Customer loyalty, consistent revenue streams and high profit margins are driving demand for premium consumer brands among private equity firms, which can help these businesses adapt to changing customer demographics and new technology.
The premium consumer market includes luxury items like expensive vehicles, high-end watches and designer clothing, along with relatively inexpensive offerings such as apparel, lifestyle, and sports and recreation products. The market is defined by dynamism, resiliency and a loyal and passionate consumer base—qualities that appeal to Chicago-based Winona Capital, a private equity firm that has developed extensive expertise in the space.
While the premium consumer market is characterized by high-profit margins and is largely insulated from recessionary forces, those advantages matter little if the products don’t connect with customers. “Great companies capture consumers’ hearts before they capture their dollars,” says Winona Co-Founder and Managing Director Laird Koldyke.
Winona chooses its investments carefully. Growth and profitability are among its criteria, but the firm also pays close attention to the company’s brands. When evaluating an investment, it’s important that a company’s products and services are the best they can be, and that the company knows what it’s doing.
Winona helps its companies create value by accelerating revenue growth, expanding profits and building their brands. “We feel if we do that well, we will maximize the ultimate value of the business for ourselves and the shareholders and the founders of the business,” he says. When it comes time to sell a business, buyers will look for revenue growth, but “they will pay incrementally more if they believe there is true brand power and true brand promise that they can expand upon,” Koldyke says.
“Great companies capture consumers’ hearts before they capture their dollars.”
Co-Founder and Managing Director, Winona Capital
To help improve the performance of its portfolio companies, Winona relies on service providers like audit, tax and consulting firm Plante Moran, which works with Winona and its companies to fine-tune systems, including working capital management, financial reporting and supply chains.
“They assure us that the accounting practices are right, that our tax treatments are right, and that our tax planning is right, and [that] as we get ready to sell a business, we’re delivering a very clean financial company,” Koldyke says.
Tapping into Next-Generation Consumers and Technology
An overwhelming majority of growth in premium consumer goods is coming from younger generations of customers, whose purchasing habits, values and technology literacy are prompting companies to adjust their strategies. “This shift in mindset is pushing companies to really think not only about what they sell but how they sell it,” says Matt Petrucci, partner and transaction services leader with Plante Moran.
Young consumers are less likely to trust large corporations, and often they prefer to buy from niche companies, such as Fat Brain Toys, a specialty toy-maker in Winona’s portfolio. Founded in 2002 in the garage of a husband-and-wife team, Fat Brain is now one of the largest independent toy retailers in the country.
Winona has invested in a number of successful brands, including Monica Vinader, a British luxury jewelry brand with a global footprint that offers “luxury experience at affordable price points,” and Peter Millar, a manufacturer of premium lifestyle apparel, which Winona has since sold.
Koldyke says the proliferation of smartphones has influenced purchasing decisions of young consumers, who now expect the convenient shopping experience provided by Amazon and other large e-retailers. The challenge for brands is tapping into demand and reaching customers, he adds.
Technological change will continue to impact the industry, Petrucci says, adding that advancements in augmented reality will transform the industry through offerings like smart mirrors. “We’re going to start seeing these show up in more retail stores and fitting rooms, he says. “[They] will force the clothing industry to be more and more customized.”
Benjamin Glick is ACG Global’s marketing and communications associate.