ICR hosted its 22nd annual investor conference on January 13-15 in Orlando. Along with presentations, panels, and a lot of networking and relationship building, 175 public and private companies had the chance to meet with a variety of institutional and private equity investors in settings ranging from large group presentations to sell-side hosted lunches, private mutual fund meeting rooms and evening receptions.
Each year, the ICR investor conference serves as a window into the current and emerging trends in the broad consumer sector covering retail, restaurant and food, healthy living, e-commerce, soft and hard lines, real estate and more. The 2020 ICR Conference did not disappoint. Here are some of the major highlights:
Retail Trends
Six fewer holiday shopping days between Thanksgiving and Christmas resulted in bigger headwinds than expected for retailers, especially those that lacked sufficient e-commerce penetration to offset the overall decline in store traffic. This has put even more pressure on companies to develop a robust omni-channel offering, but without material degradation to operating profitability, a dynamic that tends to favor the large, well-capitalized retailers that have the wherewithal to invest and gain share of online spending, which continues to increase at a healthy pace.
While e-commerce business is growing overall, many brick and mortar retailers are seeing cannibalization of their physical stores. Therefore, leveraging online and mobile apps to gain new customers, service existing customers with online exclusives and gifting, as well as add new services such as “buy online, pick up in store,” are working to drive growth across channels.
Several companies attested to how subscription services and loyalty programs are helping to drive customer retention and lifetime value, while others focused on the constantly evolving landscape and need for companies to be able to compete, which is leading to the rise of personalized shopping and increasing innovation in the industry. Companies that evolve their footprints and make the store an experience for consumers are clearly outperforming.
For apparel companies, the takeaway was that consumers are interested in a casual lifestyle — which can mean pairing a dressy top with jeans — and stores are increasingly expected to merchandise their products to make it easy for consumers to pull together this look.
For OTC products in pharmacies and retailers, many companies are trying to convert to being a CPG company, and certain presenting companies (including Prestige and Perrigo) highlighted the steady cash flow and organic growth involved in the healthy living “do it yourself” medications. There is a growing consumer trend toward the use of pharmacy and OTC products to take care of oneself and this group of companies is looking to capitalize on this movement.
The private company panels provided insight into how many fast growing DTC lifestyle brands like ThirdLove, TULA Skincare and Glamsquad, are succeeding. Consumer engagement is top of mind for these brands, and while each articulated different strategies, influencer engagement has become a critical growth engine to drive marketing and sales and engage with their consumers in unique ways. In addition, a large driving force is their ability to capture data and leverage it to create new products and services that meet the needs of their consumers.
Restaurant Trends
Generally, investors have still not regained the level of interest they had in restaurants a few years ago. Although the consumer continues to appear healthy, restaurants are expected to continue to fight a tough battle for traffic growth. Top line growth continues to be driven by modest unit expansion, menu innovation and increased use of technology initiatives, such as loyalty programs. No surprises on the cost side are currently expected as management teams generally reiterated outlook for a benign commodity environment, however, sustained labor pressures has resulted in a lack of near-term catalysts. Delivery continues to be a vibrant topic of conversation, but it appears as if “implementation at all costs” has given way to a focus on the true incrementality of the delivery customer and its profitability (including who bears the brunt of the cost).
On the Restaurant Delivery panel, we heard from UberEats, Kitchen United, Olo, the National Restaurant Association and Just Salad, all coming from different perspectives on what the future of off-premise looks like. Unanimously it was agreed that the shift toward off-premise consumption is here to stay, but how the third-party delivery landscape will shake out is still TBD. The push and pull between the operator and the delivery company remains, and many believe that a flat fee passed to the consumer will be the only sustainable way for the industry to survive. The debate over virtual brands also continues, with UberEats saying they have many of them on their system, and Olo and Kitchen United saying that they are something everyone in the room should be afraid of.
One company that caught the attention of many, was Luckin Coffee, a Chinese company that recently debuted on the NASDAQ. The technology-driven company boasts a small physical footprint and low labor costs due to it cashier-less/pay thru app or facial recognition model that leverages Big Data. They have opened approximately 4,500 stores in China in 2 years!
Health & Wellness Trends
The $5 trillion health and wellness industry continues to evolve in two important ways. The do-it-yourself wellness continues to expand in good-for-you food delivery as well as OTC do-it-yourself healthcare. This industry is growing more than 3x inflation annually, with the fitness category benefitting from both demographic (aging boomers seeking to stay fit longer in life) and class (middle class emerging market interest in fitness) tailwinds. The next phase of fitness technology is expected to keep customers at gyms and “at home” fitness engaged longer. The tech explosion allows fitness-seeking consumers to work out how they want, where they want, and when they want. A long history of faddish fitness products/concepts means the industry annals are littered with massive booms and busts. But interactive software will add significant flexibility to otherwise static equipment.
Food, Beverage & Cannabis Trends
After hearing from both public and private, U.S., Canadian and international cannabis companies, there continues to be evidence of change and broader implications for the consumer packaged goods and beverage industry.
- Cannabis remains a sector that is here to stay, despite the retrenchment in valuation and the latest industry headwinds, particularly in Canada. Consolidation continues to be a theme amongst growers in North America. The IPO route is alive, and investors are interested in steady strong EBITDA stories as opposed to just strong top line growth, in case of market fluctuations and rapidly changing weather patterns. The prevailing theme in Cannabis was to drive profitability and stop trying to show outsized top line growth; prove to investors that the business model works! Cash is king in the space as the few players that are not capital restricted and have strong management teams, compelling brands and market positioning are poised to survive. Many investors believe the cannabis sector is “bottoming out” and they that those with seasoned management teams and strong balance sheets will win over the long term.
- Canadian market is in transition a year post-legalization, with industry-wide growing pains including a delay in licensing approvals for “Cannabis 2.0,” meaning edibles and other products will not hit the market as expected; a slow retail-store rollout; illicit market pricing pressure; widely-publicized public health advisories on vaping; as well as advertising restrictions, all of which have significantly hampered sales growth. Most companies warn these issues could persist into 1H20. In turn, valuations have been halved and sources of additional capital have largely dried up. This increases the potential for consolidation in 2020 as the industry slowly moves toward maturity.
- CBD across food and beverage in the U.S. is still expected to take a while to reach consumers. The 2019 Farm Bill legalized hemp production in the US, but then the FDA stepped in to prohibit CBD additives for “consumption or therapeutic use” citing the need for further scientific study. The industry emphasized the need to educate consumers about the standards for safety and efficacy around CBD, and the assumption is this could mean US approvals for CBD “wellness” products could take much longer than expected.
Retail Real Estate Trends
For the third time, we hosted a panel of real estate landlords and leasing experts, to discuss the state of the retail real estate market, and how “brick and mortar” stores remain integral in a retailer’s sales program. Despite the headlines about dying malls, the key to a store’s success is all about “location, location, location”, and our panelists agreed that premier centers, with a dynamic roster of retailers, restaurants, and entertainment options continue to succeed. Ben Schall, President and CEO of Seritage Growth Properties stated, “…we take the mantra of embracing the transformation that’s happening in the retail real estate industry … staying status quo is not an option.” Rachel Wein, CEO of WeinPlus added “You want to make sure you have the right neighbors that are going to drive traffic, that make someone want to get off their couch and not just shop on the phone.” Further, the trend toward creating “live-work-shop-walk” centers by adding apartments, office and service uses creates a neighborhood center that is vibrant day and night. Cameron Pratt, CEO of Foulger-Pratt stated, “…office is being built in mixed use environments where there is a vibrant retail base because those are the amenities that people really want.” And while online sales continue to grow, the reality is that physical locations are still in the best position to reach the customer quickly. Nick Wibbenmeyer, Managing Director of Regency Centers stated that Warby Parker, for example, “now does more sales out of their stores than online,” and they have demonstrated a reduction in new customer acquisition costs. There is no doubt that retail real estate will continue to evolve with the consumer and technology, and we look forward to providing an update next year!
SPACs
Investors continue to warm up to Special Purpose Acquisition Companies (SPACs), specifically, as well as alternative ways to go public versus the traditional IPO. Private equity firms remain very active in SPACs as they have a substantial amount of capital (dry powder) to invest and they are increasingly trying to differentiate themselves based on the value they can add to a portfolio company.
The importance of Telling Your Story (in Good Times and Bad)
A highly-regarded, mid-cap presenter at the conference announced disappointing holiday results and saw their stock open down 20% on the morning they were presenting. However, management’s ability to address the results in person with most of their sell-side analysts and many important investors through a very well-attended fireside chat, two 50 minute breakout sessions and additional 1×1 and small group meetings, allowed for greater clarity of what pressured holiday sales and helped instill confidence that the issue was confined to Q419. The result was a stock that regained most of its initial 20% decline, and earned a sell-side upgrade, over the course of their two day conference participation.
ESG As a Differentiator in Consumer
The annual letter from BlackRock CEO Larry Fink coincided with the conference and the reality of the issues all companies face today became a big and dynamic part of the discussion, even for private companies such as Just Salad, which prominently features its recyclable and re-usable bowls, or farm-centric companies like Fifth Season or Farmshelf and their management of food waste. One manufacturer/retailer indicated it planned to commit to going carbon negative and generating zero waste. With consumers expressing a strong affinity toward eco-conscious brands, it is not just index funds that will drive the ESG trend in consumer.
Private Companies Are the Incubators
More than ever, investors are looking for new ideas and companies to invest in. Significant amount of buzz surrounded the day of private company presentations, not just for the specific businesses that presented but for the fresh and innovative ideas and business models they showcased, helping to challenge or validate other investment theses.
The Election Looms
The elephant (and the donkey) in the room was the upcoming election and widespread concern about how it will impact the back half of the year, including access to capital, the IPO market, advertising rates and overall consumer sentiment. Some even believe that this view may almost become self-fulfilling given the widespread conventional wisdom that everyone will step to the sidelines while the quadrennial process plays out.
Until next year.
Interested in having a deeper conversation about how these trends may affect your company? Just reach out.
