United States

2019 Annual Consumer Products Industry Spotlight

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"Both emerging and established brands are citing e-commerce as the key driver of revenue growth and margin expansiont." - Kunal Bhatt, Director, Transaction Advisory Services, RSM 

Spotlight

Retail sales data from the holiday season is painting a mixed picture of consumer strength. However, consumers continue to send one clear signal to retailers by completing more of their holiday shopping online with specialty retailers rather than with department stores and other big-box retailers. That trend looks unlikely to change as specialty retailers, from Lowe’s to Lululemon, still command foot traffic while maintaining a share of the wider e-commerce market that still appears durable enough to withstand Amazon’s approach. Meanwhile, consumers remain price sensitive and have increasingly taken to online shopping to find deals—particularly in footwear, according to data reflected in the latest edition of RSM’s The Real Economy: Industry Outlook. These trends point to a breakdown in some sectors between what was once a much clearer dichotomy between online and brick-and-mortar shopping experiences. The numbers behind these trends suggest that, for early adopters of technologies designed to support omnichannel strategies, first-mover advantage has quickly started to erode that distinction, with benefits accruing to the bottom line. “Key trends we’ve noticed are both emerging brands and established brands citing e-commerce as the key driver of revenue growth and margin expansion,” says Bhatt.

Big picture

Mergers and acquisitions (M&A) across the consumer products (CP) space declined considerably in both Europe and North America last year. Dealmakers completed some 3,300 transactions while deal value slid by nearly 40% year over year (YoY) to $492 billion in aggregate as the current cycle continues to wind down—likely with further deceleration on the horizon. The American consumer is flashing warning signs. According to the Economic Cycle Research Institute, the resilience of consumers could be on the wane. Despite the broader consensus that consumption can continue to drive the U.S. economy forward, dealmakers across the CP market must contend with emerging signs of weakness and position themselves accordingly. Retail spending, although robust in the fourth quarter of 2019 given the holiday shopping season, still dropped overall on a YoY basis. A few factors explain this dip, but chiefly, it’s the decline in total pay, which has outpaced the dip in hours worked—despite unemployment remaining near historic lows. However, with the bulk of discretionary consumption (60%) coming from the top 40% of income earners, some retailers have succeeded in negotiating the effect of fewer consumers at the top end representing an outsized share of overall spending. As Kunal Bhatt, director in transaction advisory services at RSM US LLP, has observed, “many clients have worked to diversify SKUs to accommodate a diverse consumer buying group.” These moves have supported the ongoing digital transformation across the consumer space. As both emerging and established brands drive e-commerce initiatives to scale, dealmakers can expect the consolidation cycle start to ramp back up.

Looking ahead

Over the coming year, much will depend on the election for dealmakers in the United States, while the United Kingdom’s exit from the European Union becomes a reality for the wider European consumer market. Heading into 2020, sentiment continues to soften on the apparel and accessories subsectors, but it’s stronger across the broader “experience” category of restaurants, hotels and leisure over the last year. Meanwhile, the retail landscape will remain in transition given rent cost pressures and recent bankruptcies. “Going into 2020, branded companies with successful digital strategies appear to be poised to receive significant attention from investors,” says Bhatt. But these macro trends, mostly positive, may inflate multiples even further. “Similar to the tariff discussions last year, I believe many investors are in a ‘wait-and-see mode,’ specifically as it relates to the presidential election and further trade pressures with China and the European Union,” Bhatt continues. Meanwhile, increasing wages across the service industry have started to overtake perennial concerns around costs of doing business, like increases to the price of inputs, as restaurants and retailers compete in a tight labor market. This has spurred digital transformation across a far wider swath of CP than just retail. “Digital transformation continues to be a key area of focus for many of our clients who look to leverage technology solutions in order to realize operating cost efficiencies in a tight labor market,” says Bhatt.


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