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March 25, 2020

Perspectives from a Consumer Lens - Rays of Light Amongst the Storm Clouds

MHT Partners  | Consumer Investment Bank

First and foremost, we hope everyone is safe and healthy. Given the abundance of uncertainty and ambiguity in today’s world, we thought it might be helpful to provide some perspective on sectors of the consumer economy that are doing well, relatively speaking.

Clearly there are sectors suffering mightily right now and net net, there will be winners and losers from a structural perspective once the pandemic settles down and “normalcy” (a relative term) returns.

Focusing exclusively on the good (in part because the bad is widely publicized), we want to share conversations and anecdotal perspectives we are hearing from our clients and prospects:

1.Direct-to-consumer (“DTC”) models, in general, are holding on well. Of course, it depends on exactly what products are being sold and at what price point, but relative to traditional brick-and-mortar, distribution-dependent vendors, DTC-focused models are outperforming. A recent conversation with an “on trend,” plant-based food producer with a sizable presence in traditional grocery, food distribution and DTC reported that food distribution is obviously suffering, grocery is performing well, and DTC is “shooting the lights out.”

More industry-specific (vs. business-model specific) correspondence provides the following anecdotal (and admittedly limited) evidence:

2. Outdoor products manufacturer (100% DTC) – business has been strong as this producer’s older, healthier and active customer base finds themselves with extra time on their hands due to working from home and shelter-in-place restrictions and a general desire to hit the outdoors, “staycate” and indulge in activities that are, by definition, “social distancing.”

3. Pet-related companies (numerous) – the pet sector, which grew through the Great Recession, appears to be holding on well as our four-legged friends are afforded the same status as other members of the family, proving their health, livelihood and entertainment are on par with two-legged members. Pet product vendors and retailers (namely those with e-commerce capabilities) report good, if not very strong performance thus far. A conversation with a brick-and-mortar pet retailer with e-commerce capabilities reports challenges hiring large numbers of new warehouse workers to fulfill orders that are “going bonkers.” From a higher level, one need look no further for evidence of the durability of the pet/DTC space than Chewy’s stock price, up 3% in the last few weeks while the market is down 30%+.

4. Home fitness equipment manufacturer (100% DTC) – business is exceptionally strong, in particular, given social distancing, gym closures, etc. Ability to keep adequate inventory has been mitigated by ability to cost effectively overnight freight and given Chinese factories are back to full utilization. Additionally, ad spend (CPM, CPC) has declined significantly.

5. Traditional gaming company (board games, etc.) – as families hunker down and are “forced“ to interact more than normal, the demand for simpler, and in many respects “comforting“ entertainment (at least for those of us old enough to remember actually playing these games as youths) has increased.

6. Food manufacturer (serving Costco, Trader Joes, etc.) – demand remains very strong from grocery and club channels (the latter was described as “doubling down” on orders). Main concern is having enough factory workers to fulfill demand, “social distancing” on the factory floor (that can entail reworking line configurations) and obvious worker and/or factory equipment COVID19 infection and contamination.

7. Off-price retailer – while suffering from temporary store closures, this business expects to perform strongly in the near term as inventory presently sitting idle in non-off-price retailers will, in some instances, be viewed as “worth pennies on the dollar.” A natural escape hatch for this inventory will need to be off-price retailers who obviously have the customer base and importantly, the warehousing to accommodate.

8. “Retail healthcare” (numerous conversations with healthcare service providers with a consumer-facing angle) – depending on geographic location, the more discretionary the procedure or service, the more near-term deferrals (distinct from a cancellation), based on shelter-in-place mandates, local demographics (e.g., age), etc. Centers for Medicare & Medicaid Services may begin requiring patients to forego any elective / non-essential procedures. Dermatology, dental, orthopedic, Lasik-focused vision and fertility are likely going to take near-term hits (but will likely rebound quickly from “deferred treatment”). Instances of discretionary patients not wanting to leave home and/or go to a medical office now are balanced by telemedicine (providers with these capabilities are differentiated and faring well) and by the recognition of existing or looming shortages of personal protective equipment (which appears to be subsiding a bit). Non-acute retail healthcare services that are nonetheless viewed as mission critical and non-discretionary are clearly performing, but providers face many of the same health risks, albeit perhaps against a less urgent backdrop, as acute care medical professionals do.

MHT Partners, a leading consumer growth investment bank, will remain committed to providing thoughtful insight during this time of uncertainty and welcome further discussion (Craig Lawson, clawson@mhtpartners.com, Patrick Crocker, pcrocker@mhtpartners.com), Gavin Daniels, gdaniels@mhtpartners.com, Tara Smith, tsmith@mhtpartners.com, Tom Gotsch, tgotsch@mhtpartners.com).

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