Article

Road to returns in consumer goods

Nearly every major PE firm has been active in the consumer goods sector, and with good reason: reliable cash flows, familiar brands and constant opportunities to make the everyday things we buy a little more profitable.

著者：Charles Tillen, Martin Toner and David Harding

First published on 5月 09, 2011
min read


With economic growth looking more solid, private equity investors are primed to go shopping for deals. And when deal-making revives, it is a safe bet that buyout funds will be eyeing opportunities in consumer goods. Nearly every major PE firm has been active in the sector, and it is not hard to understand what makes it so enticing. Consumer companies generate reliable cash flows, their brands are familiar and easy to understand, and there always seems to be a way to make the everyday things we buy a little bit better—and, for a PE owner, more profitable. Current conditions are ripe for more consumer goods companies to end up in PE portfolios. Ongoing consolidation among retailers, the deepening penetration of private-label offerings and widespread product proliferation will likely result in carve-outs, public-to-private deals and rollups of orphan brands. Major consumer packaged-goods companies are divesting non-strategic businesses. For example, Kraft Foods's announced sale of its frozen pizza division was part of the company's post-merger portfolio rationalization preceding Kraft Food's 2010 acquisition of Cadburys. There is also the ever-lurking presence of investor activists who are buying positions in laggard consumer packaged-goods companies and pressing management to boost shareholder returns through asset sales, among other means. But making money in consumer goods companies has been hard for PE investors. Too often, these investments end up disappointing—it's as if the contents of the container are not what the pretty packaging suggests. A brand may look to an investor like an underachiever that can be turned around when, in fact, it is performing at its strategic full potential. The consequences of confusing one for the other show up most clearly in the lackluster performance PE funds have experienced. Because everybody is a consumer, many PE investors think that making money in the sector should be easy. In fact, consumer goods deals perform roughly in line with supposedly more complex industries like health care and technology. According to Bain & Co. data, median returns from PE-owned consumer goods companies between 1995 and 2009 were a full 5 percentage points below that of companies in all sectors. Challenge Grows The challenge for PE funds to earn solid returns in consumer goods is apt to become even more daunting, as they battle major changes that have accelerated since the downturn. The engines that they have long relied on to power their returns are sputtering. Economic growth is tepid in a tenuous recovery, and assets prices and acquisition multiples are already high and show little potential to expand. Meanwhile, nearly all PE funds have become more specialized and have embraced the idea that they must be value creators to succeed. Thus, competition to identify and land the most attractive assets will increase. Clearly, PE acquirers have their work cut out for them to spot companies where their active ownership can materially improve their competitive position. To do that, they need to be mindful of important traits that make the sector distinctive. Scale is important in consumer goods as it is in most product and service industries, but it is not sufficient by itself. A consumer goods company may be a market-share leader but not make much money, or it may occupy a small niche and command premium margins. Equally important for setting a consumer goods company apart is the power of the brand. Customers are loyal to, and willing to pay more for, brands they trust. It is in the interaction between the latent advantages of scale and the strength of a brand where the best PE opportunities can be found. To spot them, PE acquirers need to take a rigorous analytical approach. One framework that we call "high road-low road" is a powerful tool for sizing up how much opportunity a consumer goods investment presents. The principal insight of "high road-low road" is that the primary driver of success in consumer goods company is a product's so-called premiumness-that is, the percentage sales in the category that command a premium price to private label. In categories where that percentage is about 60 percent or greater, high-road brands are more valuable and the potential for boosting margins-and shareholder value-tends to be much higher. In fact, it is better to be a follower in a high-road category than a leader in a low-road category. In high-road categories (think of razors or baby food), a brand's ability to reap large profit margins enables its owners to sustain major investments in innovation and marketing, leading to higher prices and profitability—a self-reinforcing strategy, if executed correctly. In low-road categories (think of frozen vegetables or canned tuna), products tend to be commodities with thin profit margins. Leading brands in low-road categories can achieve superior economics by gaining scale and relentlessly taking out costs, as a leader in an industrial business would do. The qualities that characterize high-road and low-road brands influence where PE funds can expect to find attractive acquisitions. Brands in high-road versus low-road categories face different economic realities that require them to pursue very different strategic options. PE investors need to be on the lookout for brands that offer the potential to execute several broad winning approaches. The first path to winning returns is to pick up "hitchhikers." Big consumer goods companies want to hold on to their high-road leaders, putting their top-shelf brands off limits to potential PE buyers. But the acquirer of a strong follower in a high-road category can make very healthy margins by prudently tending the brand's market position and keeping a tight rein on costs. That's what The Blackstone Group and Lion Capital did when they joined forces to restore iconic status to the slumping Orangina soft-drink brand following its carve-out by Cadbury in 2006. Best Strategies The popular thirst quencher had long enjoyed top market positions in its category, but management had been investing in other brands in its portfolio at Orangina's expense. Following the $2.6 billion buyout, however, the new PE owners moved quickly to refocus the company by stepping up spending for marketing and shelf space. Then, under the leadership of a new CEO, Orangina streamlined operations and engineered a series of small, successful acquisitions in France and the Ukraine. With Orangina's fizz restored, the PE owners sold the brand to Suntory, in 2009, for $3.9 billion, generating a sparkling 30 percent annualized return on equity. PE owners can also breathe new life into low-road brands, but again, they need to match their strategy to the realities of what's possible. Consumer goods companies are often eager to divest poor-performing assets, but PE investors would be wise to follow the dictum "buyer beware." These companies face very long odds of success. They operate in a market where competition revolves around price, but they lack sufficient scale to be a cost leader. That places them in a virtual "dead end"; our work shows that only one company in 100 navigates its way to a healthier strategic position from this starting point. Two paths to success on the low road are to attain low-cost leadership in a category by building scale or by focusing on a well-defined niche. The first promising low-road strategy is to back a solid budget brand that is a scrappy "rival" in a category that lacks a clear leader. PE investors hunting in this space look for companies that are potential acquisition platforms. By assembling other brands to the core holding and smoothly integrating them, they can build significant value by creating a runaway category leader with scale advantages that are difficult for competitors to match. For example, when Centre Partners acquired Bumble Bee Seafood from Con Agra in 2003, the canned-fish products manufacturer had a household-brand name in its commodity category. Pursuing a strategy to improve Bumble Bee's procurement strength while driving down costs, Centre engineered a reverse merger of Bumble Bee with a leading Canadian seafood company, significantly increasing its market clout and returning capital to its limited partners in the process. Then, when the economy tanked in 2008, Centre reacquired the growing company at an enterprise value of $600 million. In late 2010, Centre exited Bumble Bee a second time through a $980 million sale to Lion Capital, the UK-based PE firm. The second winning low-road strategy is to acquire a promising niche brand with premium potential. PE firms that have successfully executed this approach typically get involved early in the life of the target company. They provide funding that helps a young organization with a novel brand that has done well in a few local or regional markets make the leap to national scale—the point when it achieves a growth record and scale that makes it attractive for a major consumer goods player to acquire. VMG Partners, a San Francisco-based PE firm, followed this route to high returns through its 2007 acquisition of Waggin' Train, a producer of all-natural treats for pets. Waggin' Train's whole-meat snack products caught on with the small segment of dog owners who care passionately about their pets and are willing to pay extra to indulge them. With the product category growing at more than four times the rate for pet treats overall, VMG Partners and company management helped build brand awareness and push Waggin' Train products beyond mass retail and club stores into grocery and pet retail outlets. Sales took off and last September, VMG Partners earned its own treat by selling Waggin' Train to Nestle Purina Pet Care. As these examples demonstrate, PE funds that invest in consumer goods can succeed only by taking to heart what travelers on any journey understand: You cannot reach the destination you desire unless you know what road you're on. Charles Tillen and Martin Toner are partners at Bain & Co., based in the firm's Boston and New York offices, respectively. David Harding is a Boston-based partner who leads the firm's Global M&A practice.

With economic growth looking more solid, private equity investors are primed to go shopping for deals. And when deal-making revives, it is a safe bet that buyout funds will be eyeing opportunities in consumer goods.

Nearly every major PE firm has been active in the sector, and it is not hard to understand what makes it so enticing. Consumer companies generate reliable cash flows, their brands are familiar and easy to understand, and there always seems to be a way to make the everyday things we buy a little bit better—and, for a PE owner, more profitable.

Current conditions are ripe for more consumer goods companies to end up in PE portfolios. Ongoing consolidation among retailers, the deepening penetration of private-label offerings and widespread product proliferation will likely result in carve-outs, public-to-private deals and rollups of orphan brands. Major consumer packaged-goods companies are divesting non-strategic businesses. For example, Kraft Foods's announced sale of its frozen pizza division was part of the company's post-merger portfolio rationalization preceding Kraft Food's 2010 acquisition of Cadburys.

There is also the ever-lurking presence of investor activists who are buying positions in laggard consumer packaged-goods companies and pressing management to boost shareholder returns through asset sales, among other means.

But making money in consumer goods companies has been hard for PE investors. Too often, these investments end up disappointing—it's as if the contents of the container are not what the pretty packaging suggests. A brand may look to an investor like an underachiever that can be turned around when, in fact, it is performing at its strategic full potential.

The consequences of confusing one for the other show up most clearly in the lackluster performance PE funds have experienced.

Because everybody is a consumer, many PE investors think that making money in the sector should be easy. In fact, consumer goods deals perform roughly in line with supposedly more complex industries like health care and technology. According to Bain & Co. data, median returns from PE-owned consumer goods companies between 1995 and 2009 were a full 5 percentage points below that of companies in all sectors.

Challenge Grows

The challenge for PE funds to earn solid returns in consumer goods is apt to become even more daunting, as they battle major changes that have accelerated since the downturn. The engines that they have long relied on to power their returns are sputtering. Economic growth is tepid in a tenuous recovery, and assets prices and acquisition multiples are already high and show little potential to expand. Meanwhile, nearly all PE funds have become more specialized and have embraced the idea that they must be value creators to succeed. Thus, competition to identify and land the most attractive assets will increase.

Clearly, PE acquirers have their work cut out for them to spot companies where their active ownership can materially improve their competitive position. To do that, they need to be mindful of important traits that make the sector distinctive. Scale is important in consumer goods as it is in most product and service industries, but it is not sufficient by itself. A consumer goods company may be a market-share leader but not make much money, or it may occupy a small niche and command premium margins. Equally important for setting a consumer goods company apart is the power of the brand. Customers are loyal to, and willing to pay more for, brands they trust.

It is in the interaction between the latent advantages of scale and the strength of a brand where the best PE opportunities can be found. To spot them, PE acquirers need to take a rigorous analytical approach. One framework that we call "high road-low road" is a powerful tool for sizing up how much opportunity a consumer goods investment presents.

The principal insight of "high road-low road" is that the primary driver of success in consumer goods company is a product's so-called premiumness-that is, the percentage sales in the category that command a premium price to private label. In categories where that percentage is about 60 percent or greater, high-road brands are more valuable and the potential for boosting margins-and shareholder value-tends to be much higher.

In fact, it is better to be a follower in a high-road category than a leader in a low-road category.

In high-road categories (think of razors or baby food), a brand's ability to reap large profit margins enables its owners to sustain major investments in innovation and marketing, leading to higher prices and profitability—a self-reinforcing strategy, if executed correctly. In low-road categories (think of frozen vegetables or canned tuna), products tend to be commodities with thin profit margins. Leading brands in low-road categories can achieve superior economics by gaining scale and relentlessly taking out costs, as a leader in an industrial business would do.

The qualities that characterize high-road and low-road brands influence where PE funds can expect to find attractive acquisitions.

Brands in high-road versus low-road categories face different economic realities that require them to pursue very different strategic options. PE investors need to be on the lookout for brands that offer the potential to execute several broad winning approaches.

The first path to winning returns is to pick up "hitchhikers." Big consumer goods companies want to hold on to their high-road leaders, putting their top-shelf brands off limits to potential PE buyers. But the acquirer of a strong follower in a high-road category can make very healthy margins by prudently tending the brand's market position and keeping a tight rein on costs.

That's what The Blackstone Group and Lion Capital did when they joined forces to restore iconic status to the slumping Orangina soft-drink brand following its carve-out by Cadbury in 2006.

Best Strategies

The popular thirst quencher had long enjoyed top market positions in its category, but management had been investing in other brands in its portfolio at Orangina's expense. Following the $2.6 billion buyout, however, the new PE owners moved quickly to refocus the company by stepping up spending for marketing and shelf space.

Then, under the leadership of a new CEO, Orangina streamlined operations and engineered a series of small, successful acquisitions in France and the Ukraine. With Orangina's fizz restored, the PE owners sold the brand to Suntory, in 2009, for $3.9 billion, generating a sparkling 30 percent annualized return on equity.

PE owners can also breathe new life into low-road brands, but again, they need to match their strategy to the realities of what's possible. Consumer goods companies are often eager to divest poor-performing assets, but PE investors would be wise to follow the dictum "buyer beware." These companies face very long odds of success. They operate in a market where competition revolves around price, but they lack sufficient scale to be a cost leader.

That places them in a virtual "dead end"; our work shows that only one company in 100 navigates its way to a healthier strategic position from this starting point. Two paths to success on the low road are to attain low-cost leadership in a category by building scale or by focusing on a well-defined niche.

The first promising low-road strategy is to back a solid budget brand that is a scrappy "rival" in a category that lacks a clear leader.

PE investors hunting in this space look for companies that are potential acquisition platforms. By assembling other brands to the core holding and smoothly integrating them, they can build significant value by creating a runaway category leader with scale advantages that are difficult for competitors to match.

For example, when Centre Partners acquired Bumble Bee Seafood from Con Agra in 2003, the canned-fish products manufacturer had a household-brand name in its commodity category. Pursuing a strategy to improve Bumble Bee's procurement strength while driving down costs, Centre engineered a reverse merger of Bumble Bee with a leading Canadian seafood company, significantly increasing its market clout and returning capital to its limited partners in the process. Then, when the economy tanked in 2008, Centre reacquired the growing company at an enterprise value of $600 million. In late 2010, Centre exited Bumble Bee a second time through a $980 million sale to Lion Capital, the UK-based PE firm.

The second winning low-road strategy is to acquire a promising niche brand with premium potential. PE firms that have successfully executed this approach typically get involved early in the life of the target company. They provide funding that helps a young organization with a novel brand that has done well in a few local or regional markets make the leap to national scale—the point when it achieves a growth record and scale that makes it attractive for a major consumer goods player to acquire.

VMG Partners, a San Francisco-based PE firm, followed this route to high returns through its 2007 acquisition of Waggin' Train, a producer of all-natural treats for pets. Waggin' Train's whole-meat snack products caught on with the small segment of dog owners who care passionately about their pets and are willing to pay extra to indulge them. With the product category growing at more than four times the rate for pet treats overall, VMG Partners and company management helped build brand awareness and push Waggin' Train products beyond mass retail and club stores into grocery and pet retail outlets. Sales took off and last September, VMG Partners earned its own treat by selling Waggin' Train to Nestle Purina Pet Care.

As these examples demonstrate, PE funds that invest in consumer goods can succeed only by taking to heart what travelers on any journey understand: You cannot reach the destination you desire unless you know what road you're on.

Charles Tillen and Martin Toner are partners at Bain & Co., based in the firm's Boston and New York offices, respectively. David Harding is a Boston-based partner who leads the firm's Global M&A practice.