The new acquisition targets of a changing marketplace

The consumer staples sector has undergone tremendous change over the last two decades, and these changes only seem to have accelerated over the last five years. We see the impact of a fundamental shift in consumer behavior everywhere from the growth of club stores to the acquisition of Whole Foods by Amazon in 2017. The retail sector is under pressure from online competition and shifting consumer preferences, and the producers of these products are also under pressure to lower prices, increase innovation and create growth.

Acquisition, or inorganic growth, is one method being employed by established and cash-rich companies to adapt to this changing marketplace. Clorox and Nestle made major acquisition announcements over the last 12 months in the VMS/nutraceutical space. In our last piece for New Hope Network, we spoke about the VMS sector’s desirable demographic profile, and we think Clorox and Nestle were drawn to the growth of their targets and their favorable customer profiles. We would not be surprised to see similar acquisitions in the coming months and years. And while all deals are unique, we see trends and themes that could be of interest to growing businesses in the space. 

Businesses that cultivate relationships with their hardcore customers and create “evangelists” are interesting to companies whose main consumer loyalties come from generational inheritance and broad advertising. According to a company presentation, Clorox generated over 80% of its revenue from #1 or #2 ranked brands in their respective categories. In certain categories, the company has maintained its number one share position for decades. Yet, the company’s shareholders desire growth, not just strong share positioning. We believe that the company’s move into nutraceuticals with the purchase of Renew Life in 2016 and Nutranext in March of 2018 partly reflects its desire to build new sources of younger customers and penetrate channels where it can interact with those customers.

Related:Trends and themes emerge in supplements deals

Bonnie Cooper, former Vice President of Marketing at Renew Life for 10 years and active through the Clorox acquisition and integration, recently discussed her view on their interest in Renew Life.  “In wanting to expand their health & wellness category, I’m sure Clorox realized the potential of the nutritional supplement category as an excellent place to achieve accelerated growth. With Renew Life, the products are sold in multiple channels, bridge several consumer demographics and lifestyles, and have attractive gross margins.” She added that Renew Life’s position in high-growth categories like probiotics, omnichannel presence, and excellent customer relationships in the natural channel likely added to the equation. To continue, she said Clorox’s expertise in digital marketing was just one important advantage on their side, especially for targeting younger demos, research-savvy consumers, and the growing number of online supplement shoppers.

Acquirers are eying younger demos. The dynamic in nutraceuticals contrasts with many other industries where purchasing often declines with age (think sneakers) and young customers must constantly be replaced with new ones in order to keep sales strong. In this industry, we see the opportunity for brands to educate and enroll consumers, then retain those customers for many years. Smart acquirers, therefore, are looking to tap trends in younger consumer groups and ride the wave with them. Growth-stage brands would be well-advised to leverage opportunities to build appropriate customer audiences as doing so may only enhance enterprise value as those companies add scale.

This is the third in a series of articles by Bakley Smith, CFA (VP, Green Circle Capital) on the financial state of the VMS/nutraceutical industry. Green Circle is a boutique investment bank, based in New York, NY that focuses exclusively on the natural products industry.