Key Points
- Consumers remain stretched, but the most recent GDP and spending figures offer positive signs.
- With the prospects of interest rates easing, private sponsors in the retail and consumer space will look to monetize portfolios.
- Corporates need to acquire capabilities to enable them to stay competitive against the biggest players.
- Increasingly those companies that have invested in technology – organically or through acquisitions or partnerships – will maintain an edge.
How is consumer sentiment and spending power at present?
Douglas Trauber: Today, what we have is a consumer whose non-mortgage interest expense as a percentage of discretionary income is at near historical highs. We’ve got a consumer that’s stretched, and corporates en masse that are hovering near zero same-store sales.
Larry Grafstein: Growth was quite robust because of some of the idiosyncratic factors associated with the pandemic. Now you have a combination of rates going up, the consumer getting squeezed, and at the same time, pricing power coming down. It raises inflection point issues for companies of all sizes, especially in the public markets.
“There are inflection point issues for consumer companies of all sizes, especially in the public markets”
Larry Grafstein, Deputy Chairman, Global Investment Banking
Vito Sperduto: However, GDP figures for the final quarter of 2023 saw a 3.3% annualized increase, clearly ahead of what Wall Street was expecting. From a consumer perspective, there was strong spending on their part that helped drive expansion. The signs are good.
Hugh Paisley: The consumer seems to be resilient, and I think the unemployment rates are a good stability factor. We are going to see signs of return to discretionary spending.
How is that translating into action among financial sponsors?
Trauber: We’re seeing optimism from both corporates and from sponsors towards more activity to grow. On the sponsor side, given they were pretty much sidelined for ’22 and ’23 other than specific situations, the theme is more active: they’ve got a lot of capital to put to work.
Paisley: We’re seeing a plateauing of where interest rates might get to and ultimately, we see potential of an easing cycle as we move towards the end of the year. And we’ll also get a sense of what that may mean in terms of monetizing portfolios, whether that be through sale processes or IPOs.
What about the corporate market?
Trauber: If you look at the three largest corporates in groceries – Walmart, Amazon, and Costco – each has a subscription model that allows them to add more value. How do others keep up with those top 3? Is there a capability, a ubiquity or a geographic expansion they can acquire? I think we’re going to see more corporate activity as they try to align themselves better to compete.
“We’re going to see more corporate activity as they try to align themselves better to compete”
Douglas Trauber, Global Head of Consumer and Retail
How are retail players innovating and acquiring the capabilities they need?
Paisley: The future of retail is adaptive: using technology like AI to analyze what each individual consumer wants, and being able to use predictive technologies to streamline what the customer sees on the ecommerce site, but also understand what the customer is doing in store.
Trauber: I spent time with the CFO at one major convenience grocery company. I was amazed not just at the size of their AI team, but their progression in terms of driving efficiencies, inventory management, pricing algorithms and personalization.
Paisley: There are category leaders that have been continuously investing. We saw capability-driven acquisitions such as Walmart and Jet. We’ve seen Home Depot over the last 10 years invest heavily in digital capabilities. Those companies are thinking, I already have some capabilities that I’ve brought in-house; how do I embellish those? In some cases, that’s through partnerships.
Another level of retailers will really feel the pressure over the next five to ten years to make those investments that they may have deferred or delayed. The gap is widening between the number ones and number twos: you see it in the valuations across specialty retail.
Trauber: As an example, the logic for the Kroger-Albertsons transaction is that Kroger spent 15 years investing in their infrastructure to become more omnichannel. To further that investment, they need scale. This is an example of creating the scale and leveraging the freed cashflow to drive efficiency, enhance their competitiveness against Walmart and drive growth.
“The future of retail is adaptive: using technology like AI to understand what each individual consumer wants”
Hugh Paisley, Co-head, U.S. Consumer and Retail Investing
