G2 Capital Advisors is pleased to present its Consumer & Retail industry update for Q3 2022, providing commentary and analysis on M&A and market trends within the Consumer & Retail sectors.
The world’s largest fast-moving consumer goods companies saw robust growth following the global pandemic, and exhibited resilience in the wake of supply chain constraints and the sharp rise in inflation. In fact, the sector not only survived – it thrived, with average sales exceeding pre-pandemic levels. That said, as sentiment has coalesced around a near-certain downturn, performance is not surprisingly bifurcating between staples and discretionary goods, with prospects for the latter turning sharply.
High inflation, supply chain issues, and increasing recession worries are all factors pressuring the consumer discretionary sector, which already faces the greatest sensitivity to economic cycles. In Q3 2022, discretionary goods companies saw increases in two risk criteria – lowered corporate guidance and greater short interest. Companies in the sector that lowered guidance doubled vs Q2 and increased ten-fold vs Q1, with short interest surpassing all other industries.
Consumer staples, on the other hand, held up better than the broader market, consistent with prior downturns. While the S&P tumbled 25% through Q3, consumer staples stocks fell less than half that, playing their traditionally defensive role. Nonetheless, consumers are now choosing what and where to buy differently, as the pandemic shifted a growing portion of food sales online. Moreover, while many brands enjoy pricing power over private label products, they are nonetheless vulnerable to premium house brands from the likes of Whole Foods and Trader Joe’s.
After years of grappling with the rise of online shopping, brick-and-mortar retailers are posting some of their best results, with retail vacancies at a 15-year low and plans for expansion underway as consumers continue to venture out post-pandemic. In fact, sale growth among physical stores is outpacing that of e-commerce, as the pandemic forced companies to expand and better integrate their omni-channel offerings. While still vulnerable, the retail industry nonetheless appears better-positioned than in prior downturns.