Our Retail Analyst discusses the key strategies that have
propelled a select few companies in U.S. consumer retail amid a
challenging demand backdrop.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Simeon Gutman, Morgan
Stanley’s Hardlines, Broadlines & Food Retail Analyst. Along
with my colleagues bringing you a variety of perspectives, today
I’ll discuss how some retail businesses are responding to
daunting consumer challenges.
It’s Tuesday, May 14th at 10am in New York.
There have been dramatic shifts within the consumer sector over
the past three years. During the pandemic, we all had to redirect
our spending away from services, such as travel and leisure, to
various goods, which we were able to purchase online and have
delivered at home. Consumer packaged goods, for example,
experienced two years of outsized growth during the pandemic. But
since 2022, consumption has been declining across the value
chain.
For some categories, this dynamic may not be a temporary,
post-COVID phenomenon, but rather a continuation of a
longer-standing secular trend that had started prior to the
pandemic. For example, non-durable goods – such as clothing,
footwear and food at home – were already losing wallet share
pre-COVID. Grocery spend was losing to dining out, as consumers
placed more value on convenience. And although some sectors
experienced unprecedented pricing power between 2020 and 2023,
they’re now seeing this pricing power decline as inflation
moderates.
Against this backdrop, Consumer Packaged Goods companies and
retailers are attempting to find new growth levers in the face of
stagnating – or even declining – sales and decreasing pricing
power. A select few companies in US consumer retail, automotive,
communication services and IT hardware have been able to navigate
the current consumer environment of slowing growth. We believe
there’s a powerful lesson in the combination of strategies these
successful outliers have deployed to reposition themselves in the
face of tepid demand.
For example, these companies are shifting their value proposition
by focusing on products in faster-growing markets. They are also
exiting underperforming areas to optimize their core brand and
product portfolios. They’re streamlining their internal
operations by changing organizational structures, revamping their
supply chains, and using AI to automate processes. All of this
helps to reduce costs and enhance productivity. Successful retail
companies are also looking to alternative revenue sources
and profit pools to grow their businesses, focusing on
higher growth areas within their industries. Discount retail is a
prime example as it focuses on high margin digital media, which
has the potential to lift operating profit margins for the entire
sector. Furthermore, a shift to omni-channel has revolutionized
Retail, by capturing greater consumer wallet share and reducing
delivery costs. And finally, successful companies have
prioritized free cash flow by divesting non-core assets in less
profitable areas.
Businesses that have been able to deploy these strategies have
been rewarded by the market. They have seen their average
12-month price to earnings multiples expand more than 35 percent
over the past five years, meaning that the market's outlook for
these companies is considerably better than it was previously.
Several of these strategies have also led to stronger top-line
growth and margin expansion, which our US equity strategists
identify as the two major drivers of shareholder value across
consumer staples and consumer discretionary.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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