Consumer Products

Consumer Products

The consumer products industry has changed significantly. Customers are more savvy and cost conscious, and may never revert to prior spending behaviors.

State of the Industry

  • Continued high levels of price and marketing competition from big box retailers (Walmart, Costco) and lackluster sales growth continue to plague grocery stores, which were already losing market share and are now facing profitability concerns.
  • Consumers are consolidating trips due to high gasoline prices and substituting for cheaper food options, while splurging on certain higher-end products. Middle price point product categories are being squeezed.
  • Private-label brands continue to be a source of additional sales and margin as consumers look for value and brand loyalty continues to erode.
  • Credit/debit card interchange rate costs are rising, (in some cases up 700% over 10 years) with uncertain regulatory outcomes and the use of alternative payment channels, such as PayPal, increasing.
  • Too many “me-to” products; product line extensions are not yielding revenue growth. CapEx dollars shifting away from innovative products that could expand markets. Companies are reluctant to take major risk with new product development and continue to favor line extensions. The consumer is left with undifferentiated products and forced to choose on price.
  • Large Hispanic market growth opportunity: Hispanic buyers make three times more grocery store trips than non-Hispanics.
  • Expansion into eco-conscious and naturally derived products continues as customers look to feel good about product purchases. This will impact raw material sourcing, packaging and product margins.

Insights from Our Clients

  • Many grocery stores were built with expensive infrastructure when real estate values were high. Today, owners cannot sell or refinance locations without realizing impairments or infusing equity.  Only prime locations are seeing some recovery.
  • The market for sale leaseback transactions continues to be very competitive. Recent deals we have done are in the 10-11 Cap range. Traditional debt financing transactions continue to be difficult to do as the banks are not as aggressive.
  • Previously high-margin “prepared foods” areas are under-utilized and cannot be easily converted to store shelves. ROI on related equipment (freezers, heaters, ovens) is low.
  • Margin erosion continues as commodity price increases (grains, fuel) are difficult to pass along to consumers. Most companies don’t have ability to hedge their exposure.
  • Affordable Care Act implementation and the uncertainty of higher future tax rates have slowed investment and have caused clients to focus on cost cutting rather than innovation and expansion.

6-12 Month Outlook

  • Location and store format are longer-term assets as consumers look for convenience and personalization. Grocery/convenience stores want a presence in every micro-neighborhood. Smaller stores and in-store features are being designed to target niche markets, while larger stores are used for one-stop shopping.
  • Despite the economic recovery, shoppers will continue to shop at discount stores, seek out coupons and buy private label brands, making it harder to regain pre-recession brand loyalty. Couponing has become increasingly important, but not necessarily in the traditional way.
  • Marketing is not sufficient to sustain brand loyalty; companies are looking to analytics and technology innovation from mobile, social media and the cloud.
  • Consumers who turned to social media as a source to learn about new products continues to significantly increase year over year. The goal is to get consumers to publicly promote their “savvy” purchases on Facebook, Twitter or YouTube.
  • Online commerce will continue to cannibalize traditional retailers and incumbent national brands.
  • Margin pressure will continue due to elevated food prices.
  • Big box and large retailers will continue to source products directly from manufacturing, forcing some suppliers out of the business.
  • Concentration of companies is expected to increase as larger players use resources to expand into untapped overseas markets. Smaller companies limited in geographic scope will likely enter into contracts with downstream retailers in foreign countries to grow their sales.
  • Volatility in gas prices will continue to affect lower-income consumer attitudes towards savings and lower-priced products, while higher-income consumers will continue being relatively price inelastic for most packaged goods.
  • Retailers are increasingly looking to turn packaged good sales into “experiences” where the customer sees the product purchase through the prism of lifestyle, such as we see with Apple stores.

Source: IBISWorld