Expect challenges in the massive U.S. retailing and consumer-products sector from Amazon.com and eventually China’s Alibaba to continue and even speed up, an analyst said.
“This is no ordinary disruption,” said Sajal Kohli, senior partner at McKinsey & Co. “Amazon is a triple threat in terms of price, selection and better experience.”
And the retail and consumer-product landscape Kohli sketches out could provide plenty of opportunities for buyout firms on many levels.
Traditional consumer-packaged-goods makers and retailers have been reeling as sales continue to move online. Many players are distressed. “This industry is in turmoil,” Kohli said. “That’s why you see this revolving door in management teams. … We’re in an era of volatility.”
After spending billions to build fulfillment centers around the U.S., Amazon now can reach about 95 percent of the U.S. population in three hours with product deliveries. And it continues to scale up its infrastructure, he said.
It’s also become a media company with the success of Amazon Prime video offerings. It’s even moved into clothing manufacturing, he said.
“We spend a lot of time obsessing over them,” Kohli said.
Alibaba also remains a threat. The giant online retailer has been rumored for years to plan a major entry into the U.S. market. It’s not yet known if it’ll build here organically or make a large acquisition. Meanwhile, Amazon may also be moving toward retail stores as well to round out its network of fulfillment centers.
From a PE perspective, turnaround specialists may look to buy an ailing retail or consumer name at a discount, hoping to revive the business. Or real-estate-focused firms may come up with plans to take advantage of dislocation in the properties of closing businesses.
On the credit side, some companies will need to refinance or obtain capital to boost their businesses.
Meanwhile, plenty of PE firms, among them Leonard Green & Partners and Bain Capital, also invest directly in consumer brands and retail chains.
Traditional players have been responding by trying to buy companies in faster-growing markets such as China and India. The M&A activity is fueling growth for now, he said.
Overall, traditional players in retail and consumer products must focus less on market share and more on a concept called portfolio momentum — quickly matching pockets of demand in the marketplace with products, driven by fresher information on consumer behavior.
“Data scientists will be the new heroes,” Kohli said.
Loyalty programs to reward customers have been a useful tool but have become less effective, he said.
The Millennial generation holds the key to success since it eclipsed the Baby Boomer generation last year as the largest single demographic in the U.S., he said.
Fortunately, a big chunk of the generation still enjoys an old-fashioned shopping excursion, he said.
Overall, retailers have been focusing on building up their presence in more heavily populated areas, as big-box stores in suburban and rural areas fall out of favor.
Kohli addressed about 200 people on Nov. 1 at the Association for Corporate Growth’s New York Annual Consumer and Retail Conference held at Fashion Institute of Technology. The theme of the event was “Blurred Lines: The Convergence of Consumer and Retail.”
Kohli works in the Chicago office of McKinsey and leads the Americas retail practice.
Buyouts photo of Steve Gelsi