Source: MSCI

The most commonly cited groupings that relate to the consumer products industry are the GICS “Consumer Discretionary” and “Consumer Staples” sectors. But these groupings include consumer services (housebuilding, cruises, casinos and restaurants), products that are not CPG, such as automobiles and CPG categories that don’t compare well to others, like tobacco.

So looking at the performance of, say, the Consumer Discretionary sector and taking it as a barometer for the consumer products industry does not make a lot of sense. Inferences about private CPG valuations based on the earnings multiples of companies in the Consumer Staples sector are equally unconvincing.

Improvements

Some firms have made progress in this area. Strategic finance firm Drivepoint has created a basket of 23 North American public companies, all of which own consumer product brands that sell via the DTC channel to varying extents. Their DTC benchmark index tracks the performance of this basket of companies over time. They recognise the limitations in doing this, but overall this basket is a much more relevant comparator for private DTC brands than any of the GICS sectors or sub-industries.

A Bespoke Approach

With more data, it’s possible to create a basket of companies that is far more relevant to a particular DTC or retail brand and is therefore a much better comparator. To do this, we need to understand each of the public companies in the consumer products space, their business models, their channels, the categories they operate in and even which brands they own.

Then we can answer questions like:

• Which public companies own at least one footwear brand? How have the valuations of this group changed over time?

  • What if we exclude luxury brands from this analysis?

  • What if we exclude companies with >$2Bn market cap?

• Which publicly-traded companies are a good proxy for my wellness brand? What is the trend in their valuations?

  • What if we exclude those who do not own any nutritional supplements brands?

  • What is the difference in valuations between those selling consumables vs those selling durables in this sector?

Hahnbeck does this for its clients. An understanding of the truly relevant public market comps (and trends) is one component of a comprehensive valuation model.

The DTC & CPG Public Company Universe

DTC healthcare brand HIMS would not be included in either the Consumer Cyclical & Consumer Staples sectors

For example, in the North American public markets (including OTC markets), at the time of writing there are 474 companies in the CPG space. Within this universe, 36 are DTC brands, which means the DTC channel (their own website) is their predominant sales channel*. There is substantial variation between them. Of the DTC brands, only half have enterprise values of greater than $100m and only five of them have enterprise values of greater than $1Bn.

We will be exploring the publicly-traded DTC brands and the wider CPG space in a series of blog posts, looking at questions like:

• How important is profitability in the valuation of DTC brands? How has this changed over time?

• Are specific product categories associated with superior performance, or higher valuations?

Making inferences that will be useful to the owners of privately-held retail and DTC brands.

* Note that many companies report retail sales from company-owned stores within their definition of “DTC”, which causes most lists of “DTC Brands” to accidentally include many businesses that are not actually DTC brands at all. We have excluded these. We have included companies where the DTC website is the largest channel.

How To Interpret Public Comp Data

For the fast-growth DTC and retail brands that are Hahnbeck’s current and future clients, the most relevant insights from this data relate to valuation. Using public market data in the valuation of private companies is not straightforward - it is best to ask the advice of an M&A advisory firm like Hahnbeck to help you with this. But here is a summary, expressed a list of “Do’s” and “Don’t’s”:

Do:

• Use a relevant basket of comparables

• Scale the valuation metric to account for size, market position, geography, brand equity and other factors

Don’t:

• Use only one (or a small number of) comparables

• Expect that the same earnings multiple applied to a large public company is applicable to a small, privately-held one

• Overstate the relevance of short-term changes in valuation. We’ve seen examples of people tracking small changes in the valuation of a basket of comparables and suggesting that each subtle shift in valuation (each month or each quarter) implies a change in the valuation of privately-held DTC and retail brands generally. This is false

• Ignore the bigger picture

Many factors can influence the valuations of privately-held brands, not least of which is the acquisitiveness of the market (which can be quite different to the market for publicly-traded securities). There is only so much that can be inferred from public market data. In particular, understanding the buyers is critical in understanding the valuation and saleability of a given privately-held DTC or retail brand. Knowledge of private market deal terms and valuations is also critical.

In summary, public market data can be very helpful in understanding market dynamics and can contribute meaningfully to private market business valuations, if interpreted correctly and used in combination with other sources.

If you would like guidance on the valuation and saleability of your DTC or retail brand, or strategy in bringing it to market, Hahnbeck can help. Our insight is tailored to clients in the $2m to $15m EBITDA range. If your business falls within this range, please don’t hesitate to reach out to us at info@hahnbeck.com for a confidential discussion.