Consumers’ tendency to trade up to high-end products while seeking to save on everyday items, along with the growing complexity of consumer tastes, has led to an increasing polarisation of consumer spend. This trend has given rise to growth opportunities at both premium and value ends of the market and looks set to continue, leading to interesting investment opportunities in businesses that are well positioned to capitalise on it, and is playing out differently by subsector.
Within retail the rise of fixed price and discount retailers was seen by many as a product of the recession’s impact on consumer spending habits, but it appears to be a lasting change: Poundland plans to double its store count to over 1,000 over the next 10 years following its recent IPO, while in food retail, hard discounters Aldi and Lidl have continued to put significant pressure on the previously unassailable position of the Big Four supermarkets who dominate the mid-market. At the same time, however, upmarket players have also been outperforming the market, with Waitrose recently reporting 5.1% like-for-like sales growth for FY14. According to Kantar Worldpanel, the combined growth of these three food retailers has taken three percentage points of market share in UK grocery over the last 3 years.
In the food and beverage sector the polarisation has tended to favour the premium end of the market as trends such as affordable indulgence, healthier eating and the premiumisation of certain categories have gathered pace. This has been reflected in the recent pattern of private equity deal activity with businesses such as Fever Tree (premium mixers) and Tyrrell’s (premium snacks) attracting investment on the back of strong growth.
Within the health and fitness market the most notable activity has been at the value end of the market with The Gym and Pure Gym disrupting the market with innovative “no frills” propositions enabling consumers to access gym membership in a flexible, affordable manner without having to commit to annual contracts. Both businesses have attracted private equity investment in the last year.
ECI’s own recent investments are also indicative of the polarisation trend, with premium catering business Rhubarb and tour operator Great Rail Journeys (which provides escorted tours by rail to affluent over 55s) being recent additions to the portfolio. At the value end of the market ECI recently exited via an IPO from discount retailer Conviviality Retail (trading as Bargain Booze).
ECI has a strong recent track record of investment in consumer businesses that have niche, highly differentiated product offerings which set them apart from their peer groups. We see the current theme of polarisation of consumer spend continuing to play out over the coming years. We expect this to continue to produce exciting investment opportunities and we are interested in engaging with businesses that match these criteria.
Please contact Chris Watt for further information.
