High-profit margins and consistent revenue await companies that can successfully develop “the next cool thing” and deliver it to a loyal base of eager hobbyist customers, despite some scaling difficulties and major demographic shifts impacting this market.
Composed of companies that supply high-performance and aftermarket products for automotive, motorcycle and watercraft hobbyists, among others, the enthusiast consumer market has become an ideal investment environment for private equity firms.
Sensing the opportunity, New York-based Monomoy Capital Partners has employed an operationally focused strategy to help companies expand product development, enhance supply chains and reach enthusiasts.
Passionate customer engagement characterizes the enthusiast market, and appeasing them is crucial to success. One way to do this is to give them more of what they want, says Jaime Forsyth, a managing director at Monomoy. The firm invests in middle-market companies, which can benefit from Monomoy’s capabilities for improving their operating systems, processes, general infrastructure and go-to-market strategies.
For one of its former holdings, Holley Performance Products, Monomoy helped improve R&D efficiency to accelerate the pace at which new products come to market. As a result, the company, which manufactures aftermarket automotive products, was able to double its addressable market. “That’s powerful,” Forsyth says.
But with growth comes growing pains. After spending many years cultivating a small but devoted customer base, enthusiast companies face challenges when they try to expand, says Ted Morgan, a principal at audit, tax and consulting firm Plante Moran, which has partnered with Monomoy to support many of its portfolio companies.
“These enthusiast consumers always want the next best thing, which requires players in this market to have a strong pulse on consumer preferences and product development skills.”
Principal, Plante Moran
“When you’re trying to grow from, say, $20 million or $50 million in revenue to $100 million or $250 million or even more, it draws different business dynamics into your operating model,” he says. Entering international sales channels, shifting to a global supply chain and increasing brand visibility are among the difficulties a growing enthusiast consumer company faces.
Discovering the ‘Secret Recipe’ for Growth
Increased customer demand and more available products put pressure on supply chains, a challenge that companies must overcome to achieve profitable growth, Morgan says. One way for suppliers to mitigate this challenge is by adopting flexible manufacturing techniques to support lower volume production runs.
Being sensitive to supply and demand is the most important consideration for investors in this market, he says. “These enthusiast consumers always want the next best thing, which requires players in this market to have a strong pulse on consumer preferences and product development skills.”
Getting the product into the hands of the customer is the next key item to address, Morgan adds. “Advanced supply chain and logistics skills, in particular, are critical as global footprints of suppliers continue to expand.”
Many companies in the enthusiast consumer space are leveraging consumer-interfacing technology as they support and expand their customer base. But others are not, despite the critical role a company’s online presence plays in attracting and engaging younger customers.
Adopting new technology represents a major shift for companies whose marketing efforts have traditionally targeted baby boomers, often through in-person events. “In the past, this may have been a three-day weekend at a racetrack,” Forsyth says, but now the means of engaging enthusiasts has migrated to the digital sphere. It’s why marketing strategies now include communicating with customers on social media, online forums, blogs and other platforms where enthusiasts can share their passion.
“Shifts in the enthusiast consumer market have led some business owners to realize they may not have the skillsets associated with launching a true social media platform with e-commerce and direct-to-consumer capabilities,” Morgan says. “Some of these owners are deciding to sell their companies.”
That trend has opened the door for private equity investors with the expertise to help these businesses compete in the digital age.
Benjamin Glick is ACG Global’s marketing and communications associate.