Corporate

To take a closer look at how the consumer goods and retail sector works, Andrew Apfelberg, Co-Chair of the Branded Consumer Products Industry Practice Group at Greenberg Glusker weighed in for a discussion with the Los Angeles Business Journal.

How would you describe 2018’s overall climate for retail in Southern California?

2018 will continue the evolution of retail from a traditional brick-and-mortar experience to an in-person/ on-line hybrid. I expect on-line sales to expand as manufacturers are increasing their direct-to-consumer emphasis and the delivery cycle is being shortened each day. Traditional stores will likely pivot to more of a “showroom” model (as Restoration Hardware has done) or a “concierge” model (as Nordstrom has done). I am not bullish on shopping malls but think that neighborhood retail centers will flourish (as will stores like ULTA that built a strategy around them).

What are the main challenges and opportunities facing retailers and manufacturers of consumer goods doing business in California compared to other states?

The main challenge is, in actuality, the main opportunity. California is long known for its employee-friendly environment, consumer protection and push towards transparency (in ingredients, animal testing, manufacturing methods or otherwise). This certainly increases the costs of production which can be a challenge to a new product being developed or an existing product maintaining healthy margins. However, it is exactly this sort of product that the consumer (especially the upper-middle class parent of young kids and the millennial) is embracing and seeking out. Therein lies the opportunity. If a manufacturer can legitimately position its product as being in alignment with the organic, non-GMO, Fair Trade, cruelty-free type sensibilities of this customer base, they will have a loyal following that is willing to pay a premium. A perfect example of this is COOLA, which puts out an amazing sun protection product and is based in Southern California.

What sectors within consumer products are performing particularly well and why?

Luxury brands and prestige products continue to do well. With more disposable income than at periods in the past and more product information at their fingertips, the consumer is willing to spend more to get a better product. The smart manufacturers are making these more accessible (whether by making smaller sizes or through different distribution methods). These brands tend to better understand the impact of consumer knowledge about their products and real-life product reviews. In that kind of universe, the consumer can get validation that the money being spent is worth it. Hourglass Cosmetics has done a particularly good job with this. The future trend is going to favor luxury products where consumers continue to spend money but focus that spend on a few products that matter rather than a lot of products that don’t. Another sector that may surprise people is automotive. This spans from aftermarket parts to car care products. Autos are continuing to be a form of personal expression and identity (especially in places like Southern California). As such, consumers are willing to spend real dollars to craft such expression or identity. As with other sectors, the products need to be high quality, well branded and readily accessible. I really like what Smartwax and Chemical Guys have done in this space.

Are there other sectors bubbling up under the surface that you think will see a surge in the near future?

One of the sectors I am most optimistic about is what I would characterize as the “wellness movement.” By that, I mean a product that helps a person to be healthier physically, emotionally, in appearance or all of the above. In the past, there was a focus only on that last factor and, in a sense, beauty was only skin deep (whether we are talking about apparel, beauty or food/beverage). In contrast, today’s consumer recognizes that things don’t work in isolation. By that I mean that what one eats and drinks is interrelated with what one uses as a topical on their skin and what they wear. When all those sync up, it can be a powerful and highly effective combination. Add on top of that a charismatic founder who is knowledgeable and leads by example and you have a real exciting opportunity. One of my favorites in this space is MoonJuice. Another sector that people don’t often talk about in public but which already is a massive business is cannabis related products. There has been strong demand for hemp-based food/beverage products and apparel as well as CBD topicals. I am proud to have helped the Bob Marley estate establish one of the first branded cannabis strains and accessories in the world as well as their forays into the beverage and consumer electronics spaces. With the recent legalization of cannabis in California and a handful of other states, I see this area expanding rapidly, especially for higher-end products.

How have recent trends in consumer behavior and purchasing habits affected the consumer goods industry?

People are strongly preferring to shop from home or in neighborhood centers rather than shopping malls. This has led to a sharp increase in direct-to-consumer strategies and the development of high quality products that are easy to ship. Additionally, I am seeing more product specialization and associated branding to carve out a “niche” in the market. Companies are increasingly trying to be best-in-class at a more narrow type of product category instead of being all things to all people. In fact, some forward-thinking companies (such as First Lite) have moved almost entirely in that direction.

What are we seeing on the M&A front?

There is significant demand for high-quality companies. They are finding themselves with many suitors, premium valuations and seller-favorable terms. Private equity funds are increasingly looking to establish a relationship with premium brands earlier in their lifecycle. Strategic buyers are willing to come in with strong offers to get companies that bolster their product offerings, have strong brand recognition and for which there are potential synergies to enhance profitability. Both types of buyers are placing increasing importance on a company’s social media presence and proprietary “content” and related media. As a result of these and other factors (such as increased consumer spending), branded products are doing better than non-branded. In my time as an investment banker and as an attorney I don’t think I have ever seen such vibrant M&A activity for consumer products.

What are some of the best ways for a retailer to build its brand and elevate itself from the competition?

Using a public figure for a license, endorsement or brand ambassador is an incredibly powerful way to differentiate a brand. The company immediately announces to the world who it’s demographic is and what it stands for. If done right, there is instant credibility with a significant sector of the buying community and a sense that the purchase will help the admired celebrity or athlete. It also can give the product increased exposure into aspirational demographics through the personal promotional efforts of the celebrity. Consumers increasingly want to directly associate with their favorite public figure or to emulate in this way the life led by such public figure. Companies increasingly want to co-opt the image and loyal following of the public figure to build goodwill and drive almost immediate sales. Celebrities and athletes with strong social media presence are among the most desirable. I helped OPI establish and run such a program and it worked very well both in the eyes of the consumer and potential acquirers (including COTY who ultimately did buy them). Just as important, due to the exclusivity provisions contained in these agreements, it is one of the very few times there are real barriers to competition. During the exclusivity period, none of the competitors can get the brand association with such public figure. Interestingly, many of the deals with public figures have included them making financial or other investments which has further closely tied their interests with that of the manufacturer.

What are some of the best practices for a branding or endorsement campaign promoting a consumer product?

The single most important thing is having true alignment between the public figure and the product/manufacturer. Unless the association is authentic and about more than money, it will not resonate with the public. In fact, it will likely backfire. The second more important thing is for both sides to be clear in their expectations and desires over the length of the campaign and take into account all the different ways that such expectations could get frustrated. If the public figure and the manufacturer have a close working relationship and goals of mutual benefit, you can overcome almost any obstacle and, in fact, will find opportunities that were not apparent at the time of signing the contract. A last thing to consider is for the company and the celebrity to be open and transparent with one another and bring the other “inside the tent.” By so doing, each side will better understand the other’s objectives, concerns and ways of doing things and be able to adapt or encourage innovation or additional partnership opportunities.