For consumer product companies (CPCs), accurately determining the value of the business and its equity is critical. Valuation will play a critical role and be driven by many company-specific and market-driven factors. These may include issuing equity incentive grants, going to market for minority investment, reporting under GAAP, or evaluating a deal on the horizon to sell your business or become a public company.
As the world continues to emerge from the multi-year impact of the pandemic, there are new challenges ahead that are affecting consumer confidence — and in turn, may affect your business and its valuation. At the same time, there are also crosscurrents in play. For example, despite increased inflation and rapidly increasing interest rates, consumer spending levels currently remain high, but are showing some signs of strain.
While the pandemic is gradually fading as the driver of primary business impact, so are the supportive measures of the federal government, Federal Reserve and various U.S. states and foreign central banks. COVID-19 relief stimulus monies are largely gone at the consumer level, and the Federal Reserve is now rapidly raising interest rates to curtail far overheated inflation readings — squeezing financing and, therefore, demand. These measures are causing consumer savings rates to fall and driving reliance on revolving credit for a higher percentage of purchases. Consumers today are stretched significantly more than they were in 2021.
Faced with these evolving realities, owners and executives of CPC companies should focus on the underlying drivers of their company’s valuation now more than ever. It is critical to prepare through the adoption of insight-driven capital investment and planning strategies. While it is important to maintain a strong understanding of the rapidly evolving market impacts, consumer behavior and buying trends, CPC management should also take a more refined look at cash flow, identify non-core products with margin squeeze, and analyze profitability at the customer-specific level, especially if key inputs are experiencing such a price squeeze.
The valuation discussion will become more critical the closer your company is to a key market event, such as fundraising, debt restructuring, or a potential merger and acquisition (M&A) scenario. If a company remains “market ready” at all times, this will help with minimizing the risk of a capital squeeze layered on top of an operating profitability squeeze. It will also maximize the potential for a strong deal when the markets are in a more conducive window of opportunity.
Focusing on the Core
With the rapid shift to direct-to-consumer expedited by the pandemic, CPCs are taking a close look at their go-to-market strategies. With revenue growth “at all costs” headlining 2021, companies are now re-evaluating their product offerings and potentially reducing the number of products sold. Now is a challenging time to introduce SKUs that may cannibalize other products or have less proven contribution margins. The strain becomes magnified if the supply chain leads to difficulties in execution, consistency and end-delivery of product. While the prior focus was growth, an emerging theme is disciplined — and reliable — unit profitability. Navigating the cost and supply element to secure profitable growth may be tougher than ever and will require savvy management and analytics.
The input challenges are more pronounced if a CPC has stalled growth and is also struggling at the gross margin level. Without a growth story, feeling the squeeze on margin can make it incredibly difficult to finance a profit gap, resulting in more expensive borrowing or a decrease in investor appeal. If financing may become an issue in the coming 12-18 months, it may be time to look proactively for a joint venture or M&A as a means of reshaping your product portfolio for a stronger foundation and to hold valuation. These types of partnerships or consolidations can be helpful in times of cost and input pressures as economies of scope from proven core products can be synergistic. Companies looking to take this approach — especially those wanting to divest or be acquired — should be prepared for rigorous due diligence and a bullet-proof exit plan, if needed.
Infusing Resilience into Your Supply Chain
CPCs are incredibly reliant on the functioning of the supply chain to achieve profitability and growth. This has proven a challenge in recent years, not only because of the pandemic, but due to other events, such as Brexit, the U.S.-China trade war, climate-related disasters and substantial currency fluctuations. Now, factors like globalization, low-cost supply and minimal inventory have become key to effective supply chain management, and resilience is more important than ever. CPC management can leverage their supply chain to scale and power new go-to-market strategies, and, as a result, maximize their company’s valuation.
Companies looking to diversify and create new revenue streams should make sure they have the right digital and supply chain capabilities in place to support them. This means that they can:
- Create and maintain supply to produce the products the market demands;
- Predict demand so that their products are available where they are needed; and
- Move supply to various locations, if and when needed (in the case of the COVID-19 pandemic, for instance, the important tenet of supply chain management was particularly challenging)
Using data and analytics to evaluate, plan and predict both supply and demand will assist companies in preparing for changes and reacting more quickly to changing consumer needs.
Investing in Technology to Better Manage Inventory
There has never been a time where rapid and usable data has been more critical to success. It is no secret that the pandemic accelerated digital transformation in companies of all sizes across the globe. CPCs have made investments in cloud computing and upgrades to their e-commerce and at-home-shopping platforms. Technology can also be leveraged to build internal capabilities and efficiencies, including inventory management. A company’s inventory is often its largest asset, and ineffective measurement and management of inventory can lead to inaccurate financial statements and, even worse, poorly informed and unprofitable business decisions.
A company should upgrade its technology stack to ensure all parts of the business are aligned and informed by accurate data; this is critical for CPCs to grow and flourish in today’s digital economy. For example, an Enterprise Resource Planning (ERP) system manages and integrates day-to-day business activities, such as accounting, project management, risk management and compliance, into a single integrated system. In doing so, it improves the efficiency of financial operations and productivity, plus offers cost savings. A single back-office system like an ERP reduces manual processes and integrates financials, fulfillment, inventory and sales into one singular platform. CPCs that invest and accelerate their businesses through technology will be best positioned to grow and build stronger customer relationships. It has always been important to be data-driven. However, given the current volatile economic and market environment on both the supply and demand side, companies must be highly proficient at managing data and automating processes more now than ever before.
To learn more about valuations for CPCs, contact Advisory Partner Kemp Moyer.
Read our related post, “Current Trends in Valuation for Technology Companies.”