« Exchanges at Goldman Sachs

Whenever, Wherever: The New Model for Retail

2016-05-04

Kathy Elsesser, global co-head of the Consumer Retail and Healthcare Group in the Investment Banking Division at Goldman Sachs discusses how the slowdown in deal-making in the first quarter of 2016 has affected the consumer retail space, why the sector is so attractive to activist investors and whether the rise of e-commerce means the end of brick-and-mortar retail.

This episode was recorded on April 12, 2016.

The information contained in this recording was obtained from publicly available sources and has not been independently verified by Goldman Sachs. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording and any liability as a result of this recording is expressly disclaimed. This recording should not be relied upon to evaluate any potential transaction. Goldman Sachs is not giving investment advice by means of this recording, and this recording does not establish a client relationship with Goldman Sachs.

Copyright 2016 Goldman Sachs. All rights reserved.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanged Goldman Sachs for people from our firm. She there inside Son developments, curly shaping markets, industries in the global economy on Jake Seaward Global out of court communications here at the firm recent volatility markets has slowed deal making debt issuance another core activity to discuss those developments. And I'm joined by capital Sesar. The global co head of the consumer, retail and healthcare group in our investment bank here Goldman Sachs, Cathy welcome to the programme, makes Jake
Kathy last year, was a record breaking year for emanate, but the first quarter of this year of twenty sixteen we saw market slowdown activity. What do you think about the state of the market really today, given the strength of last year, it does feel different Jake now than it did last year at this time, so twenty fifteen, we saw vines at more than forty percent and so far this year, global reach hell emanate. Volumes are down more than twenty five percent. There's still a number of strategic deals that we're seeing where one court nation is buying another. For example, lows bought the canadian home Improvement Company, Rona and Samsonite is buying to me, but like all sectors, the volatility of stock prices has made it challenging for buyers and sellers to agree on valuations. So was the markets of stabilized a little bit of starting to seal
more interest would get placed, starting to see more discussions in the board room. There's another dynamic at play. A large percentage of the historic retail emanate has been driven by private equity firms, so that being capitals K K hours in Carla the world and they were buying and selling a lot of assets between themselves or taking public companies. Private in order to do that, those transactions rely on the non investment great market to fund a large portion of the purchase price, and that market had been pretty rocky in late fifteen early sixteen, and that too has come back and been much more improve dynamic, and therefore I think that too will
resurgence. As we see more financing available for non investment grade, you'll see p firms jumped back in exactly right. So after tough start for the year, the debt markets have stabilize low, but have you said? How would you characterizes do the credit markets right now and you think you could show continued improvement over the course of the year. The credit markets have improved dramatically in concert with the equity markets to your point in a late twenty fifteen early. Sixteen there are significant outflow of capital from the debt markets, But since early February, that trend has reversed and there's been roughly thirteen billion of inflows into the non investment great market and close to seven billion into the investment great market. Why is that in part? It spinner increasing oil price environment, more stability in the equity markets and pretty positive consumer economic information, and so with those inflows. Both markets are now positive into their capital. The put to work to support deals, and I suspect the market will continue to see improved
as rates are expected to stay low, longer and volatility calm down and, quite frankly, some of the transactions that have been executed this year and performed very well the secondary markets. Let's talk a little bit about activists in the space there been some pretty high profile. Instances in recent years were activist one after challenge: a consumer retail company. Why are these companies so appealing to activists and we expect that trend to continue gets interesting Jake, but twenty five percent of all activists campaigns last year were targeted consumer retail companies. They attraction is in part due to the familiarity. Everyone knows the products and brands, for example, craft foods, Clorox Proctor, Gamble, Pepsi and for the most part There is relatively low volatility with these businesses, so not a lot of clinical fashion risk. It was really not much downside risks,
exactly so, there's a good potential upside with relatively low downside and then, as far as the trend, continuing fifteen was a rough here for the activists in many saw their worst annual performance since their conceptions and triggered a net outflow of about three billion dollars in the last quarter of fifteen. So it would seem that perhaps the bloom is off that rose, but actually think the activists are here to stay and there's the couple reasons for that. One group of activists- Capital has outpaced the market by about two point five times since twenty third do not talk about performers just about influential to perform. was pretty weak and that resulted in outflows. Having said the end of the year at the end of the year, having said that, these funds have raised more than a hundred fifty billion dollars and that's money that can be put to work for new investments So there is a large amount of capital that can be used for activists campaigns. The second thing
as the market volatility, while it created some poor performance last year also provides opportunities potential for new investment theses and third there's a generational shift among mainstream what we call long. Only investors folio managers now view engaging with companies as part of their role rather than simply selling when they're not happy. This provides a bedrock of some for the activists, funds and means that activism is now really embedded within the mindset of those core investors, so activists, basically working hand in hand with mainstream investors are cases here. The markets become very core.
things are tending to go up and down together. So in order for investors to really beat the market and find clinical alpha return, they need to do better than the market and, as a result, if you believe that an activist fund can create a near term event, either increase return of capital or drive consolidation that can create better returns than simply the market. Is that sometimes that call for the return of capital coming at the expense of the longer term vision? These companies, I'm sure, that's what what a corporate He owes. Would like to argue what have you found in your experience and take? I think that there had to be many board members and see egos are looking out for the long term as they should. At the same time, there is near term pressure on performance when global growth is good, but not great, and so it's a really tough judgment call as to how much capital should be putting back into the business for the long term, verses, supporting stock prices in the narrator.
So, let's talk about the consumer for second, the consumer has seen a bit of a windfall in terms of falling gas prices and typically fallen gas prices just mean more disposable income in people's ITALY savings account or checking account new conversations with clients how they see the impact or are they seen the impact of lower gas prices and have they been surprised that has been relatively muted that economic response so far, has been muted, and I do think they are surprised symbol and say that the consumers have unnecessary and believed that that's lower gas prices were sustainable and so therefore were keeping those savings. for themselves. I think a larger group believe that lower gas prices has resulted in increased discretionary cash flow, but that cash was being used for things today, the consumers no longer necessarily looking for staples there looking to spend their money on experiences, be it travel bit. Restaurants,
or you no more minutes on your phone or other mobile device, so less actual goods and more experiential. Let you talk the low, but about interest rates being well, and they ve been love for a long time in men, expect them to stay low for awhile, how the multi national clients adapting to that environment vertical is theirs bit of a divergence between: U S, interest rate policy and then the rest of the world, while those divergence policies are also driving issues around effects, so interest rates by large are low across the globe. Some lower than others, obviously, which tends to make it slightly more advantageous for those in lower interest rate environments like Japan to potentially deploy capital, but for an extra it is really not new news, but certainly on the minds of multinationals, and it's an important issues in many companies were the better The sharing of a weaker dollar, or at least you S, based companies, shrubs alone their cost basis and increasing their top lot on overseas cells. Exactly so think about it. This way up here,
U S base company three years ago, the euro was at one thirty and then went to one forty every euro you earned with translated back to dollar forty in your home country. Now that's reversed, as the dollar has contained industry, against the Euro, and that would be similar across all different porn currencies. The flip side, the also true multinationals that are based overseas. There now seeing the benefit of a strengthening dollar net net. For my perspective, most corporates, while they're focused on it cuz it does affect cash flow and other things investors tend to look through it both to the upside and the downside. So most companies, really focus on driving planning and budgeting based on constant dollars it is. The dollar is strong. You do see some foreign multinationals looking for more. U S, exposure tell exactly one of the biggest trans. I say we could talk a whole pod about this in retail has been the rise of e commerce and even though it
it has been around for a long time. We're really starting to see significant increases in usage, so he commerce sales rose fourteen point five percent in the fourth quarter of last year, and that has been a really rapid trajectory What do you think our bricks and mortar on the way up now it so interesting? I get that question a lot as you can imagine. I recall about fibres Years ago, being at an internet conference where there is a lot of casually dressed, entrepreneurs wondering why I possibly would run the global retail group of Goldman Sachs. They thought it was a little entertaining The increase has been rapid, but let's be clear. Stepping way back econ sales only represent eight point: five percent of total. We tell fail thing: I'd states towards growing quickly it at its and has been around for sixteen seventy years.
at a minimum. Yes, I don't think retails on the way out. You know, having said that, the retail model needs to evolve in order to ensure that the consumer can by what they want when they want it whenever they want it, and if there's one thing the internet has done, has created that level of engagement and convenience now without an airline that yesterday, when buying decisions are based on a breath of selection, price and speed, take books, music office supplies, com will tend to win more than they were But retailers always been about more than selection, price and speed. It's about the experience, the service and, quite frankly, the social dynamic there sultans that retailing com are converging to put the customer in the centre. no longer. Where do I buy it? It's about. I just want to buy it, and I want to do it anyway, that I want it. So it's more about putting the customer in the center and not focusing on the channel
and retailers all now have highly integrated web and mobile offerings and, quite frankly, many pure play e commerce. Players have open retail location. the rain was delighted to see that you have a flat. Bonobo is poorly parkers a good example and even Amazon. The leader com has a store in Seattle, so more convergence story than anything else and really what's changing is that the customer is expecting a lot of what they like about e commerce in their traditional retailers and, quite frankly, and benefit the retailer too, because when you go on line we know where it Jake. When how long you spent on say what you really don't follow me around. A lotta isn't days afterwards, unfamiliar with that phenomenon. So how much of this movement towards the changing mindset of the consumer is really a generational shift in the way younger consumers millennials think about
buying things you don't understand. The majority of online shoppers tender skill, younger millennials, got more than half of those who buy online, even though they make up only twenty six percent of the population may also spend more shoppers between the ages eighteen and thirty four spend more money on line in a given year than any other age group on an absolute and ass. They sat opposite basis. Ok now he said that we gotten accustomed at all aid levels to the convenience of shopping online and boomers enjoy shopping online. The differences in how they do it, many of the majority of their time spent on their phone and shopping morbidly, where
the majority of boomers per se shop from the desktop Cathy talk about the shift towards more focus of the consumer on health in wellness products, we see a lot of companies really marketing heavily in the space and using some companies. It started off in this space being challenged by large upstarts, what's going on that market today, so this is a dynamic that certainly being driven in part by the millennials has been just talked about. His relates to a calm but really cut across all demographics and age groups and parties. Is, there has been so much more education on the part of consumers as a result of the information that is now available to them through online and other sources used to be that it was real something that was a whole foods dream. Walter Raw, John Mackey thought that people should have the option to have fresh organic food and many people back when they were growing. Whole foods thought that was for a very select small group of people.
But as we sit here moving into new neighborhoods They are moving into new neighbourhoods and in a more organic offerings, are now available that then you wouldn't believe that Walmart would be carrying a significant amount of organic food, but the consumers become, as I said, more educated and more concerned about what they're putting into body and we're seeing that now move not just from the food and beverage sector, but into health and beauty. So people are looking for organic hair care, skin care or, if not, truly organic, at least infused with cocoanut oil and cocoanut water, and it's a very different approach. Then we had seen historically so to finish up. You ve worked in this space and consumer retail since two thousand one. What struck me the most in terms of how consumer preferences have evolved over the years com has. completely changed the way consumers interact with products and vice versa, and it's really turning the model upside down.
and what I mean by that is a lot of manufacturers always thought about the product and having the best product. You still need to have the best products, but now you also need to find the best way to engage with year, end user and for some time. What is the end user- was never a part of the formula, meaning they were thinking of the customer as the retailer I manufacturing product to sell to the retail and retailers going to edit it and select what they think is right for the customer. Now the customer is really the center of all of those discussions and what the consumers want is really paramount. So I think that's probably the most interesting shift that steak
Place and will provide a lot of opportunity both on the retail side, as well as on the consumer side said she'd be good news for consumers. They should get better experiences and presumably slightly better pricing overtime. Price transparency has been the biggest issue for retailers, but also the biggest benefit for consumers as result of the online distribution of information. On that note, I think we'll wrap this up. Thank you, Cathy Ecstatic. That concludes, This episode of exchange, the Goldman Sachs, I'm Jake Seaward thanks for this, this part gassed, was recorded on April twelfth two thousand sixty the information contained in this recording was obtained from publicly available sources and has not been independently verified by Goldman Sachs. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the
accuracy or completeness of the information contained in this recording and any liability as a result of this recording is expressly disclaimed. This recording should not be relied upon to evaluate any potential transaction. Goldman Sachs is not giving investment advice by means of this recording, and this recording does not establish a client relationship with Goldman Sachs.
Transcript generated on 2021-10-15.