The consumer sector covers three main areas: retail, leisure and consumer goods. Businesses in this sector are ultimately underpinned by consumer behaviour and spending patterns. In our increasingly digital world, they are working hard to reach out to connected consumers.
Once connected, collecting and analysing data on the consumer is of vital importance to CEOs of consumer businesses. Data allows businesses to tailor consumer retention and loyalty strategies: the aim is to win a greater share of the consumer’s attention and wallet.
Private equity investors look for companies that will outperform in growing markets and show resilience during downturn. They target companies that typically lead the market with strong brands, differentiated offers and clear customer propositions. New and emerging consumer markets with the promise of growth are of interest to them.
Even in these challenging economic times, there are winners – such as online retailers, food retailers, manufacturers of essential household and personal care products and retailers with strong ‘value for money’ credentials.
Clayton Dublier & Rice bought 60% of British discount chain B&M in 2012. The auction was fiercely contested and resulted in a deal that gives the company an enterprise value of approximately £965m.
In a historic deal for the consumer goods sector, Warren Buffett’s Berkshire Hathaway and private equity firm 3G have agreed to take over Heinz, the food company, in a deal worth $28bn.
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Retailers are being forced to adapt to meet consumer demand for more value, better service and greater convenience.
For many retail businesses, the opportunity exists to re-engineer the operational model that delivers success. This often requires a compelling multi-channel proposition and a strategy that meets challenges such as efficient product delivery.
In 2011, Bridgepoint paid £180m for Wiggle, the international online cycling retailer. The price equated to 12-13 times earnings before interest, tax, depreciation and amortisation.
Wiggle has a model that benefits from the shift to online retailing and the increasing popularity of cycling for health and environmental reasons.
Private equity continues to be attracted to retailers with distinct and sustainable brands, predictable cash flows and the ability to roll out whether online or off-line.
Unsurprisingly, economic pressures on the consumer, coupled with European legislation banning smoking and country specific gambling regulations, have disadvantaged leisure businesses.
Nevertheless, businesses in some leisure sub-sectors such as cinemas, for example, have proven resilient as they offer good value for money entertainment and they are enticing consumers with new technological developments.
New concepts are also emerging, such as value gyms, which allow consumers to pay for what they really want to consume by stripping out extra features and services which consumers value less.
Although deal volumes in the sector have declined, there were a number of deals completed in 2011 - early 2012, including Audley Travel and Travel Republic. In this market context, the focus is, more than ever, on finding a target with a clear and differentiated proposition, and the right operating and property models.
Consumer goods businesses are facing margin pressure on two fronts: the financial squeeze on consumers and rising commodity prices.
Brands are diversifying into new product areas and adjacent categories to appeal to the cash conscious consumer. They are also expanding geographically for wider appeal. Businesses are running tighter operations.
Within this context many large-cap consumer goods corporations are reviewing their operations strategically. Opportunities exist for private equity to carve out brands and businesses deemed to be non-strategic to the parent company.
Lucozade and Ribena, for example, will attract considerable private equity and trade interest when sold by GSK in 2013. Such brands attract investors motivated by brands and businesses that have the ability to internationalise their offerings.
Sectors such as personal care and alcohol, and growth sectors such as mothers and baby and sports and outdoors, will continue to attract private equity interest.