a catalyst for public company transactions. Brand growth and innovation, though in a niche segment, are the factors attracting Private Equity. 2017 is expected to be a great year for M&A activity in this segment. M&A market in the F&B and Personal Care segments presents high potential. Additionally, cross-border M&A is on a rise on the back of US-based innovation leaders in food and consumer products. Cross-border interest has been as much about gaining access to where the innovation engine is as it is on a relative currency basis. The majority of multinational businesses are US-based, so therefore US will continue to see significant inbound investment.
Increasing trend of strategic partners in the Consumer & Retail industry: More than 70% of M&A transactions in the last few years have been strategic investments, especially because when retailers search for growth,opening new stores is not necessarily the right solution– acquiring businesses is. These retailers are usually well-capitalized to improve the fulfillment end of the acquired business. This further depends on the segment; for example, food, beauty and supermarket segments provide economies of scale and synergies for strategic warehousing and distribution.
Brand matters for the benefit of investors, company and consumers alike: With the increasing popularity of internet searches, consumers are becoming more knowledgeable. As a result, consumers take less time to purchase a product and at the same time, companies reduce efforts to educate them. As per Mitchell Williams, consumers want to be excited about product, presentation and service. In addition, branding is important to augment online sale. Brand, growth and innovation are key drivers for PE investments in this industry. Premium branded growing businesses, with growth of more than 20% p.a., trade at a 2x-4x revenue multiple for the F&B segment and greater than 4x-5x revenue multiple for the Beauty segment. This also provides varied exit opportunities for investors.
Reverse expansion of e-commerce to traditional retail format: Digitally native companies now believe in having flagship stores, i.e. retail rollouts. However, there is a significant amount of analytical work underway around the lifetime value of a customer, frequency of purchase, and binding loyalty. Reverse-expansion could also be a creative partnership with major wholesalers to do concept shops or consignments to create awareness among customers. Setting up an e-commerce brand is less of a financial burden than creating a brick and mortar brand and then expanding online. Investors would like to look for companies that are likely to reverse-expand into select retail stores as customers prefer physical presence of certain products.
The Amazon effect forcing retail businesses to become more efficient: As Amazon grows in size and consumer wallets tighten, retail businesses are forced to focus on execution and become more efficient. Although according to Adam Rifkin, this has not negatively affected the M&A segment as many retailers have realized that they lack the in-house skillset, culture or technology necessary to execute online sales effectively, instead forcing them to find partners to tap these channels. Adam also believes that Amazon will lead to a reduction in a number of competitors in the market, causing the weaker companies to fall away quickly. According to him, retailers–who are able to add a lifestyle element to their products and serve underserved consumers–will be able to compete with Amazon effectively. The Amazon effect, according to Ken, will force efficiencies and let better players get ahead.
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