As the Economic Recovery Gains Momentum, Has the Perception of ‘Value’ Changed?
Mary Anne Citrino, Senior Managing Director and Head of Blackstone Advisory Partners’ Consumer Advisory Practice, responds to that and more.
Q: Mary Anne, you’ve had a firm pulse on the global consumer and retail environment during your thirty years in the business. How is the average consumer responding to the ongoing economic recovery?
A: Now, more so than ever before, consumers are focused on value. This does not necessarily translate into lower priced purchases, but rather a focus on quality and ‘bang for the buck.’ The magnitude of this recession put a different lens on global consumers’ perception of and demand for value. Increased unemployment, a temporary loss of credit, and everyday pessimism caused consumers to rethink their purchases and, specifically, what they were getting for the money they spent. The desire to maximize value is found amongst all demographics – from the high-end shopper at Tiffany or Neiman Marcus, who demands better quality for their luxury items, to shoppers at closeout stores seeking ‘the thrill of the hunt.’
Q: Has the economic recovery benefited certain consumer demographics and classes of retailers more so than others?
A: It’s no secret that broad economic indicators have favored higher income consumers over others. A key contributing factor to this trend has been access to and investment in the equity markets, which have appreciated meaningfully since their nadir in early 2009. The wealthy have benefited from improved economic fundamentals as well as appreciation in the value of their investments, compounding the wealth effect. Lower income consumers, on the other hand, generally do not have the same access to the equity markets as their more affluent counterparts, and were pressed to build savings and postpone purchase decisions until the economy showed signs of a recovery, forcing them to search for value as they began to spend again.
A great example can be found within the dollar store retailers. The success of this class of retailers during the downturn is, in large part, due to the fact that they took this period as an opportunity to add meaningfully to their product offerings, which now address a wider range of consumer needs than they have previously. Additionally, they also began to offer higher quality and more nationally branded products, increasing their target demographic to include middle class consumers that ‘traded down’ during the recession, and providing these consumers with a greater incentive to stick to value-priced retailing even during expansionary times.
Q: How have these trends affected M&A activity in the sector?
A: I would characterize M&A activity in the consumer sector in recent months as ‘opportunistic.’ Particular aspects of the recovery remain uncertain, and will continue to be so until factors including unemployment, government budget shortfalls, and political uncertainty abate. Despite the fact that both strategic and financial buyers are flush with cash, the same analogy applies for them in the position of potential acquirers and sellers as it does for consumers: they want to maximize value and receive top dollar for their investments. While valuations and access to credit have improved dramatically during the past few years, we still have a long way to go.
The opportunistic M&A has occurred in verticals with greater visibility and that capture some of the aforementioned trends. For instance, Nelson Peltz’s Trian Group recently offered to take Family Dollar Stores private in a deal worth more than $7 billion, and at a valuation higher than Family Dollar has ever traded at. Shortly thereafter, Leonard Green & Partners and the Schiffer-Gold founding family of 99 Cents Only Stores offered to take that business private, as well, in a deal valuing this business in excess of where it has traded during the past three years.
On the other hand, M&A amongst the luxury retailers, while also opportunistic in nature, is unique given the prevalence of longstanding family stakes within these businesses. This dynamic makes an acquisition proposal more difficult to consummate, since a potential acquirer must generally have the ‘buy-in’ of the family in order to successfully pursue an acquisition. Nevertheless, many independent, family-owned luxury retailers have suffered in recent years from a model that excludes outside investment, and found it more difficult to compete against larger retailers – a trend that is likely to fuel M&A activity in this sector going forward. A great example is LVMH’s recent proposal to acquire the 51% stake held by the Italy-based Bulgari family’s namesake business. The Bulgari family (who founded their business 125 years ago) called the sale a ‘compromise,’ as Bulgari’s performance during the downturn and recovery thereafter painted a much bleaker picture of the sector than that of its suitor.
It will be interesting to see what luxury retail has in store for M&A. What we’re witnessing so far is that the majority of growth in the sector is coming from both the U.S. as well as Asia ex-Japan. The latter is being fuelled by China, a country whose rapid economic growth and rising affluence is proving to be a major end market for luxury.
Q: Any other thoughts as we head into the second quarter of 2011?
A: Consumers are spending again, propelled by a rise in overall confidence and a drop in unemployment. While a full recovery will take time, retailers at both ends of the spectrum are experiencing slow and steady growth, and are also being affected by new catalysts for M&A. While factors such as rising commodity prices and inflation may continue to eat away at profit margins in the near term, they are also forcing companies to innovate, operate more efficiently, and, overall, ‘do more with less.’ Blackstone’s Chairman and CEO, Steve Schwarzman, commented on The Kudlow Report last Friday evening that he is more optimistic on the U.S. economic recovery than he was 12-18 months ago, and I absolutely agree with him.