The Takeaway: A Q&A With ChanChan Wang: Natural Selection—The New Survival of the Fittest for Consumer Companies
How do investors view today’s consumer business environment?
Investors have been much more circumspect about consumer businesses’ ability to grow in the past three to four years, and deal value fell 32% quarter on quarter in Q1 2023. Capital raising in B2C and D2C has become more polarised around the consumer health and pet care sectors, particularly on companies that have demonstrated the ability to be seen as broad consumer staples and not just a part of selective discretionary consumer spending patterns. In conjunction, some investors are also looking towards B2B to reduce direct consumer exposure, while some direct-to-consumer businesses are adopting an omnichannel approach to broaden revenue streams in the current market. In summary, there is no place to hide for those propositions that are failing to gain consumer traction quickly.
What sort of brand propositions remain targets for investors?
The march of premiumisation and value-focused brand propositions have created a polarisation in the market and there is a sense that being in the ‘muddled middle’ is not a strong enough proposition to sustain a brand’s growth in a flat market with low consumer confidence.
How should a business owner view their business model in the current environment?
Creating a resilient business model that meets a true need in the market may sound obvious, though we have witnessed numerous consumer propositions that have launched without core consideration for funding a model to profitability. The lure of the permanent low-interest-rate environment had, until recently, made the price and cost factors in any model less important. That has now changed irrevocably, and whether your business has enough cash for a period of six months is key when fundraising. If this doesn’t happen, it might be problematic; other considerations have to be made. Are we at the end of the ‘extend and pretend’ model? Yes, I think we have seen the end of that.
What metrics should owners focus on?
Profitability is the all-important, non-negotiable metric for investors in evaluation—not just growth at any price—as growth accompanied by low and persistent margins will not attract investors. The particular emphasis is now on gross margin and EBITDA. This could prove challenging for certain sectors, such as the plant-based sector and meal kits.
Is there a specific point of business growth and development when owners should consider a sale?
It's worth exploring all options, including a potential exit, as any additional capital injection would require significantly more future returns on capital and may risk further dilution of an owner’s stake. A good advisor can help explore different options, including an exit, which may be the most viable option as opposed to an ‘I must exist at all costs’ approach—the essence of emotional attachment to a business in a very tough trading environment. Debt raises and internal rounds are also becoming more popular, as they offer a way to avoid external valuations impacted by market conditions. Other options include consolidation, mergers, and combining with smaller businesses with significant synergies and scale. A commercial partnership (or B2B partnership) with potential eventual buyers for cash/profit could help demonstrate the commercial viability of some of these businesses and also demonstrate the rationale for an eventual acquisition.
Owners may start a business with a survival-at-all-costs mentality, though often they don’t evaluate fully where the business is in its stage of development and whether it can achieve the most important factor—growth, the key to survival.
So, what’s The Takeaway?
Owners must fully evaluate where the business is in its development and whether it can achieve the most important factor, growth—the key to survival.