The pandemic, and more recently, macroeconomic and geopolitical volatility, have affected nearly every industry. The consumer products sector is no exception. In conversations with consumer-focused investors, we have discussed some of the most prominent trends and challenges in the consumer space and report on them here.
What We’re Hearing
Supply Chain Constraints Persist
While supply chain constraints have been an issue for consumer companies since the beginning of the pandemic, the war in Ukraine and renewed shutdowns in manufacturing hubs like Beijing and Shanghai have added fuel to the supply chain fire. China appears to be slowly reopening, but the situation in Ukraine has added an unpredictable wrinkle. With significant uncertainty remaining, investors are not confident that we will witness meaningful supply chain improvements by the end of the year.
What do these bottlenecks mean for consumer brands and their growth? Numerous investors mentioned that brands are purchasing inventory much earlier than they did pre-pandemic. The longer lead time has drained companies of funds, as they now require more working capital than in the past. Consequently, many brands are unable to put as many dollars to work in revenue-generating areas, such sales & marketing, product innovation, and hiring.
Contract and Private Label Manufacturers vs. Branded Opportunities: A Potential Paradigm Shift
While consumer brands have long been private equity darlings, there’s a sentiment among investors that contract and private label manufacturers will outperform branded opportunities, should inflation continue to climb and the country enter recession. This shift is attributed to contract and private label manufacturers’ ability to push forward price increases more easily than branded companies can. Thus, profit margins for contract and private label manufacturers are typically considered more insulated than non-manufacturing brands operating further down the supply chain.
Additionally, in a recessionary period where discretionary spending declines (more on this later), consumers may opt for more affordable private label options versus higher priced branded alternatives.
Discretionary Spending is Down
Another trend consumer investors mention is a reduction in discretionary spending as inflation, higher interest rates, and geopolitical conflicts force consumers to spend more on essentials such as gas, food, and housing. This stands in stark contrast to the last few years in which discretionary spending reached all-time highs, powered by multiple rounds of federal stimulus checks and historically low interest rates. Investors anticipate that many consumer brands will continue to feel compressed performance if inflation continues unabated and the country falls into recession. As a result, valuations are likely to fall from the record highs of 2021, although A+ assets will continue to command premium valuations.
Valuation Expectations Remain High
Another insight from various private equity groups is that valuation expectations from sellers, especially for consumer opportunities, remain high coming off 2021’s white-hot M&A market. Many investors are hopeful that this year’s volatility will temper expectations among sellers. It remains to be seen, however, whether the challenges reflected in the public equities market will have a significant or lasting impact on private valuations, given the level of competition for quality deals among both private equity groups and strategic acquirers.
Biden’s Tariff Impact
President Biden may ease the tariffs on consumer goods from China implemented by the Trump Administration. Such a decision could help ease historically high inflation rates by reducing the cost of Chinese goods in the U.S. market. In addition, the move would reduce costs and improve profits margins for many consumer brands manufacturing goods in China.
With that said, there is disagreement among officials on the Biden team regarding the action’s likely impact on inflation. The jury is out about the President’s final decision – consumer brands with manufacturing in China will be watching intently.
How Can Class VI Help?
These days, consumer product companies face numerous growth challenges. Regardless of your company’s sale horizon, Class VI Partners can help through our assortment of services tailored to each stage of your entrepreneurial journey.
- Assess how an investor would view your company’s risks through our CoPilot platform
- Grow your brand to the next level and beyond with our highly customized Pathfinder program
- Sell or grow through acquisition with our investment banking team, which has managed some of the most successful consumer product deals in the market
- Thrive with our Family Office wealth management practice, which delivers high-touch service exclusively to a select group of business owners
Top Consumer Product Challenges
Fewer Barriers to Entry Bring New Entrants in Droves
The e-commerce boom has driven an influx of competition in consumer products. Startup CPG companies have entered the market en masse as technology has reduced the infrastructure requirements to get off the ground and attract customers.
As a result, competition for market share is extremely high, and a well-crafted, sustainable scaling strategy is critical in building company value. Our team has helped CPG companies across a variety of sub-sectors plan and execute growth strategies to drive stronger customer engagement, revenue growth, and profitability, which translated into premium valuations from investors upon sale.
Collecting and Utilizing the Right Data
The most successful CPG companies understand that data is power. Analyzing the right data is essential for brands to grow and should play a significant role in driving product, channel, and sales & marketing strategies. CPG investors place a premium on tracking – and more importantly, understanding and utilizing – data. Our team can dig deep into your data and metrics and help uncover where your opportunities and risks lie.
Supply, Channel, and Inventory Management
Implementing a lean and cost-efficient supply, channel, and inventory strategy is a challenge for many consumer product companies, but can be especially daunting for newer brands without the luxury of tenured relationships with suppliers and retailers. The supply chain bottlenecks driven by COVID have only exacerbated this divergence.
Additionally, consumer preference for more product variety has pressured brands to create more SKUs and reduce the length of product lifecycles. As a result, well-planned supply chain efficiency, channel strategy, and inventory control measures are more important than ever in building sustainable growth and profitability. Class VI can help you evaluate bottlenecks and optimize strategy across your value chain.
Consumer Product Sub-Sectors Served (to add icons below):
- Food & Beverage
- Health & Wellness
- Pet Products
- Nutritional Supplements
- Specialty Consumer Products
If you are interested in learning more about how we can assist your brand in its growth strategy, equity raise, or sale, we would welcome a conversation. We would be happy to share how we have helped entrepreneurs like you.
To schedule an introductory call, please reach out to Bobby Motch ([email protected]) regarding investment banking services or Rob Scott ([email protected]) about our pre-sale advisory program, Pathfinder.
A Few of Our Consumer Success Stories
Bobby Motch | Head of Sponsor Coverage | Class VI Securities, LLC
As head of Sponsor Coverage, Bobby is responsible for managing financial and strategic sponsor engagement, developing sponsor-related content, and managing Class VI’s Buyer CoPilot program. Prior to his role as Head of Sponsor Coverage, Bobby was responsible for executing and closing transactions and supporting Class VI clients through financial analysis, modeling, market outreach, industry research, and valuations.
The views expressed represent the opinion of Class VI Partners. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Class VI Partners believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the Class VI Partners view as of the time of these statements.
Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Testimonial may not be representative of the experience of other customers. Testimonials are no guarantee of future performance or success. Testimonials are NOT paid testimonials.