Less than four months in and 2022 is already looking good for the consumer goods and services (CGS) industry. While the COVID-19 pandemic has negatively impacted certain sectors, CGS companies are expecting to see increased operating margins. Despite this rosy outlook, significant challenges exist. Supply chain struggles are unlikely to be resolved fully or quickly, labor is hard to come by and keep, and costs are increasing rapidly. Getting ahead of these obstacles is essential for success in 2022. Fortunately, for many CGS companies, private equity firms are stepping in to provide guidance during this transformative time. – Private Equity Growth
Sharing his thoughts on the growth of private equity in the CGS sector and the potential for extraordinary returns on investment in 2022 is Mark Hauser, founder, and managing partner of Hauser Private Equity (HPE). HPE is a hybrid private equity fund manager that invests throughout the lower-middle and middle markets via partnerships with control buyout funds and selectively with managers of growth equity and special situation funds. The firm currently funds between $200 million and $2 billion, depending on the underlying investment strategy.
Growth in the Consumer Goods Industry
As Mark Hauser notes, private equity investors allocated $35 billion to CGS companies in 2020 despite the global pandemic, and this trend is likely to continue. “Looking ahead, experts predict a strong, upward trajectory in [merger and acquisition] deals across consumer and retail as the sector engages in value-driving activities such as restructuring and divestiture in the wake of the pandemic.”
Although historically stable and predictable – and thus unexceptional to many investors, the CGS sector is undergoing an evolution that makes it much more appealing to private equity firms. According to Mark Hauser and other experts, “the CGS industry has recently received a long-awaited dose of innovation, paving the way for transformation and opportunities for outsized returns.” Three trends have contributed to this change: increased digitalization, decreased customer loyalty, and the growth of value-driven shopping.
Although e-commerce was growing fast before COVID-19 hit, the pandemic pushed even more U.S. consumers to shop online and to spend more money, more frequently. Companies have been under pressure to adapt to these demands and have started investing in skills and technology to gain a competitive edge. Mark Hauser says this trend is likely to continue despite the lifting of public health regulations and the reopening of storefronts. Given rising prices due to inflation, consumers are paying extra attention to price tags and can often find greater savings online.
Related to online shopping trends is a shift in customer loyalty. The pandemic became a time of experimentation for many consumers who could no longer purchase from their favorite brands. A variety of factors including an unwillingness to shop at a physical location, supply chain issues, and inventory shortages led shoppers to favor convenience and immediacy over brand loyalty. Mark Hauser points out that “emerging CGS businesses are capitalizing on this moment of transition, acting quickly to connect with potential new customers looking for their next purchase.”
In addition, today’s shoppers are more willing to leave one brand for another based on a company’s values. Mark Hauser points to research showing that “79% of buyers reported in 2020 that they changed their brand preferences based on sustainability factors.” Indeed, value-driven shopping is more popular than ever, especially among young people who often base purchasing decisions on where a company stands on issues like the environment, diversity, and equity, or employee rights. Today’s consumers are not only more likely to buy from brands with a “strong purpose,” but they are also willing to pay more for products from companies whose values align with theirs.
Together, these trends spell opportunity for private equity firms seeking to earn a high return on investment, says Mark Hauser. While recent trends will be detrimental for some CGS companies, others will benefit immensely, especially with an injection of private equity funds to assist with branding, digital transformation, and expanded offerings. Because today’s consumers tend to shop smaller brands, value eco-friendly products, and are looking for an omnichannel experience, investors who can identify businesses that best meet these needs are likely to reap big rewards.
The Impact of COVID-19 on Consumer Goods
For the CGS sector, 2022 is likely to be one of strong financial performance. In a recent survey conducted by Deloitte, the world’s largest professional services firm, the top goal for industry executives is “driving greater revenue.” Contributing to this positive outlook is the fact that the average consumer has money to spend following the pandemic thanks to government stimulus checks, increased savings, improved performance of financial portfolios, and rising home values.
To tap into this purchasing power and build trust with consumers, CGS companies must embrace three key strategies, says Mark Hauser. They need to increase transparency, expand digital engagement, and invest in the future of work. Fortunately, private equity investors can assist portfolio companies in implementing these strategies.
There is no better way to build trust than to increase transparency. The two go hand in hand, says Mark Hauser. To achieve optimal transparency, companies must have the proper infrastructure in place, including the ability to collect and share meaningful data. In addition, companies can build trust by increasing their environmental, social, and corporate governance (ESG) reporting, a move that will be appreciated by today’s value-driven shoppers.
Because consumers are continuing to rely on e-commerce to make purchases, companies must learn to engage with them more meaningfully through digital channels and provide a seamless experience as they move from one channel to the next. According to experts like Mark Hauser, “digital engagement systems, including increasingly popular direct-to-consumer platforms, are an important way to increase transparency. They can be the means not only to personalize offers but also to share data on sourcing, labor, carbon reduction, safety, freshness, and more.”
Lastly, CGS companies must demonstrate a commitment to improving the future of work. With more people leaving their jobs, employers must fight to attract and retain top talent, says Mark Hauser. The key is to “put people squarely at the center of their future work visions, humanize work, and rally around outcomes that inspire and energize.” CGS companies that follow this strategy will be better equipped to meet the challenges of post-pandemic consumerism.
What Private Equity in Consumer Goods Looks Like Today
Like consumer goods and services, private equity is expected to see significant growth over the next few years. Mark Hauser reports that global private equity assets under management are likely to reach $5.8 trillion by 2025 and suggests that firms who are adept at building relationships with key stakeholders – employees, portfolio companies, and limited partners – will be best positioned to cultivate and maintain growth over the long term.
Nearly every major private equity firm is already active in the CSG sector and with good reason: familiar brands, reliable cash flow, and the constant opportunity to make everyday items a little more profitable. However, today’s CGS market is more appealing than ever.
According to Mark Hauser, the pandemic revealed the potential for private equity firms to provide CGS companies with not only financial assistance but also industry and management expertise and access to key networks, which pays off for them in the long run. Indeed, a certain symbiosis exists between private equity firms, portfolio companies, and limited partners: “PE firms’ ability to add value to their portfolio companies and deliver high returns could attract fresh capital and reinvestments, which may fuel assets under management (AUM) growth.”
Hauser Private Equity Invests in Consumer Goods
Anticipating the ongoing growth of consumerism, Mark Hauser has been an advocate for investing in the CGS sector. HPE, which invests through both direct investments and funds, has directly invested in consumer goods for a number of years. Some of its largest investment partners include Clearlake Capital (AUM $6.5 billion), Gryphon Investors (AUM $3.4 billion), Nexus Capita (AUM $1.7 billion), Palladium Equity Partners (AUM $1.5 billion), Wellspring Capital Management (AUM $1.45 billion), and Acon Investments (AUM $1.07 billion).
About Mark Hauser
Mark Hauser is a private equity investor and fund manager with more than 35 years of investing and operating company experience. He is the founder and co-managing partner of Hauser Private Equity, which invests in private equity funds and directly in privately owned businesses. The firm’s four funds have invested more than $300 million worth of capital in privately owned businesses nationally across a diverse set of industries.
Before Hauser Private Equity, Mark Hauser was vice president of Cincinnati-based Reynolds Dewitt Securities. His merchant banking work there resulted in public offerings of Mid-American Waste Systems, Future Healthcare, and Health Images. Throughout his career, Mark Hauser has served on the board of directors for consumer goods and food and beverage brands. He has also served on boards for government-contracted security and defense businesses and digital advertising and textile manufacturing.