Looking ahead, Managing Director John Neuner sees continued strength in consumer services and franchising, products and services that support healthier lifestyles, and all things pet-related. He is watching several macroeconomic indicators as 2019 kicks off, two important shifts in consumer spending, and the impacts of tariffs and labor shortages.
In the midst of today’s uncertainty, Neuner advises private companies, strategic buyers and investors to take the long view, and to focus on predictable demand. See his full comments below.
Within your industry, which subsectors do you anticipate experiencing the highest levels of interest? Why?
Consumer services and franchising: Consumers and businesses increasingly outsource daily tasks, jobs, and services. Within this category, the franchise models have been the most attractive, given stable growth, predictable cash flow, and strong organic and acquisition opportunities across segments.
We’re also seeing continued strength in fresh and healthier foods, in fitness, and in health and beauty, all driven by consumer interest in healthier lifestyles. Travel and leisure is active as well, and is becoming more accessible than ever to the global population.
Finally, people continue to spend money on their pets, whether on food, products or services. And we’re seeing the same trend toward fresh and healthy pet products that we’re seeing in consumer products.
Which industry-specific trends or issues are you watching most closely?
We watch consumer sentiment, wage growth, savings rate, unemployment, and consumer debt levels. Our team is also tracking the continued shift in branded versus private label products across retail and e-commerce, as well as the continued bifurcation of consumers between premium and value.
Which geopolitical and/or macroeconomic issues are most relevant to your industry? Why?
Tariffs are key for almost all consumer products. Except for food, the majority of branded products are produced outside the U.S., and the current and potential impending tariffs have not fully rippled through yet. Commodity price increases are on our radar as well. We’re watching to see the impact of these cost increases, which can vary by sector depending on gross margins.
Wage rate gains and employment shortages are relevant too, impacting companies’ expenses and growth, while providing for a healthier consumer spending environment. All categories are susceptible to this, but consumer service companies have an especially high labor component.
Given the length of the current bull market, what should private companies, private equity groups and strategic buyers be thinking about?
I would say to private companies that economic cycles come and go. You can never predict when they start or stop, but history has shown that in the long term the trend is up and to the right. So they should continue to invest for the future, and while there could be bumps along the way, most companies have been rewarded by plotting a long-term strategy and executing it. They should also be thinking about ways to maintain and extend their brands and broaden their consumer bases.
For private equity groups, I would say that great companies tend to outperform others during a downturn. Current valuations are not just a function of the economic cycle, but also reflect the reallocation of global assets into private capital. While there could be some shifts, the best companies will always have a premium, which they typically deserve due to their ability to perform across cycles.
Strategic buyers should consider the fact that consumer tastes are evolving, as is the retail environment. It’s important to have scale, plus a well-rounded portfolio of products, services and brands positioned to weather the storm and meet shifting consumer tastes. So they need to continue to be forward-looking and play the long game.
Which qualities make acquisition targets most appealing in a more challenging operating and investing environment?
Predictability of demand: Many of our consumer service companies are focused on need-based items that are required in good or bad times, such as plumbing, electrical, and mitigation/restoration. Others provide recurrent services or products that consumers are unlikely to stop buying, such as education and food. The key is to ensure it is your products they are buying, which you can do by owning the shelf, having better products, and developing regional or national scale.