As prolonged lockdown orders remain in place around the world – extremely limiting typical day-to-day consumer behaviour – the global Consumer and Retail sectors are facing unprecedented challenges, from production and supply through to distribution and sales.
In the latest instalment of our ‘3 Point Perspective’ series, Lowell Strug, Global Head of Consumer & Retail Investment Banking, examines how COVID-19 is affecting the Consumer Packaged Goods (CPG) and Retail industries, and how financing and deal-making in these sectors might look after the pandemic subsides.
With retail stores, restaurants and consumer outlets closed, and no certainty about when or how they will re-open, consumer and retail companies are looking to the capital markets to raise the funds required to weather the coronavirus pandemic. In fact, consumer and retail companies have been increasingly issuing debt and equity since the crisis began. Those that can produce well-articulated survival and growth plans based on responsive business models will continue to attract investor interest.
Source: Corporate filings, Bloomberg, Dealogic
Since lockdown measures will ease at different rates across markets and specific sub-sectors, consumer and retail companies with business significantly affected by shutdowns and social distancing measures will likely find it easier to access funding, if they can convincingly articulate how much they will need to raise in one issuance in order to demonstrate liquidity for both the short and medium term.
While this may come at a greater cost, approaching the market early on to meet expected liquidity needs will likely be viewed more favourably than approaching multiple times on an as needed basis. Companies showing stronger performance will have greater flexibility to access capital opportunistically during this elevated period of volatility.
While some consumer and retail companies faced a sudden drop in business as the COVID-19 pandemic unfolded, others saw rapidly increased demand as people raced to buy essential goods in record volumes.
The companies that successfully managed this elevated demand through creativity and co-ordination between their own operations, suppliers and retailers are feeling a newfound confidence in their core capabilities and overall business prospects. Historically, confidence of this nature has helped drive M&A activity.
A key ingredient for M&A is C-suite and board-level confidence, which we’re seeing emerge in certain CPG companies that have navigated the crisis successfully so far.Lowell Strug, Global Head of Consumer & Retail Investment Banking
We envision future M&A activity will be undertaken by businesses looking to increase scale, diversify business models and enhance on-line capabilities, which will help protect against future downturns while addressing changes in consumer behaviour.
Before COVID-19, much of the new growth in the CPG sector was driven by entrepreneurs and innovators focused on emerging consumer preferences for products with new ingredients, enhanced functional claims or other factors increasingly important to a new generation of consumer. Often these new businesses were more digitally savvy and creative in generating brand awareness and trial through a differentiated go-to-market strategy.
The coronavirus pandemic imposed two simultaneous challenges to this entrepreneurial class’s ability to disrupt and take share: health and lifestyle changes coupled with economic fallout. As customers turn to established or essential brands and become more value conscious, demand for new and unknown brands by both consumers and investors will likely decrease. Similar behaviour was seen in 2008, when store brand purchases jumped almost two share points during the financial crisis, and maintained this new position after it.
Source: Nielsen, Scantrack (U.S. FDM excluding Walmart), 4-week increments (vs. prior year); UPC-coded. Original available at https://www.nielsen.com/wp-content/uploads/sites/3/2019/04/Private-Label-US-White-Paper-Dec-2011-1.pdf (PDF, 1MB)
The knock-on effect of this behavioural change is that newer or more expensive brands will struggle in retail environments where the consumer is more cost conscious and less willing to gamble on new brands with their more scarce dollars. In addition, investors who were interested in high growth stories were more readily willing to forgive the losses that normally accompanied start-up businesses. This growth without regard to profit will likely be more challenging to underwrite post-pandemic. As a result, we foresee more willing early sellers among successful disruptors and new market entrants at more realistic valuations.