United States

Q3 2019 Consumer Products Industry Spotlight


"Companies exploring a potential sale in the upcoming term should continue to seek vendor diversification out of China and into other areas of Southeast Asia in order to present an attractive asset to the market."

Kunal Bhatt, Director, Transaction Advisory Services, RSM 


Signs have emerged that the American consumer is struggling. More drivers are taking on lengthier auto loans to stay on the road, suggesting that the strength of the consumer backbone keeping the U.S. economy upright may be faltering. According to the RSM U.S. Middle Market Business Index, a potential recession is expected in the latter half of 2020, and recent reports have noted that U.S. consumer debt levels have reached $14 trillion, roughly $1 trillion above levels reached on the eve of the financial crisis. “Consumer businesses will find this data point troubling as we move forward into uncertain waters from a broader economic perspective,” says Bhatt. In addition, student loan debt more than doubled during the decade since the housing market bubble burst to spur the evolution of a younger, asset-light consumer who now rents or shares a whole range of consumer goods, from cars to clothing, all of which were previously purchased outright. Meanwhile, the exceptions to these trends have started to come under pressure from tariffs and disruptions to supply chains, particularly in apparel and footwear. As RSM has noted in The Real Economy Blog, deal-makers in this space already generated more than half of all tariffs collected by the United States while representing just 6% of imports before the trade war.

Big picture

The American consumer has helped to blunt many of the adverse effects on the wider U.S. economy that have arisen from the trade war with China. However, consumer sentiment has started to flag of late and, in addition to the uncertainty ushered into the market from rising tariffs, retailers must also contend with increasing labor costs pressuring margins. At the tail end of the summer, U.S. consumer sentiment declined by its most significant amount since 2012 as concerns around trade disputes with China, and more recently, the European Union, started to take hold. As a result, many clients in the consumer products space are growing rather weary of the continuing developments related to U.S. trade policy. Knowing these changes represent a larger macro event that may unfold over years and hit many aspects of the enterprise, some companies started to revise their sourcing strategies. “These organizations are the ones that have been able to successfully weather the storm,” says Kunal Bhatt, a director with RSM’s transaction advisory services. “Companies exploring a potential sale in the upcoming term should continue to explore vendor diversification out of China and into other areas of Southeast Asia in order to present an attractive asset to the market.” Likewise, players in the CP space with recurring revenue streams are emerging as attractive assets to financial sponsors and corporate acquirers alike as the prospects of a downturn rise.

Looking ahead

The year ahead for deal-makers targeting the CP market will hinge on how factors ranging from the trade war and tariffs to a looming economic slowdown and a less robust consumer base affect the market. Collectively, these factors represent a deviation from the patterns that have fueled the strong economic growth of recent years and will force retailers to evolve. In the near-term, however, many companies in the sector are still banking on a resilient consumer to drive holiday spending in the fourth quarter. “As an industry in transition, our retail clients will certainly be hoping for another strong holiday shopping season,” Bhatt observes. “However, consumer sentiment may be waning and could have a direct impact on the upcoming season.” Meanwhile, other trends are reshaping the CP landscape. The demand for ethical sourcing of goods has risen as a primary concern among a growing segment of the consumer base. Confronting this challenge head on, clients in the middle market are finding success addressing the increasingly conscientious consumer. Promotional spending to highlight environmental, social and governance initiatives has been beneficial to many clients, including certifications on vegan and cruelty-free cosmetics. By contrast, middle-market players in the food and beverage sector may suffer at the hands of larger competitors, given their greater ability to leverage economies of scale and quickly adapt to changes in consumer preferences. As RSM has found, a number of complementary resources are already bridging the gap between profitability and sustainability for retailers in the middle market post-adoption. “Blockchain technology can provide consumers with a transparent view of the entire supply chain, resulting in the socially conscious consumer having a view of how the product they purchased is made,” says Bhatt.

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