The retail sector’s do-or-die holiday season is coming up, and the challenges are many in this economically uncertain year. ACG NY will do a deep dive into the industry at its 2011 Retail Update, held at the New York Athletic Club on November 16. To get a preview of the obstacles and the opportunities facing retail, Mergers & Acquisitions spoke with Richard Baum, the managing partner of the private equity firm Consumer Growth Partners, who will moderate a panel at the conference. Among his many duties, Baum sits on the board of handbag maker Vera Bradley, which debuted on the Nasdaq exchange last fall and has a market cap of $1.74 billion. Before founding CGP, Baum spent 15 years as an equity research analyst covering specialty retailing at Credit Suisse First Boston, Goldman Sachs and Sanford C. Bernstein.
M&A: What impact does the holiday season traditionally have on M&A in the retail sector?
Baum: I am not sure there really is a “cause and effect” relationship between how well retailers perform at Christmas and how active the M&A market will be in the subsequent year. It’s nice to think that if we have a nice Christmas, everything is going to be great for the next twelve months. However, in order for the M&A market to be robust, we really have to have a healthy economy. If the economy fails to recover, many companies are going to be reluctant to put themselves up for sale.
M&A: How is consumer spending affecting the retail sector today?
Baum: Despite everything negative that is going on in the economy, the rate of consumer spending is still positive Consumer spending is not growing as rapidly as it was several years ago, which requires consumers to be more selective about how and where they are spending their money. Consumers are spending a majority of their disposable income in two areas: Consumables or the “must haves.” Consumers will always need the basics to live on, no matter what is going on in the economy. But today consumers are buying more of the consumable “must haves” at the best price. The other areas of “must have” items are in product categories that are clearly “hot” with the best example being Smartphones. On the other hand, things that consumers are spending less on are what I would call the “nice to haves” or “want to haves,” because consumers can clearly live without them. A good example of this type of category is apparel, where consumers could easily live without the latest and greatest and not miss a beat.
M&A: What's in store for retailers that have pulled through, and those that are still trying to pull through?
Baum: It may come as no surprise that Charles Darwin spends a lot of time in retail and branded consumer products. The fact that the “strong survive and the weak perish” applies very well to retailers and consumer brand companies. Any company that has weathered the storm during the last couple of years is going to make it at least for another year or likely longer. How did they do this? Two actions that have been predominant during this period have been expense control and inventory control, both of which require great discipline.
