Consumer Market Bites

Transcript

Hello everyone, thank you for joining us today to discuss what makes a successful consumer transaction.

My name is Chelsie Harris, and I lead the Private Deals business here at PwC.

I am joined by Andrew Pryde, who leads our Retail and Consumer team in the Deals Transaction Services business.

So Andrew, the past few years have seen numerous outstanding consumer transactions, incredible multiples, and great outcomes for business founders. However, it hasn't all been smooth sailing. In the past 12 months, we've also seen several consumer businesses struggle to secure new debt or equity funding, and private equity has become noticeably less bullish about investing in consumer businesses.

Let's consider those successful transactions, though. What are some of the common threads?

Yeah, thanks, Chelsie. It's definitely been a period filled with challenges as well as triumphs. But I think there are three key areas common to all successful transactions.

First is strong brand identity. Consumer brands have invested in understanding who their customers are and have cultivated a strong customer following, which leads to consistent revenue streams. They've gained a competitive edge in the market.

Second is scalability and growth. The ability of a business to scale its operations, enter new markets, or launch new products is crucial. Those with a strong track record have been able to achieve high valuations and secure better funding.

Third is robust financial health. Financial health is a cornerstone of successful transactions—strong revenue growth, sustainable profit margins, effective cost management, and managing inventory and working capital are all crucial for securing investment in this market.

So, market and competitive advantage are key. What about transactions related to scale?

Yes, scalability is vital. It provides businesses with greater access to new markets, new customers, buying power with suppliers, and leverage of their fixed cost base. However, it's important to scale in the right way. Businesses launching a new brand must ensure it doesn't cannibalize their existing brand or negatively impact their brand equity. Overexpansion without a focus on return on investment can diminish investor perception.

So bigger is not always better.

Not always better, no. It's about having a sustainable path to long-term growth. Chelsie, you run our Private business here at PwC, and many of the consumer businesses you deal with are smaller in scale or family-run. How do you approach managing information and data flow in a deal context?

Well, we both know retail is detail, and the due diligence process can be a data-hungry exercise. While being audited isn't necessarily critical, having robust, detailed monthly financial information will pay dividends. For example, demonstrating margin performance and improvement over time by SKU, customer, and region is crucial for investors. They need to understand unit economics and how they might change in various circumstances. A well-developed business plan that you actively monitor will give investors confidence in the forecast you present during the deal process. Additionally, considering consumer research to add context to insights less easily proven by data is valuable.

That's great advice, Chelsie. You mentioned due diligence as a data-hungry exercise. What are the most common questions or areas of focus in a deal process, in your view?

In my view, there are four key areas. The first is sales—not just total sales, but sales by category, customer, product, channel, region, and SKU. Understanding where products are sold and who is buying them is crucial. The second is underlying earnings. It's important to assess whether the business has financial stability and earnings unencumbered by abnormal or one-off items. Third is growth. Having a robust financial forecast that you can demonstrate achieving over time is critical. Finally, the balance sheet. It's important to evaluate how well invested the business is, whether in stores, systems, or inventory, to ensure the new owner won't need to invest heavily in cash upon takeover.

Thanks for the insightful conversation today, Chelsie. There are several key takeaways that we should highlight for our audience. Firstly, ensure you understand your customer, market, and key competitors. How does your product perform in different economic environments, and how do you win against other players in the market? Secondly, invest in managing information and data flow. As you said, retail is detail, and having robust monthly reporting and access to quality information is key. Third, be clear on growth opportunities, not just for the immediate term but also for the medium and long-term, such as a 10-year horizon. What are the new products, markets, and customers? What are the EBITDA growth opportunities? Finally, invest in your management team. A capable team independent of the owners will increase confidence in the transaction and ultimately protect deal value.

Thank you so much for the conversation today, Andrew. I hope everyone else found it as insightful as I did. I look forward to seeing you next time.