Kurt Salmon Review 03 VFSP 140815

KURT SALMON REVIEW
Retail. Consumer. Private Equity. Strategy.
IN THIS ISSUE
Niche pockets of life for American
apparel manufacturing 4
Why expanding beyond China
makes sense for Western brands
looking east 14
How Greek yogurt revolutionized
the category—and changed
consumers’ palates 34
From the Editor
Connectedness is the most powerful force shaping our world generally—and the retail
and consumer products space specifically.
As we show in this issue of the Kurt Salmon Review, this phenomenon not only imposes
new challenges and mandates, it also creates new opportunities.
Case in point: globalization. Clearly one of the biggest manifestations of our more connected world, globalization is coming full circle and shaping the industry in surprising
ways. We detail why it makes sense for certain brands and categories to bring manufacturing back to the United States. And on the opposite end of domestic manufacturing,
we discuss why North American retailers should look beyond China to other Southeast
Asian countries for international expansion.
Of course, any issue about connections would be remiss if it didn’t mention omnichannel—which is driving retailers and brands to forge tremendous connection points across
channels. We describe how the grocery industry should approach omnichannel and take
a closer look at the financials behind ship-from-store programs.
We hope you find this issue insightful and, as always, we look forward to hearing from you.
Best regards,
Bruce Cohen
Senior Partner and Head of Private Equity and Strategy Practice
TABLE OF CONTENTS issue 03
FEATURES
Made in the USA? 4
Key niche categories will breathe
new life into American apparel
manufacturing.
Beyond China 14
For Western brands looking to expand
into Asia, venturing beyond China can
pay off big.
Can Traditional Grocery Get
It Right? 22
The latest battle in the struggle to
differentiate: omnichannel.
Plus a look at promising grocery
concepts for investment consideration. 28
Omnichannel at a Cost 32
Ship-from-store might save sales—
but it has its tradeoffs.
2
INVESTMENT IDEAS
DUE DILIGENCE INSIGHTS
Learning from the Greeks 34
One Size Doesn’t
Fit All 52
Greek yogurt has reshaped the category
and changed consumers’ palates, creating
new opportunities for investors.
Finding Diamonds in
the Rough 42
How to spot the best and
brightest brands in the
glimmering luxury
jewelry category.
Deal Ideas at a Glance
Ideas for investing in private-label personal
care 48 and plus-size apparel. 50
The importance of factoring
in regional differences in
brand equity during the due
diligence process.
Surviving the Flood 58
Identifying investment opportunities
in retail categories that are better able
to thrive in an Amazon-dominated world.
N
I
E
D
A
M
4
E
H
T
?
A
US
American apparel manufacturing writ large may be
a thing of the past, but brands and investors should
take notice of pockets of life in key niche spaces
Unless you’re a grandstanding politician, the notion of American apparel
production may feel like it was declared dead years ago. And there is some
truth to that way of thinking: Our share of domestically manufactured apparel
has dropped from 50% in 1994 to 2.5% in 2012.i (See Exhibit 1.)
This trend shows little sign of reversing, as market forces like labor costs,
capacity and specialized capabilities conspire to keep the vast majority of
apparel manufacturing overseas.
EXHIBIT 1: Domestically Manufactured Apparel Has Fallen Significantly
Share of U.S. Apparel Consumption by Origin
(Percentage of Garments)
U.S. Made
Imported
50.0%
44.5%
34.5%
28.7%
20.4%
13.2%
9.4%
3.0%
2.0%
2.5%
50.0%
55.5%
65.5%
71.3%
79.6%
86.8%
90.6%
97.0%
98.0%
97.5%
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Source: American Apparel & Footwear Association
5
But despite this gloomy diagnosis, not all
apparel categories will fare equally when
it comes to re-shoring. In fact, we believe
some types of clothing manufacturers
can build compelling business theses for
bringing manufacturing back home—and
breathing new life into smaller corners of
the American apparel manufacturing space.
We estimate that domestic apparel manufacturing will grow at an annual rate of 4%
to 6% through 2017, building on a small uptick
in momentum that started post-recession
EXHIBIT 2: Best Candidates for Re-Shoring
Consider Domestic Production
Size: Small to mid size
Desired speed to market: Fast
Categories: Higher-end contemporary
fashion, premium suits and dress wear,
premium denim, accessories, localized
and specialized products (e.g., dance
or cheer apparel, sports team– or
college-branded apparel)
Exceptions: Large businesses that may
benefit from a select “Made in USA”
product line
6
Examples:
There are two big reasons American-based production
makes good sense for select categories: positive
consumer reception and operational efficiencies.
and a growing demand for higher-quality,
American-made products and faster fashion.
This growth in volume will come despite a
likely continued decrease in manufacturing
facilities, which decreased 12% from 2009
to 2012,i suggesting an increase in efficiency.
The vast majority of this manufacturing
growth is projected to come from a few select
categories that can benefit most from moving
production closer to the consumer: small
or mid-sized contemporary fashion and
premium denim, accessories, and specialized
or localized products. Think dance or cheer
apparel and sports team or college paraphernalia. (See Exhibit 2.)
There are already several American-made
success stories in these categories. Highend menswear, especially suits, is an area of
particular focus. For example, in 2013, Men’s
Wearhouse acquired American clothing brand
Joseph Abboud for $97.5 million in an effort
to expand its “Made in the USA” collection.
Also in 2013, premium menswear brand Samuelsohn bought high-end suit maker Hickey
Freeman’s Rochester-based production
facility and license based on the belief that
the company can grow 50% in three to four
years while remaining 100% American made.
The domestic premium denim market is
experiencing similar growth. For example,
True Religion is seeing a significant sales
bump, driving its 51% employee growth
between 2009 and 2012. High-end brand
rag & bone is also experiencing a surge in
demand behind its continued store rollout.
In the accessories space, Walmart recently
announced that it is expanding its “Made in
the USA” program by investing $28 million
in existing production facilities to produce
No Nonsense leggings, tights and socks. Also
in 2014, Renfro Corporation invested $14
million in U.S.-based production capacity
for sock manufacturing. And preppy clothier
Vineyard Vines produces its ties, tote bags
and belts in the United States and, thanks
to significant sales growth in 2013, will be
increasing its local production capabilities
to meet this new demand.
What’s driving all this growth? There are
two big reasons American-based production
makes good sense for select categories:
positive consumer reception and operational efficiencies.
Positive Consumer Reception
The “Made in the USA” stamp helps boost
sales. In fact, 72% of Americans said it was
important or very important that their
clothing be made in the United States.ii
And apparel was the third most important
category for “Made in the USA” products,
as shown in Exhibit 3.
7
EXHIBIT 3: Almost 75% of Americans Prefer Buying American-Made Apparel
Importance of Purchasing “Made in the USA” Product by Category
Percentage of Respondents Selecting “Important” or “Very Important”
75%
Major Appliances
74%
Furniture
72%
Clothing
Small Appliances
71%
70%
Automobiles
Sports/Exercise Equipment
66%
Home Electronics
66%
Personal Electronics
66%
Jewelry
Motorcycles
59%
Gift Items
59%
Source: December 2012 Harris Poll
8
63%
Not only do Americans say that buying
American-made products is important
to them, they are often willing to pay more
to do it. In fact, 75% are willing to pay a
premium for “Made in the USA” products,
and 60% say they do just that every month.iii
(See Exhibit 4.)
And while this patriotic sentiment can
be expected at the tail end of a recession
because it translates into U.S. jobs, we
believe the “Made in the USA” trend is here
to stay, as consumers perceive Americanmade goods to be of higher quality and
more authentic.
These sentimental reasons also suggest that
there are cases when it may make sense to
produce select American-made product lines
for the positive brand image (think Levi’s),
even though a brand may not be a great fit
operationally for re-shoring.
EXHIBIT 4: Many Americans Willing to Pay More to Purchase Local
+16%
75% willing to pay an average premium of 16% for American-made products
Source: Made in USA Foundation, industry reports
9
Operational Efficiencies: Speed, Accuracy and Quality
Moving production back to the States has
the potential to dramatically improve the
right company’s entire supply chain and
production cycle.
lead times can help high-fashion brands
Starting with product development, re-shoring lets brands review and turn samples
more quickly by moving the factory significantly closer to the designers, speeding up
the design process.
re-shoring helps specialized products com-
From there, re-shoring enables a brand to
place smaller orders that may be deprioritized or rejected by large international
factories. For example, School House, a highend university-licensed clothing company,
recently moved production back to the United States due to its low priority with large
Sri Lankan factories. Small or mid-sized
companies that may have trouble reaching
minimums and gaining leverage with overseas factories should benefit the most here.
Re-shoring also facilitates improved quality
control by allowing for greater oversight,
perfect for higher-end products. And shorter
10
capitalize on emerging trends. “It’s so convenient ... you can react so much faster to the
market,” says a rag & bone designer. Plus,
panies efficiently meet short-term demand
while carrying less inventory and reducing
markdown risk. Domestic production can
easily save six to 11 weeks on average out of
a 39-week process for basic woven apparel.
These savings take on heightened importance
in today’s retail industry, as consumers are
now accustomed to speedy, easy access
to a constant stream of new products.
Yes, labor is more expensive in the United
States, but wage increases in China (106%
from 2008 to 2013iv) have made the country
less competitive and driven brands to look
elsewhere. And when factoring in reduced
shipping, inventory holding and markdown
costs, American production starts to make
increasing sense for some brands, as illustrated in Exhibit 5.
EXHIBIT 5: American Manufacturing Isn’t That Much More Expensive
Materials
Trim and Hardware
Labor
Duty
Shipping
Illustrative Cost Breakdown for Premium Cotton Garment
UNITED STATES
$38.10
$17.40
$3.20
$0.50
$17.00
ASIA
$31.40
$18.40
$2.30 $5.50
$3.50 $1.70
Comparisons do not include:
> Costs of holding inventory
> Opportunity cost related to missed sales related to longer lead times
> Lower markdown risk
Source: The New York Times
11
In fact, American production can actually
deliver increased profits, especially for higher-priced items. Assuming that consumers
are willing to pay on average 16% more for
American-made goods (see Exhibit 4) with
the cost of goods sold as shown in Exhibit
5, along with a standard 50% retail margin,
American-made products can actually be
more profitable, especially if they are sold
at higher price points. (See Exhibit 6.)
This lends further credence to the idea that
high-end and contemporary fashion brands
may find particular benefits to re-shoring
production.
EXHIBIT 6: American-Based Production Can Deliver Higher Profits
INCREMENTAL PROFIT TO MANUFACTURE IN USA VS. ASIA
Illustrative “Made in the USA” Breakeven Retail Price
for Premium Cotton Garment
12
Breakeven
Retail Price
$4
$97
$3
$2
$1
0
-$1
$60
$70
$80
$90
$100
$110
$120
$130
$140
U.S. RETAIL PRICE
-$2
-$3
-$4
Assumptions:
> Consumers willing to pay 16% more for “Made in the USA” garments
> 50% retail margins
> Cost of goods sold: $38.10 (USA) and $31.40 (Asia)
Given all this, it’s no surprise Brooks Brothers re-shored 70% of its suit production due
to increasing costs. And PVH is motivated
by the same reasons. “For the first time in
50 years, PVH is now manufacturing shirts
back in the U.S., in North Carolina today,”
said chief supply chain officer Bill McRaith
at an American Apparel & Footwear Association conference. “We are scaling up quickly
because it’s financially viable, not because it’s
a good thing to do, not because we can make
a statement, but because it financially makes
sense to go make those products in that location. We can respond to the consumer so fast.
It is completely irrelevant how much extra
I have to pay for the product. I always make
more when I sell. I may have to pay $5 extra
[to produce it in the United States], but I will
make $20 at retail.”
American-manufactured products. And the
SEAMS Association is working with a major
retailer of mid-priced apparel and lingerie to
begin manufacturing significant volumes in
America. The association is also in discussions with three “household name” apparel
brands to begin U.S. production within three
to five years.
For investors and brands, the lesson may be
surprising, but don’t assume American manufacturing is a thing of the past. For certain
categories and brands, the combination of
brand cachet and operational efficiencies
American production can deliver makes it
well worth taking a deeper look. v
AUTHOR
Dan Goldman, Senior Manager
[email protected]
Looking Ahead
Because of these two key factors, we expect
to see continued growth in American-made
apparel, especially in key categories like
contemporary and high-end fashion, denim
and suits, accessories, and localized or
specialized products.
In fact, we are already seeing additional
signs of life on the horizon. This year, men’s
shoe brand Allen Edmonds announced its
intentions to expand into apparel with all
i
ii iii
iv American Apparel & Footwear Association
Harris Poll
Made in USA Foundation
U.S. Bureau of Labor Statistics
13
Beyond China
Asia expansion shouldn’t end with China.
Maybe it shouldn’t start there either.
International expansion is all the rage in retail
today. And for good reason, as demand in North
America and Europe slows and brands look for
untapped markets.
Naturally, China is at the top of the international expansion wish list for many companies,
who see its massive population and growing
middle class as a prize worth claiming.
And while the argument for expanding into
China remains strong, it comes with its fair
share of challenges, while other countries like
South Korea and several Southeast Asian countries may in some cases offer easier entry and
significant opportunity.
As a result, we suggest looking beyond China
to get a full picture of a brand’s potential Asian
growth opportunity. While China will likely
remain a part of most brands’ Asia expansion
strategies, pursuing growth in other countries
as well is an increasingly smart bet.
14
15
Challenges in China
Many brands still set their sights on China
when they expand into Asia. These brands
see its growing middle class with increasing
spending power and strong demand for
American and European luxury brands as an
incredibly tempting launching pad for an
Asia expansion strategy.
at over 7% annually through 2017, putting
China on track to surpass the United States’
GDP by 2016.i (See Exhibit 1.) In addition,
disposable income and consumer spending
are on the rise as savings rates fall.
There are even rosier parts of this picture.
Apparel and footwear are projected to grow
at a combined annual growth rate of 9% from
2014 to 2017—even faster than the economy
And this is still true, for the most part.
China’s GDP is strong and expected to grow
EXHIBIT 1: China’s GDP Expected to Continue Growth Trajectory
CHINA REAL GDP GROWTH (%) VS. TOTAL GDP (RMB, BILLIONS)
100,000
14.2
80,000
10.4
9.6
60,000
9.3
9.2
8.2
7.8
8.0
7.2
7.2
7.1
6.7
6.6
6.5
2018P
2019P
2020P
40,000
20,000
0
2007
2008
2009
2010
2011
2012
TOTAL GDP
16
2013
2014P
2015P
2016P
REAL GDP GROWTH
2017P
as a whole. And e-commerce is a significant
opportunity for all brands as it experiences
massive growth across China.
dense population. It takes a lot of marketing
power to make an impact—significant brand
presence is the price of admission.
However, in China, the opportunity for
significant gains comes with some risk. First,
consumer receptivity may be beginning to
taper off as a result of a government crackdown on lavish gifts and a growing preference to purchase luxury goods abroad, where
taxes are lower. Credit Suisse estimates that
80% of Chinese luxury purchases occur
outside of mainland China. Meanwhile, the
number of outbound Chinese travelers hit
100 million in 2013, up 20% from 2012.ii
At such a large scale, brand consistency
and control are often harder to maintain,
especially when handing the reins over to
franchises, which can backfire. “Where
[competitors] have gone franchise very, very
quickly, they’ve lost control of their brand a
little bit,” says Jeff Kirwan, Gap’s president
of Greater China.iv
As a result, China may be on the verge of
suffering an overstoring situation similar
to the one we’re currently experiencing at
home. Up to a quarter of the 700 malls,
outlet and department stores currently
being developed in China’s 30 biggest cities
could fail.iii
Given these challenges, it’s not surprising
that some of the world’s biggest luxury
brands are slowing their expansion in China.
Two-thirds of the 43 different luxury
retailers studied by design consultants
Knight Frank and Woods Bagot missed their
targets for new store openings in China in
2013. And perhaps emblematic of a larger
shift, LVMH, the world’s biggest luxury
group, plans to slow its annual China
expansion to 4% to 5% in 2014, about half
the rate it recorded in 2013.
This problem helps illustrate another
challenge of expanding in China: Full-scale
expansion requires substantial resources and
commitment because of the sheer number
of Tier 1 and 2 cities as well as an incredibly
Finally, China is plagued by a high rate of
counterfeiting, which has the potential to
undermine any high-end brand.
17
Options Abound
As a result of these factors, brands willing
to look outside China for part of their Asia
growth may be rewarded with significant
payoff and an easier growth path. There are
many Asian countries that present viable
alternatives or additions to China.
First, South Korea and many Southeast
Asian countries have the potential to
contribute significant doors to a brand’s
growth strategy. In fact, some Western
brands have as many or even more doors
in South Korea than in China.
A Kurt Salmon study of 11 brands actively
expanding into Asia found that these players
had an average of 70% as many stores in
South Korea as in China, with Michael Kors
having more than double the number of
doors in South Korea as in China.
The first reason for this is that South
Koreans are, on average, wealthier than
Chinese citizens. South Koreans’ monthly
average purchasing power parity is $2,903,
the 10th highest in the world, while China
ranks 57th at $656.v
Plus, South Korea exerts a powerful style
influence over much of Asia. Korean pop
18
culture, from music to TV, is widely consumed across the region, especially in China.
For example, one Korean TV drama helped
spark the sales of the products featured
within it—including Jimmy Choo shoes,
Celine dresses and Samsonite backpacks.
In the case of Samsonite, sales of its entire
backpack line were three times higher in
February 2014 than in the same month the
year before, and full-year sales in Asia are
expected to double.
And Chinese consumers now flock to Seoul
to shop.vi That’s why Diageo opened a
high-end, six-floor “Johnnie Walker House”
in Seoul last September. “Korea is an
influencer for luxury items and lifestyle
experiences,” James Lee, head of Johnnie
Walker House Seoul, said. “By investing in
Korea, we are impacting consumers across
Asia Pacific.”
Many Southeast Asian countries represent
another significant growth opportunity,
offering easily a few dozen doors, or over
50% of China’s top-tier doors, by placing
three to five stores each in Malaysia, Singapore, Thailand, Vietnam, Indonesia and the
Philippines.
EXHIBIT 2: Many Western Brands Are Developing Broad Footprints Outside China
NUMBER OF RETAIL LOCATIONS* BY COUNTRY
598
593
325
JAPAN
CHINA
SOUTH KOREA
131
114
53
53
52
TAIWAN
HONG KONG
SINGAPORE
MALAYSIA
THAILAND
35
33
21
23
INDONESIA
PHILIPPINES
25
MACAU
VIETNAM
INDIA
* Retailers surveyed include Brooks Brothers, Coach, Gap, Hermes, Kate Spade, Marc Jacobs,
Michael Kors, Ralph Lauren, Prada, Tory Burch and Zara.
19
China ranked 96th out of 185 countries on the World Bank’s
2013 Ease of Doing Business Report, while Singapore, Malaysia,
South Korea and Thailand all ranked in the top 20.
Among the group we studied, after China,
Japan and South Korea, Taiwan and Hong
Kong were the next most popular destinations, followed by Singapore, Malaysia,
Thailand and Indonesia.
Thailand is definitely a destination to watch,
as the number of luxury malls in Bangkok
grows 25% a year.vii Thailand is also planning
to allow Chinese tourists to enter the country
without tourist visas and will also cut import
duties for luxury brands, helping it compete
with places like Hong Kong and Macau for
Chinese tourism purchases.
Indonesia is hot on Thailand’s heels, as its
luxury market has doubled since 2007 to
$1 billion and is expected to grow 40% to
60% annually.viii And that number jumps
to nearly $8 billion when including offshore
spending by Indonesians in Singapore.
Given this positive performance, it’s no
surprise that some of the biggest Western
luxury brands are focusing on Southeast
Asia. Tory Burch is targeting store openings
in Malaysia and Indonesia in 2014, while
Hermes is opening stores in Thailand,
Malaysia and South Korea this year.
Western brands are flocking to these regions
because it’s relatively straightforward to
develop a presence there, compared to
20
China. Many of these countries have
established processes and structures for
international entry, while China continues
to be impacted by significant bureaucracy
and corruption. In fact, China ranked 96th
out of 185 countries on the World Bank’s
2013 Ease of Doing Business Report, while
Singapore, Malaysia, South Korea and
Thailand all ranked in the top 20.
In addition, there are just a few well-known,
reputable licensing companies that work
with many of the leading brands looking
to expand, making the choice much easier
when it comes time to pick a local partner.
Plus, there’s a shorter list of desirable
locations—making it easier to identify them
and assess real estate viability and quality.
The most typical real estate strategy is to
build in locations that are frequented by
international travelers but are still accessible
to wealthy locals, including top department
stores and malls, hotels, and casinos in major
cities. Coach had success with this strategy
in Hong Kong and then replicated it with its
more recent entry into Vietnam.
Finally, brands starting in South Korea or
Southeast Asia can be much more gradual in
their buildup. These countries create a good
base for learning about Asian consumers on
a smaller scale—ensuring any problems can
be corrected before they are rolled out on a
larger and costlier scale.
And once these smaller operations are
established, retailers can buy out their local
licensees, bringing the brand back in-house
to exert greater control. Michael Kors, Coach
and Kate Spade have all bought out licensees
in countries like South Korea, Taiwan and
Malaysia.
For investors looking to measure a brand’s
international growth potential, it’s worth
remembering that a significant portion of
that growth may lie outside China. v
AUTHORS
Dan Goldman, Senior Manager
[email protected]
Joy Liang, Senior Consultant
Looking ahead, India, Asia’s third-largest
economy, may be heating up soon. International expansion there is still relatively
minimal, due to significant restrictions, high
tariffs and a thriving counterfeit market,
but the country could be an area of future
potential. Prada is looking at Mumbai and
New Delhi locations, potentially in luxury
hotels to capture tourists and wealthy locals
alike. Gap is also looking into India.
It’s a safe bet that Asia will remain a compelling expansion destination for years to come
and China will hold onto its spot at the
center of much of that action. But by looking
beyond China, U.S. brands can still access
much of the same growth potential in a less
challenging, more manageable environment,
giving them the chance to increase their
presence gradually while learning the ropes.
i International Monetary Fund
ii Business Standard
iii Cushman & Wakefield
iv Women’s Wear Daily
v UN International Labour Organization
vi The Wall Street Journal
vii Credit Suisse
viii The New York Times
21
22
Can Traditional
Grocery Get It
Right?
THE INDUSTRY’S LATEST CHALLENGE:
DECIDING IF AND HOW TO BUILD AN
OMNICHANNEL EXPERIENCE
It’s been a tough 20 years for traditional grocers. Burdened with razor-thin margins and limited investment
in consumer research and innovation, the industry’s
traditional stalwarts have seen themselves slowly
fall victim to a variety of specialized players—from
Walmart in the ’90s, to Whole Foods, Trader Joe’s,
Aldi and dollar stores more recently.
23
During this time, traditional grocers’ share of
grocery spending has dropped from 90% in
the late 1980s to under 50% today. And this
share decline has not yet bottomed out. Omnichannel is just the latest in a series of challenges for undifferentiated middle grocers.
In fact, 96% of consumers said they planned
to purchase groceries from a non-traditional
food retailer in the next 12 months.
This industry pressure has led to a flurry of
acquisition activity as a mechanism for traditional grocery chains to either drive growth
or stay relevant. Take Safeway’s recent sale
to Cerberus Capital, following on the heels
of Supervalu selling five of its chains to a consortium of private equity buyers, Kroger’s acquisition of Harris Teeter, and Great Atlantic
and Pacific Tea Company’s continued hunt
EXHIBIT 1: Many Consumers Search for and Purchase Groceries Online
67%
of consumers search for
grocery information online
Source: Kurt Salmon Consumer Survey
24
26%
But only
of consumers purchase
groceries online
59% of consumers surveyed said they’d be likely to use
online searchable store inventory, but only 8% of grocery
stores currently offer this omnichannel service.
for potential buyers. Now,
this undifferentiated middle group of grocers faces
a new threat in the form
of online retailers like
AmazonFresh, eBay Now,
Instacart, Peapod and even Walmart.com.
benefit from increased sales and loyalty. For
The way it looks now, traditional grocers are
on the verge of losing the next major grocery
battle: omnichannel. In fact, traditional
grocers are currently staring down a huge
chasm between the omnichannel services
they’re providing and what their consumers
want and, increasingly, expect.
pick up in store services, with 33% saying it
According to a 1,400-person consumer
survey conducted by Kurt Salmon in 2014,
67% of consumers have searched for grocery
product information online, while 26% of
consumers have purchased a grocery-related
product online. (See Exhibit 1.) And 48% and
33% of these online consumers
are researching and purchasing,
respectively, using a tablet or
mobile device.
online inventory, and just 53% offered buy
Beyond basic searching and
purchasing online, consumer
demand is growing for additional
value-added services—and, if implemented, grocers would likely
example, 59% of consumers surveyed said
they’d be likely to use online searchable store
inventory, as illustrated in Exhibit 2, with
39% saying they’d purchase more from a
grocer who offered that service. Plus, 54% of
consumers would be likely to use buy online,
would lead them to purchase more.
But despite this growing consumer demand,
most traditional grocers are just beginning
to implement these types of omnichannel
offerings. In a Kurt Salmon study of nearly
50 large grocers, only 8% offered searchable
online, pick up in store ability.
So how can traditional grocers fight back
and gain both more alignment with their
consumers’ wants and some much-needed
differentiation? First, they need to invest
in developing a robust, unbiased understanding of their core
consumers. Many grocers skimp
on gathering consumer research,
instead relying on their category captains to provide insights
on a category-by-category level
through a traditional category
management relationship. Of
25
EXHIBIT 2: There Is a Large Gap Between Consumer Demand and Current Grocery Offerings
CONSUMER PREFERENCES VS. A RETAILER’S REALITY
%-age of grocery stores
offering omnichannel
services
%-age likely to use
omnichannel services
SEARCHABLE
INVENTORY
8%
54%
BUY ONLINE,
i
PICK UP IN STORE
53%
49%
CURBSIDE
DRIVE-THRU
PICKUP
4%
42%
ONLINE RECIPE
PRODUCT SELECTOR
35%
41%
HOME DELIVERY
22%
59%
ii
Majority of these grocers are offering this service for just a limited product selection such as deli, bakery and floral orders.
Many of these grocers are piloting this service in select geographies or utilizing a third-party partner.
Source: Kurt Salmon Consumer Survey
i
ii 26
Traditional grocers still have time to get it right and drive loyalty
by directly responding to their consumers’ unmet demands and
building a compelling, customized omnichannel experience.
course, these supplier-based insights can
not only be incomplete or biased, but, more
importantly, they offer a disjointed view of
a grocer’s consumers across the entire consumer experience.
Next, armed with action-oriented consumer
insights, grocers need to put them to use
through a rapid innovation process, one
that enables them to constantly identify and
cheaply test promising ideas, rolling out the
ones that work more broadly and moving
on from the ones that don’t enhance the
consumer value proposition and the grocer’s
bottom line.
The gauntlet has been laid down whether
grocers decide to act or not. But as the middle
ground of grocery gets increasingly squeezed
by discounters, specialty players and online
innovators, traditional, undifferentiated
grocers will soon have even less room to
play. Enter omnichannel, which represents a
significant opportunity. Traditional grocers
still have time to get it right and drive loyalty
by directly responding to their consumers’
unmet demands and building a compelling,
customized omnichannel experience. v
AUTHORS
Bruce Cohen, Senior Partner and Head of Private
Equity and Strategy Practice
[email protected]
Dan Goldman, Senior Manager
27
Promising Investment Opportunities
in the Grocery Space
HISPANIC GROCERS
These grocers will benefit from growth in the Hispanic population, which is expected
to hit 30% of the U.S. population by 2050. In addition, Hispanic families spend more
on packaged goods and food at home than non-Hispanics, driven by larger household
size and active cooking habits.
NORTHGATE GONZÁLEZ MARKET. This ~$800
million, 42-store chain is centered in Southern
California, with a recent acquisition helping it
expand into Arizona. The grocer is family owned.
LA MICHOACANA MEAT MARKET. The grocer
has 117 Texas stores and sales of ~$118 million and
is owned by its founder, Rafael Ortega.
FOOD CITY. Owned by Bashas’, a family-owned
Arizona grocery chain that filed for bankruptcy
in 2009, Food City has 42 stores in the Grand
Canyon State.
28
Private equity firms looking to invest in the grocery sector should seek to identify evolving
consumer needs currently unmet by traditional grocery’s approach of trying to be everything
to everybody. A consumer needs–driven gap assessment can highlight a plethora of compelling
investment opportunities. Here are a few of the more promising consumer niches and players.
ASIAN AND SOUTHEAST ASIAN GROCERS
One of the fastest-growing population groups in the United States, with 51% growth
between 2000 and 2012, Asian Americans have an average household income that’s
28% higher than the U.S. average. Plus, Asian groceries can have broader appeal among
gourmet shoppers of all ethnicities as the popularity of many Asian cuisines expands.
99 RANCH MARKET. With over 30 stores, most
in California and others in Nevada, Washington
and Texas, this grocer targets premium suburban
locations with large Asian populations.
PATEL BROTHERS. This family-owned Indian
grocer has 52 stores in 19 states across the East
Coast and one store in California. It’s uniquely
positioned in the Indian grocery space, which
has few major players and is dominated by local
single-store operations.
H MART. A Korean American–focused supermarket with 43 locations across the United States,
most of its locations are on either coast. It also
opened its first European store in England in 2011.
29
GOURMET AND SPECIALTY GROCERY
Taking advantage of the growing foodie movement, specialty grocery sales have grown
at a 14% combined annual growth rate from 2010 to 2012, to $88 billion. These stores
are also well positioned to capitalize on growing movements toward local and artisanal
gourmet options and can create a unique customer experience.
DEAN & DELUCA. This upscale grocer has broad
international name recognition—35 of its markets
and cafés are international (Japan, South Korea,
the Middle East)—meaning it has significant expansion potential in high-end neighborhoods and
tourist locations alike. The grocer, which is owned
by its founder, also acquired Northern California–
based Oakville Grocery in 2007.
BRISTOL FARMS. With only 15 stores, primarily
in Southern California, this $200 million gourmet
grocer has significant white space potential. It
was acquired by Endeavour Capital from Supervalu in 2010.
CITARELLA. A grocer and a seafood importer,
wholesaler, and restaurant, Citarella has five New
York City–area doors and is family owned.
30
LOCAL AND SUSTAINABLE
U.S. sales of organic products are projected to reach $35 billion in 2014, up from $28
billion in 2012, according to the USDA. And the number of U.S. farmers’ markets has
shot up 364% from 1994 to 2013, further demonstrating consumer interest in this
growing category.
NEW SEASONS MARKET. This ~$60 million
natural grocer is based in the Pacific Northwest,
where it has 13 stores. It also acquired California-based New Leaf Community Markets in 2013,
giving it a compelling path to continued growth.
MRS. GREEN’S NATURAL MARKET. A 100% natural and organic market based in the Northeast,
it has 20 stores and is projecting 18 additional
openings this year—with a target of 100 stores.
The chain is part of Natural Markets Food Group,
which is owned by Catalyst Capital.
FRESH THYME FARMERS MARKET. This grocer
opened its first store in the Chicago suburbs in
April 2014, but it has already identified 22 additional locations and wants to hit 60 stores across
12 states in the next five years. Headed by Chris
Sherrell, who launched and sold Sunflower to
Sprouts, it is backed by investors from Meijer.
31
OMNICHANNEL AT A COST
The Price of Saving a Sale with Ship-from-Store
The ability to ship product from a store to a customer in order to fulfill an
online purchase can certainly save a sale. But, of course, that capability
comes at a cost. Indeed, the initial investment to build this capability can
range anywhere from $4 million to $8 million, which includes legacy and
new system changes, plus an additional $1,200 to $4,000 per store in the
network. While there is always room to optimize, we draw on our apparel
and soft lines experience to build a base case of financial tradeoffs.
SHIP-FROM-STORE TRADEOFFS
(Indexed Costs)
210
27
38
42
100
13
87
DC Fulfillment
32
38
65
Store Fulfillment
TRANSPORTATION
Sourcing closer to demand can mean a
real savings in shipping costs. Plus, thanks
to proximity, stores can be up to 60%
faster than distribution centers, according
to Kurt Salmon research. (However, this
benefit can be offset by the costs and
scale of the store operation.)
LABOR
The in-store labor cost per unit
is about three to five times that
in a distribution center because
of economies of scale, process
efficiency and infrastructural
differences.
Stores’ inventory accuracy traditionally ranges
from 50% to 80%; meanwhile, Kurt Salmon
expects to see more than 99% accuracy
at a well-run distribution center. This
leads to two different issues:
ERROR CORRECTION
Inventory inaccuracy also means
some orders will have to be
reallocated to other stores for
fulfillment. This, in turn, necessitates
appeasements. For example, the cost
of upgrading shipping to hit promised
delivery dates and the promotional
cost of coupons and incentives to the
customer to promote future loyalty if
service dates do slip.
ORDER QUALITY
In combination with a less-skilled
fulfillment workforce, inventory
inaccuracy means that the probability of order errors increases
when retailers ship from their
stores. In addition to the softer
cost to the brand, there can be
a material expense associated
with increased call-center
inquiries and handling costs
needed to correct these issues.
SPLIT SHIPMENTS
This is the cost of sourcing an
order from multiple locations,
which includes increased
packaging and shipping expenses,
as well as increased customer or
order management costs.
OPEN
33
34
Learning from
the Greeks
How Greek yogurt triggered the rebirth of a
category—and the new opportunities it’s creating
Greek yogurt, like kale, cupcakes and quinoa, is one
of the biggest buzzwords in food. But more than just
a fly-by-night fad, Greek yogurt is backed by substantial sales and consumer interest and has awakened
the long-sleepy yogurt category, launching it to
new heights.
More importantly for investors, the Greek yogurt
revolution has changed the way consumers and
retailers think about the category, creating intriguing
investment opportunities with many new small, but
high-potential, target brands.
35
In 2013, yogurt took up about 2.2 million linear feet of
U.S. shelf space, up from about 1.9 million in 2011.
A decade ago, Greek yogurt made up less than
1% of all U.S. yogurt sales. Now it makes up
more than half.
Following in the footsteps of original entrant
Fage, Chobani has driven a significant portion
of this growth. Its sales grew 32% in 2013—to
more than $1 billion. Danone is also making
a strong play with its Oikos brand—sales
spiked 165% from 2012 to 2013.i Meanwhile,
Yoplait is hoping its third foray into the
Greek yogurt market sticks.
On the consumer side, Greek yogurt has not
only helped Americans expand their per
capita yogurt consumption but, more importantly, broadened their yogurt palates and
opened their minds to new types of yogurt.
Retailers have responded by carving out
more shelf space for yogurt. In 2013, yogurt
took up about 2.2 million linear
feet of U.S. shelf space, up from
about 1.9 million in 2011.ii
Given this activity, it’s no surprise
that three of the top 10 CPG product
launches of 2013 were yogurts—
Dannon’s Light & Fit Greek yogurt,
Yoplait’s Greek 100 and Müller’s Greek
yogurt, which combined for $376 million
in sales in 2013 alone.iii
36
Retailers are also starting to experiment
with allocating shelf space to several
new types of yogurt, including mix-ins,
which are rapidly becoming the next major
wave of yogurt innovation. Most of the large
yogurt manufacturers have shifted their
attention to mix-ins, which commonly
include fruit, nuts, chocolate and granola.
German yogurt company Müller, a newer
category entrant that has a joint venture
with PepsiCo, is helping lead the push in
the mix-in space, with Chobani chasing
aggressively and Danone’s recent purchase
of YoCrunch likely a sign that they will
follow suit.
EXHIBIT 1: U.S. Lags Europe in Yogurt Consumption
Yogurt Consumption
(Pounds per Person per Year)
U.S.
Canada
Europe
9
24
77
Source: Canadian Grocer
However, while the major yogurt brands
focus on the Greek and mix-in segments,
there is a huge white space opportunity for
private equity investors to jump ahead of
them and focus on buying brands that offer
high-growth, differentiated positioning in
other category segments that may become
mainstream in the near future.
Why? For starters, there is still significant
headroom for category growth. Packaged
Facts estimates the category will continue
growing—from $7.6 billion in 2013 to $9.3
billion by 2017. Analysts have compared
today’s yogurt market to yesterday’s cheese
market—relatively uniform and unsophisticated, but developing. It will only be a matter
of time before the yogurt equivalents of
organic, herb-encrusted goat cheese and
fat-free feta grace most large supermarkets.
Industry insiders are looking to Europe as
an example of what the North American
yogurt market could be. Although U.S. yogurt
consumption has grown a staggering 800%
since 1970,iv we still eat only nine pounds
per person per year. In contrast, Canadians
eat 24 pounds a year and Europeans eat 77,v
as illustrated in Exhibit 1. Many European
grocers have not just one but several aisles
dedicated solely to yogurt.
Europeans eat so much yogurt in part
because it’s not relegated to only breakfast.
In fact, many Europeans eat yogurt for
dessert at lunch and dinner and use it as
a base for sauces and other cooking.
In addition to expanding yogurt’s role at
the table, health and demographic trends
should provide strong category tailwinds
to help propel growth.
37
We see two particularly compelling investment theses:
focusing on lesser-known international yogurt upstarts
and alternatives to traditional cow’s milk yogurt.
Many consumers view yogurt as a healthy
snack. In fact, 70% of consumers eat yogurt
for digestive health and 82% because it’s a
good source of calcium.vi Hispanic and Asian
respondents were far more likely than other
ethnicities to eat yogurt and thought it was
more important that the yogurt be healthy
and all natural. Yogurt’s health benefits,
namely its newfound focus on protein, are
also helping grow its popularity among men,
who traditionally consumed less yogurt
than women but are now climbing onto the
bandwagon.
Additionally, the heightened role of influencer
grocery channels like Whole Foods, The
Fresh Market and Sprouts creates avenues
for emerging brands to develop a national
footprint and grow awareness before moving
into the mainstream market. And with
Chobani’s recent exit from Whole Foods,
the time is ripe for new, smaller brands
to take its place in this key
influencer channel.
These factors all collide to
create a promising market
for investors. We see two
particularly compelling
investment theses: focusing
on lesser-known international
yogurt upstarts, like Australian,
38
Icelandic and Asian styles, and looking
at alternatives to traditional cow’s milk
yogurt, including lactose free, sheep’s milk,
goat’s milk, soy and Chia Pods.
According to a Kurt Salmon survey of more
than 1,000 U.S. yogurt purchasers in March
2014, most consumers are still purchasing
regular and Greek yogurt, with these “secondary” yogurt types purchased by only
6% to 12% of respondents. (See Exhibit 2.)
There are also many smaller brands—selling
both Greek and traditional yogurt as well as
many secondary types—that a majority of
consumers are not currently purchasing but
show strong growth potential. In fact, major
brands are paying attention to these smaller
players: Yoplait snapped up two fledgling
but well-liked brands—Mountain High and
Liberté—in late 2010.
EXHIBIT 2: Regular and Greek Purchasers Dominate the Current Market
Percentage of Respondents Currently Purchasing Various Yogurt Types
72%
Regular
65%
Greek
100 calorie
(regular)
47%
100 calorie
(Greek)
43%
42%
Mix-ins
32%
Probiotic
28%
Kids’
Soy
Lactose free
12%
11%
Australian
7%
Goat’s milk
7%
Chia seed
pudding
6%
Sheep’s milk
6%
Icelandic
6%
Primary household shoppers that buy yogurt, purchased within last 3 months
Source: Kurt Salmon Consumer Survey
39
EXHIBIT 3: Brands with High Advocacy and Low Awareness May Have High Growth Potential
Fage
Net Advocacy
Müller
Skyhill
Wallaby
Lancashire Farm
Noosa
Onken
So Delicious
Evolve
Nancy’s
Siggi’s
Nu Lait
WholeSoy & Co.
Smári
Emmi
Redwood Hill
Bellwether Farms
Liberté
Brown Cow
Voskos
Almond Dream
Greek Gods
Silk
Athenos
Old Chatham
Latta
High investment potential
Investors looking to grow these small brands
or help foster the success of a lesser-known
yogurt type in the United States have plenty
of options. Prime acquisition targets include
brands that currently have low awareness
but high advocacy among consumers currently purchasing them. (See Exhibit 3.)
Wallaby and Noosa represent two promising
entrants in the Australian yogurt category,
which are billed as Greek-style yogurts
40
Stonyfield
Mountain High
Brand Awareness
sweetened with honey. With its unique packaging (think one of those round deli to-go
containers) and high-end positioning, it’s
no surprise Noosa is one of the fastestgrowing yogurt brands in the
country. In fact, its sales
grew 130% from 2012
to 2013, and that’s with
distribution on only about
35% of U.S. grocery store shelves.
Dannon Activia
YoCrunch
Chobani
Danimals
Yoplait
Dannon
Yoplait Greek
Dannon Oikos
Store Brand
2010, Siggi’s was sold in 1,500
stores, up from just two in
2006, and had racked up $2.6 million in
sales. By 2013, its estimated annual sales were
approximately $17 million.vii It’s no surprise
that private equity firm Revelry Brands
bought a minor stake in the brand in 2009.
(Revelry has since exited the investment,
selling its stake to Emmi Group, a European
milk processor and dairy.vi )
The yogurt market’s resurgence also paves
the way for related categories to grow. This
includes options like Chia Pods—containers
of chia seeds, coconut and fruit that are
dairy free and vegan—that are positioned
to take advantage of the ever-expanding
American palate.
Source: Kurt Salmon Consumer Survey
Siggi’s is also one to watch. This Icelandic
yogurt with unique flavors like orange
ginger is less sweet and packs more protein
than many others, Greek or otherwise,
giving it tremendous appeal to healthconscious consumers. And while the
yogurt is expensive—at nearly $3 for a sixounce container—Siggi’s has successfully
broadened its distribution to stores from
Whole Foods to Wegmans to Walmart. By
These brands are all poised to benefit from
growth in the Greek yogurt category and a
resurgence of the category in general. Savvy
investors can get in now and reap the sweet
rewards as the market continues to expand. v
AUTHOR
Dan Goldman, Senior Manager
[email protected]
i Mintel
ii The Wall Street Journal
iii IRI
iv U.S. Department of Agriculture
v Canadian Grocer
vi Mintel
vii Food Business News
41
42
Finding Diamonds
in the Rough
Winning in the Luxury
Jewelry Category
Since the end of the Great Recession in 2009, the luxury jewelry market
has been one of retail’s growing gems. Driven by many factors, the category
has grown from $8.8 to $11.3 billion over the last five years—and this
momentum shows no signs of slowing down in future years. (See Exhibit 1.)
EXHIBIT 1: Luxury Jewelry Market Shines
U.S. Luxury Jewelry Market
(2009–2013, Retail, $ Billions)
$8.8
$9.1
$10.1
$10.8
$11.3
2009
2010
2011
2012
2013
Source: Euromonitor
43
That’s because of several positive trends
expected to provide strong tailwinds and
fuel future market growth. These include
a general shift back to luxury, an increased
emphasis on designer jewelry at department
stores and, perhaps most importantly,
disproportionate income growth for high
earners. In fact, since the recession, the
United States’ top 1% of earners have seen
their income grow 30 times faster than the
rest of the country.
In essence, the rich are getting richer and
they aren’t afraid to spend big bucks on a
branded piece of jewelry. And department
stores are taking notice, not just for revenue
growth, but for margin upside as well. As a
result, higher-end retailers have recently
converted a portion of their watch shelf
space to designer jewelry to accommodate
increasing demand and higher category
margins. Amid this growing category basking
in increased attention from both retailers
and consumers there are likely to be some
big winners among select branded players.
But which ones?
Elements of a Successful Brand
Within the luxury jewelry category, successful brands will properly execute across key
growth levers, including improving brand
equity and strengthening partnerships with
retailers around the customer experience.
44
One of these key characteristics is developing
equity as a lifestyle brand, à la Tiffany’s
success as an aspirational luxury mainstay.
This means elevating the brand beyond basic
product association to allow for more loyal
support from core customers. Leveraging
this strong lifestyle brand equity will help
the brand successfully expand into new categories, both within jewelry and accessories
more broadly.
Winning brands will also partner with retailers to create an engaging retail experience.
This includes establishing high engagement
with floor associates so they are more knowledgeable about the brand and more likely to
recommend it, becoming a category leader
in visual merchandising and branding, and
focusing on acquiring shops-within-shops
in key accounts.
Case Study: David Yurman
David Yurman is one example of a brand
that was able to successfully cultivate these
key characteristics for success. Widely regarded as a dominant brand in the category,
David Yurman has steadily grown revenues
and distribution since its founding in 1980.
The brand originally caught fire with its
iconic cable bracelet and leveraged this popularity to position itself as the next lifestyle
jewelry brand. As sales grew, David Yurman
expanded its product offering to include
a variety of materials and stones, as well as
a men’s line. Currently, the brand has over
2,000 different styles and has also made a
push as a lifestyle brand with its signature
branded watches, perfume and eyewear.
In addition to expanding assortment, David
Yurman has worked to develop a strong instore customer experience. The brand has
more than three times as many U.S. stores as
its nearest competitor (25 to Roberto Coin’s
eight) and, with more than 75 shops-within-
shops, has 50% more than its closest competitors, John Hardy and Ippolita, combined.
Furthermore, the brand is among the most
merchandised within department stores, and
floor associates are trained to understand
the brand’s storied history, inspiration and
signature pieces. One reason the brand gets
so much retail space, in addition to its popularity, is that it offers exclusive lines to key
retail partners. These key successes have led
to David Yurman’s leading position in productivity per door, as illustrated in Exhibit 2.
EXHIBIT 2: David Yurman Leads Industry in Productivity per Door
Estimated Annual Sales/Door at Department Stores
(FY2013, Wholesale, $ Thousands)
$520
$255
David Yurman
Ippolita
$200
Roberto Coin
$170
Lagos
$110
Marco Bicego
45
Potential Targets
Marco Bicego
Given the category’s strong momentum,
investors should be on the lookout for the
next great jewelry company that they can
help take to the next level. While the category is somewhat fragmented across channels,
a few key brands are particularly worth
noting. With the proper strategy layered
on top of their already-strong foundation,
these brands have the potential to develop
into the next leading jewelry brand.
Founded in 2000, this growing Italian jewelry brand has quickly gained a reputation
as a gold specialist. Known for its artisanal
craftsmanship, all Marco Bicego accessories are made with 18-karat gold, with many
also incorporating precious gemstones and
diamonds. The brand has had strong growth
via both new and existing accounts, with
double-digit growth in existing doors since
2011. Marco Bicego opened its first shopwithin-a-shop in North America in late 2013,
with additional plans for future expansion.
Ippolita
This popular luxury jewelry brand has
created a name for itself through its colorful
gemstones, Italian heritage and delicate,
handmade craftsmanship. Founded just
15 years ago, Ippolita has quickly become a
leading brand alongside established veterans
David Yurman and John Hardy.
In fact, Ippolita’s sales have quintupled over
the past five years and the brand now brings
in $100 to $150 million in annual revenue.
The brand is looking
to e-commerce and
younger consumers
as strong drivers of
future growth.
Roberto Coin
Luxury jewelry and accessory brand Roberto
Coin is looking to continue to grow its presence through its own boutiques, with eight
locations across the United States
and more in Europe and Asia.
The $200 million brand has
recently garnered significant
attention from private investors.
As Coin told Reuters in February
2014, “A lot of foreigners are looking
and we’ve had a series of offers.” v
AUTHORS
Peter Hsia, Partner
[email protected]
John Buccheri, Consultant
Stephanie Wu, Senior Consultant
46
Jewelry has grown from
$8.8 to $11.3 billion over
the last five years—and
this momentum shows
no signs of slowing
down in future years.
47
PRIVATE LABEL IN PERSONAL CARE
Overarching Thesis
With private label continuing to gain acceptance at retail, personal care is likely to have the
most growth upside among all food, drug and mass (FDM) categories.
Opportunity Drivers
„„
Personal care private label is relatively underpenetrated overall
„„
Consumer perceptions of private-label quality gaps continue to narrow
„„
Private-label penetration varies within personal care, with high-stakes products such as
cosmetics just beginning to gain traction
„„
Large mid- and premium-tier private-label brands are becoming increasingly common at
retailers such as Walmart, Target and Walgreens
„„
Winning private-label manufacturers offer value-added services such as innovation and
R&D, sourcing and procurement, custom formulations, and marketing
FDM Private-Label Penetration
40%
25%
22%
21%
20%
16%
16%
14%
14%
9%
G
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O
CH
CE
T
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CE
A
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O
AG
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O
RO
O
FO
T
EA
PR
M
N
ER
N
EN
O
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PA
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48
SEE MORE AT
WWW.KURTSALMON.COM/DEALIDEAS
DESCRIPTION
DEAL IDEAS
DEAL IDEAS AT A GLANCE
„„ Sales of ~$120 million
„„ Sales of ~$200 million
„„ Sales of ~$1.6 billion
„„ Fragrance, cosmetics, skin, hair
„„ Bath, hair, skin, baby
„„ Cosmetics, skin, bath, sun, baby,
„„ Customers include Walmart
„„ Customers include Walmart,
and Kohl’s
„„ Owned by Rothschild Invest-
„„ Privately owned
hair, deodorant
„„ Acquired by CI Capital Partners
in 2007
ment Partners
„„ Narrower product line, but wide
range of services, including
RATIONALE
CVS, Target and Loblaws
branding, design and logistics
„„ Partnerships with several large
blue-chip customers, including
Walmart’s successful Flower
brand
„„ One of the largest personal care
manufacturers in North America
„„ Customer base dedicated to
growing personal care store
brands
„„ Experience in several of the
most underpenetrated personal
„„ Successful platform for contract
manufacturing consolidation
„„ Formulations across the
personal care category
spectrum
„„ Provides “end-to-end” services
to private-label customers
care private-label categories,
including hair care and skin care
49
PLUS-SIZE APPAREL
Overarching Thesis
The plus-size segment, which represents a major percentage of the apparel market and
continues to grow, is substantially underserved. Increasing infusion of fashion into plus-size
brands, growing U.S. waistlines and e-commerce growth will generate significant opportunity.
Opportunity Drivers
„„
Plus sizes represent the majority of consumers
„„
Plus-size growth being driven in part by ethnic factors and increasingly spans all
income groups
„„
Non-plus-size consumers spend ~2.5 to 4 times more per capita on clothing than
overweight and obese consumers
„„
Plus-size consumers want to be catered to, but traditional big-box stores represent
the majority of the market
„„
More fashion-oriented brands and retailers are offering better plus-size assortments,
reducing historical biases against the segment
„„
Plus-size clothing could grow at a 15% to 19% CAGR over the next decade
Disconnect Between Population Size and Apparel Spending
OBESE
36%
OVERWEIGHT
22%
NON-PLUS
* Sales total approximately $108 billion
Source: Kurt Salmon Consumer Survey
PER CAPITA RANGE
$263–$345
$877–$1,061
82%
42%
U.S. POPULATION
WOMEN
50
18%
WOMEN'S APPAREL
SPENDING*
SEE MORE AT
WWW.KURTSALMON.COM/DEALIDEAS
RATIONALE
DESCRIPTION
DEAL IDEAS
DEAL IDEAS AT A GLANCE
„„ Sales of ~$10 million
„„ Sales of $933 million
„„ Primarily online retailer of
„„ 1,300 specialty apparel stores in
plus-size fast-fashion apparel
with limited store presence
(13 stores in Northeast and
Mid-Atlantic)
the southeastern United States
„„ “CATO Plus” fashions comprise
approximately 20% of total sales
„„ Publicly traded
„„ Privately held with $18.2 million
„„ Transition to a value-based
EDLP model raised margins
clothing to underserved market
significantly
and e-commerce business
and timeless silhouettes
„„ High end (e.g., Salon Z at Saks,
$600)
German model
relevant fashionable plus-size
„„ Opportunity to grow store base
kaftan and tunic styles)
„„ Offers both “of-the-moment”
„„ Founder is former plus-size
investment from growth equity
„„ Strong on-trend design, offering
„„ Known for dresses (signature
„„ Potential for new store growth,
„„ Strong design for target
customer
„„ Distribution opportunities
„„ Taps into luxury segment
especially for CATO Plus
51
52
ONE SIZE
DOES NOT
FIT ALL
THE ROLE OF REGIONALITY
IN DUE DILIGENCE
From cowboys to cheese-heads to lobster-lovers, each region of the United
States has its own unique identity—and is quite proud of it.
Naturally, these differences extend down to the retailers and restaurants
that have the strongest brand equity in a given region. But the concept of
regionality—that certain brands will thrive in some regions but not others
—is often left out of the due diligence process.
As a result, potential investors often overlook regional differences in
brand equity in their store growth analyses and may end up overstating
the expansion potential of a given target.
53
The following case study illustrates the
impact of regionality at work.
Southern California current diners—where
WestCoast has more than 130 locations.
Battle of the Regional Brands
But what about the brand’s viability beyond
these regions—will it be equally well received?
The answer may be no.
WestCoast is a quick-serve restaurant (QSR)
with an almost cult-like following in much
of the West and Southwest, due in part to its
reputation for higher-quality fast food. In
fact, the brand’s net promoter score (NPS)
ranks highest in a survey of more than 500
We compared our Southern California diners’
opinions of WestCoast to those of current
WestCoast diners in Texas, where WestCoast
has slightly over a dozen doors, and found net
EXHIBIT 1: Texans Are Lukewarm on WestCoast
WESTCOAST REGIONAL NET ADVOCACY
(AS MULTIPLE OF NATIONAL NET ADVOCACY)
1.5x
0.2x
SOUTHERN
CALIFORNIA
Note: Current diners by region.
54
TEXAS
EXHIBIT 2: QSR Popularity Is Not Universal
REGIONAL NET ADVOCACY BRAND COMPARISON
(AS MULTIPLE OF REGION’S AVERAGE NET ADVOCACY)
NATIONAL
SOUTHERN CALIFORNIA
TEXAS
17.9x
12.9x
11.3x
5.3x
REGION
RANK
5.2x
2.9x
2.6x
WestCoast
SouthEats
NationalChain
WestCoast
NationalChain
1
2
3
1
7
1.8x
NationalChain
1
SouthEats
WestCoast
2
7
Notes: 1. Current diners by brand. 2. Survey question was “When thinking about fast and casual restaurants, how
likely are you to recommend the following restaurants to your friends and family?” 3. Southern California ranking
out of 21 restaurants; Texas ranking out of 18 restaurants.
promoter scores to be substantially lower.
In fact, WestCoast’s NPS was more than six
times higher than what it was in Texas. (See
Exhibit 1.)
And WestCoast’s shiny first-place regional
ranking in Southern California slid to
seventh in Texas. Taking WestCoast’s place
at the top were two QSRs that serve similar
cuisine and are also considered higher
quality than their competitors—SouthEats,
a regional chain, and NationalChain, which
has more than 1,000 locations across the
United States and Canada. (See Exhibit 2.)
The bad news goes both ways. NationalChain
fares as poorly in WestCoast’s stronghold
as WestCoast does in Texas, even though
NationalChain has more than 30 Southern
California doors. In fact, on a national level,
NationalChain actually fares worse than
both WestCoast and SouthEats in both net
advocacy and repurchase intent.
These differences carry over to repurchase
intent—current diners in Texas say they’re
less likely to develop an appetite for WestCoast than their Southern California
counterparts. But those same Texans claim
55
EXHIBIT 3: SouthEats Wins Repurchase Intent in Texas
REPURCHASE INTENT BY REGION
NATIONAL
SouthEats
48%
23%
71%
WestCoast
49%
21%
70%
NationalChain
35%
32%
67%
SOUTHERN CALIFORNIA
56%
WestCoast
20%
76%
TEXAS
SouthEats
53%
WestCoast
32%
33%
NationalChain
34%
23%
Extremely likely to
dine in future
21%
74%
65%
57%
Somewhat likely to
dine in future
Note: Survey question was “How likely are you to dine at each of the following casual
specialty burger restaurants in the next six months?”
Source: Kurt Salmon Consumer Survey
56
they’ll continue to have a strong hankering
for SouthEats in the future, as illustrated
in Exhibit 3.
of the chain’s current customers identify
themselves as “value seekers” versus only
21% in Southern California.
Several factors may drive these regional
differences. First, WestCoast is a relatively
new entrant to Texas, putting down its first
roots in 2011. Likewise, NationalChain
opened up shop in California starting only
in 2009. In contrast, WestCoast has been in
Southern California since the 1950s, which
is exactly when SouthEats first opened up
in Texas.
These differences help highlight why
WestCoast shouldn’t necessarily expect to
experience the same levels of success as it
expands out of its historical home. And for
investors, they illustrate why regionality is
an important concept to consider in future
diligences, lest lower-than-expected growth
leaves them hungry. v
But we don’t expect WestCoast to gain more
fans in Texas over time, considering how
strong competitors like SouthEats are when
it comes to net advocacy.
AUTHORS
Bruce Cohen, Senior Partner and Head of Private
Equity and Strategy Practice
[email protected]
Adam Hemmer, Consultant
WestCoast is also troubled in Texas because
its traditional niche as a high-quality QSR
option is already occupied. In fact, WestCoast’s net advocacy among current Texas
consumers who consider themselves “quality
seekers” is a measly 1.7—fifth in the region—
versus its first-place score of 19.5 among
Southern California’s quality-seeking diners.
Interestingly, WestCoast’s profile in Texas is
actually more heavily stacked toward costconscious consumers. In fact, in Texas, 34%
57
SURVIVING
THE FLOOD
58
Identifying, and investing in,
Amazon-resistant categories
Many investors and casual observers feel as if Amazon, like the river
it was named for, is a massive force, taking out everything in its path.
Recent history has shown us Amazon’s power. Its sales grew from
$15 to $74 billion from 2007–2013, a compound annual growth rate
of 31%, and are projected to more than double by 2018—to $158 billion.
AMAZON SALES GROWTH
(2007–2018F, $ Billions)
$158
$136
CAGR 2007-2013: 31%
$120
$105
$90
$74
$61
$48
$34
$15
2007
$19
2008
$25
2009
2010
2011
2012
2013
2014F
2015F
2016F
2017F
2018F
Source: Susquehanna Financial Group, Amazon financial reports and Kurt Salmon analysis
59
This growth is a result of several factors,
including services like Prime, new partnerships with manufacturers and, perhaps most
importantly, Amazon’s continued encroachment on a far larger number of product categories like home improvement and grocery.
But according to 2014 Kurt Salmon research,
Amazon will not be able to co-opt every
category; retailers in high-service categories
are most likely to continue to thrive and
could make compelling investments. These
include luxury and lifestyle retailers, furni-
EXHIBIT 1: Service Is More Important in Amazon-Resistant Categories
Reported Importance of Service vs. Amazon Purchase Proclivity
59%
57%
55%
49%
47%
45%
37%
27%
30%
30%
24%
18%
14%
8%
Books
Music
Toys
Importance of Service
Likelihood of Purchase on Amazon
Source: Kurt Salmon Consumer Survey
60
Furniture
Specialty
Sports
Equipment
Automotive
Parts
Luxury
Apparel
Amazon will not be able to co-opt every category;
retailers in high-service categories are most likely to
continue to thrive and could make compelling investments.
ture, specialty sports equipment—especially
service-oriented products like bikes and
skis—and automotive parts. On average, only
16% of 1,000 consumers surveyed by Kurt
Salmon said they purchased anything in any
one of these four categories on Amazon over
the past six months, as illustrated in Exhibit 1.
But even though this number is bigger than,
say, current grocery penetration, we believe
Amazon will have trouble significantly
growing share in these categories. That’s
because an average of 52% of consumers
value service in these categories versus 29%
in categories that Amazon has won.
Similarly, only 2% of current purchasers
said service was not meaningful in making
purchase decisions—regardless of channel
—in these Amazon-resistant categories,
compared to 12% for categories Amazon
has already conquered.
This stands to reason, given that help finding
the right products and installing or setting
them up is critical in categories like automotive parts, specialty sports equipment and
furniture. And the luxury goods shopping
experience can be extremely tactile and
often requires knowledgeable sales associates
to help educate customers about products
and brands. v
AUTHORS
Drew Klein, Manager
[email protected]
Stephanie Wu, Senior Consultant
61
Authors
BRUCE COHEN
Bruce Cohen is a senior partner and head of Kurt Salmon’s
Private Equity and Strategy Practice and is a North American
practice director. With more than 20 years of consulting experience in the consumer products and retail industry, Bruce has
worked with executives and boards focused on mergers and
acquisitions, due diligence, and developing and implementing
strategies to drive profitable growth. He is regularly quoted
on retail and consumer topics in the Wall Street Journal,
Bloomberg BusinessWeek and The New York Times, among
others. He can be reached at [email protected].
JOHN BARBEE
John Barbee is a senior manager in Kurt Salmon’s Retail and
Consumer Products Group. John supports senior executives
in designing and driving their strategic supply chain and
omnichannel initiatives and systems implementations.
For more than a decade, he has worked with clients of all
sizes across the entire retail spectrum, including the soft
goods, hard goods, department store, specialty apparel,
grocery, multimedia and electronics segments. He can be
reached at [email protected].
DAN GOLDMAN
Dan Goldman is a senior manager in Kurt Salmon’s Private
Equity and Strategy Practice. Dan has expertise in private
equity due diligence and sell-side support, growth and turnaround strategy development, brand and category management, marketing, and new product development. In addition
to his experience at Kurt Salmon, Dan’s broad background
includes brand marketing experience at Procter & Gamble
as well as prior consulting experience with Cannondale
Associates (now Kantar Retail) and Hudson River Group.
He can be reached at [email protected].
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PETER HSIA
Peter Hsia is a partner in Kurt Salmon’s Private Equity
and Strategy Practice. In his 25 years of consulting,
Peter has worked with many of the leading consumer
packaged goods companies, retailers and private equity
firms. Prior to joining Kurt Salmon, Peter was a consultant with McKinsey & Company. He can be reached at
[email protected].
DREW KLEIN
Drew Klein is a manager in Kurt Salmon’s Private Equity
and Strategy Practice. Drew has conducted dozens of
strategy and due diligence projects in the retail and
consumer products space, many in apparel and footwear.
Prior to joining Kurt Salmon, he worked at UBS Investment
Bank in the retail group, where he specialized in apparel
and the sporting goods and health club industries. He
can be reached at [email protected].
The authors thank John Buccheri, Nathan Burkland, Adam Hemmer, Joy Liang and
Stephanie Wu for their contributions to this edition of the Kurt Salmon Review.
© 2014 Kurt Salmon
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