Consumer spending—and the psychology behind it—is a perpetual puzzle for investors. Before the Jefferies Consumer Conference, we spoke with Jim Walsh, Vice Chairman and Global Head of Consumer, Retail & REGAL Investment Banking, who has over 30 years of experience in the consumer sector. He shared his thoughts on how U.S. consumers are doing and companies’ opportunities and challenges in the current environment.
Q: What is the most important trend in today’s U.S. consumer market?
JW: In the U.S. consumer market, a critical factor that can set a business apart is a truly unique, high-growth, high-volume offering with an attractive value proposition for consumers. If you can effectively communicate this distinctiveness, you will likely attract a diverse range of buyers.
For others, deals will be harder.
Q: A key economic storyline of the last couple of years in the United States has been consumer resilience in the face of inflation. Is that still the case
JW: The consumer probably isn’t feeling as good as you’d think. Marginal consumer spending on luxury items such as restaurants has seen a pullback. Government dollars flowed strongly to the consumer for several years, and now those dollars have been shut off. But where a company has a unique proposition to the consumer—Dutch Bros, Wingstop or Texas Roadhouse, for example—you see a great following across many demographics. For companies with positive traffic within retail and consumer, the valuations are going up dramatically because they’re outpacing the marketplace. So, I would say you have to show consumers something they want to have at a manageable price point. Then they will come in.
Q: If I am a consumer business wanting to fuel my next stage of growth, where should I be looking?
JW: If you are a differentiated consumer business, the public markets are wide open to you now. If you can demonstrate something like 10% unit growth and positive same-store sales primarily driven through traffic, you can definitely get a premium in public markets. Cava’s 2023 IPO, which was one of the most successful of the year, was a great example. These kinds of companies are getting a better premium in public markets because investors can look to the future and have a discounted cash flow analysis that says, “Hey, we could pay for this today, but given these trends, we can look out three or four or five years and see great results.”
If you are a smaller-cap company that is just starting to show significant growth, you might find more willing buyers on the private side, where there is also a fair amount of capital to invest.
Q: If I am the leader of a company that does not meet those desirable growth metrics, what options are available to me to help fund the next stage of my growth?
If you can’t go to public markets and there is a gap in what you can do on the private side, you might want to think about preferred capital. Basically, every private equity program is looking for preferred capital opportunities, even if they don’t focus specifically on the consumer sector. That’s where there is a lot of liquidity.
And then you have a lot of companies that are not firing on all cylinders. Those are the ones that strategics are looking at where they see the ability to cut costs and get scale from synergies and technology. We’re seeing a fair amount of activity in cases like that.
Q: You have been in the consumer banking field for several decades. Aside from technology and the way it is incorporated into everything, what is it that has changed most about the way businesses grow and get capital?
JW: It’s just a far more crowded environment to bring something new and attractive to the consumer. Thirty years ago, there wasn’t as much differentiation available to the consumer, which created a wider opening for an innovator to develop a unique product or business model. That’s harder to do today, and that’s why we haven’t had many companies go public in the last few years. They are just not differentiated enough in the marketplace, and consumers have plenty of options that allow them to be selective in what they shop for or where they go to eat.
Now, there are examples where talented entrepreneurs introduce something totally new, like what Marc Lore has done with the food delivery service Wonder. But, on balance, there is just a higher bar for companies to clear to show that they have an offering that is truly differentiated.
