5 May 2020

Coronavirus: Changing consumer behavior and how businesses are responding to the crisis

Euan Rellie, Karen Cheung, Vivian Ren

Since our last report, COVID-19 impact on the Asian consumer sector, in February 2020, the epidemic has become a global pandemic. Extended lockdowns and stringent social distancing measures have upended consumer behavior and lifestyles, globally.

What new consumer habits are developing, and which are likely to become long term themes? How are businesses around the world responding to the crisis, to position themselves as relevant in the longer terms? What deal-making and private equity activity do we see, in Asia and across our markets?

The BDA Consumer & Retail team is pleased to share our update:

Coronavirus has changed consumer behavior

Extended lockdowns and stringent social distancing measures have upended consumers’ behavior and lifestyles, globally.  Even before COVID-19, consumers were already rapidly changing and evolving their purchasing patterns. The pandemic has accelerated this process, and brought about some dramatic new habits.

Many of these new habits will stay, potentially for the long term, even when the pandemic is over.

Consumers have been stockpiling supplies of not only staple grocery items, but also healthcare products and medicines

Non-essential items such as clothing, jewelry and beauty have seen significant declines.

The accelerating growth in online shopping will spur development in adjacent areas, notably digital payment and last-mile logistics. Paidy, a Japanese fintech company facilitating online payment without credit cards, raised US$48m in a Series C extension from Itochu. Ninja Van, a Singapore-based last-mile logistics provider has raised US$124m in Series D funding.

Focusing on self-care and home improvement

As the lockdown continues, there will be an increased focus on a broader concept of wellness – cleaner ingredients, organic and natural food, physical fitness, and mental rebalancing.

Online demand for cooking and mental health content has grown rapidly as consumers are developing an expansive view of wellness. Online searches for cooking and baking-related terms are surging. As consumers become more mindful of their food choices, the focus is increasingly on less processed food with more natural ingredients including organic food.

Yale’s happiness course, “The Science of Well-Being”, has attracted 1.5 million subscribers since mid-March, compared to 500,000 over the last two years. Meditation apps have seen a spike in downloads as people struggle with anxiety. Moshi, a sleep and mindfulness app for children, has raised US$12m in Series B funding.

With travel and social events curbed, consumption amongst millennials is shifting back from experiences to purchases, centering around the home.

The broader trend will reflect higher expenditure on home furnishings, kitchenware and appliances. Work-from-home arrangements may also lead to a permanent shift in workplace format, and change how consumers design and use their home space.

Virtual classes and home fitness regime

Fitness clubs and gyms are, for now, closed in most countries. Consumers are turning to virtual fitness classes and investing significantly into home fitness gear, which will fundamentally shift and define the fitness sector in the longer term.

Adidas registered record sales of yoga mats in Q1 2020. Aibi, a Singapore-based producer of treadmills and elliptical trainers, saw sales increase by up to 300%. Silver Lake has invested in Equinox, the majority shareholder of SoulCycle, to help build up its digital platform and to introduce a SoulCycle at-home use bike to tap into this trend.

To acquire and retain users, gyms and fitness instructors are going online, first offering free workout content, and gradually exploring ways to monetize remote fitness experiences. Mirror, a technology that streams fitness classes, has reported a rush of new demand.

Personal trainers are finding ways to reach their existing clients through virtual classes on Teams and Zoom. Other platforms have dropped subscription fees. Nike is offering its NTC Premium service, a platform for workout videos streaming and training programs, for free.

Changing business behavior to cope with COVID-19

To keep up with the drastic shifts in consumption behavior, and in anticipation of the future consumer, companies have taken significant measures to boost revenue, manage costs and improve operational efficiencies.

Food service companies have accelerated their shift towards online delivery and heavily promoted take-out options. Putien, a Singapore-based Chinese restaurant, launched a Takeaways Specials promotion, offering their most popular dishes at reduced prices – unheard of for a one-star Michelin restaurant.

Emerging brands across the world, from activewear by Lorna Jane and Alo Yoga, to bedding products by Brooklinen, are offering aggressive discounts to boost revenue. Others, including Apple, Sephora and demi-fine jewelry brand, Monica Vinader, are extending free return periods.

Retailers are demanding rent reductions. Related Companies, a major US real estate developer and owner, reported that “only about 25%” of its retail tenants paid rent in March.

As companies navigate this unprecedented period of difficulty, market participants are exploring how to optimize their supply chains and cost base. Some will undoubtedly emerge stronger while others will falter and eventually go bust.

How soon will consumers come back post COVID-19 and which companies will thrive

Consumer spending will rebound post-coronavirus – the question is how fast and how far. We are already seeing evidence of pent-up demand and delayed consumer discretionary spending. 

When Hermès reopened its second largest Guangzhou flagship store, it generated US$2.7m, the single highest daily revenue for a single store in China, offering a tantalizing glimpse into one possible form the economic recovery might take.

Wealthy customers bought non-COVID essentials: tableware, shoes, furniture and leather goods. Some spent hundreds of thousands of dollars on crocodile leather goods – suggesting that the pandemic has left some high-end customers ready to engage in conspicuous retail therapy.

Big corporates with sizeable cash reserves and access to extensive cheap capital are best placed to respond to crises. Their strong balance sheets will help them navigate a prolonged global disruption and gain market share.

Small and Medium Enterprises (SMEs) with limited cash balances are more vulnerable. Although interest rates are low, smaller companies are struggling to access financing as risk aversion sets in with the banking community. Some are desperately looking for rescue funding to stay afloat; others are letting their employees go.

Deal-making and private equity during COVID-19

Travel restrictions and local lockdowns have significantly slowed down the M&A market.

Most companies have redirected their management teams to focus on preserving cash rather than pursuing acquisitions. Executives are taking voluntary pay-cuts, furloughing or laying off staff.

Executives are also being asked to provide updated business plans, re-run budgets and assess liquidity needs, factoring a U-shaped rather than V-shaped recovery.

Mid-market private equity players are being more cautious for now, tending to their own portfolio companies, drawing down credit lines, pruning costs, and preparing for a longer period of subdued trading.

However, with the private equity industry sitting on a  record cash pile of US$2.5tn across all fund types, according to Bain & Co., some big players are making counter-intuitive, counter-cyclical bets. They are actively seeking deals across the industries hard-hit by COVID-19, such as the travel, entertainment and energy sectors. Silver Lake and Sixth Street Partners invested US$1bn Airbnb in April, as an example.

Some western private equity firms are being opportunistic and have shifted their focus towards taking advantage of distressed opportunities and making PIPE investments, into companies who need cash urgently. Silver Lake, Advent, KKR and Apollo, for instance, see the chance to acquire assets at much cheaper prices than last year. They will move opportunistically and aggressively.

While western players have started to move forward with more confidence, we expect Asian private equity players to follow quickly.

True Capital, a European consumer private equity player, has taken a 50% stake in fashion brand Hush, a UK e-commerce brand with US$75m revenues, focused on casual womenswear, including pajamas and loungewear. Hush claims an agile, digital-first business model, loyal customer base and relevant, contemporary product range. The CEO of True Capital, Matt Truman said: “We think highly profitable, predominantly direct to consumer brands such as Hush are the ones that will emerge in best shape from this current crisis… we’re very much open for business and excited about the opportunity ahead of us.”

We are also seeing global rescue investment in the most troubled sectors. 

Engage Brands, a US operator of Pizza Hut, Checkers & Rally’s franchises, has acquired restaurant chain Boston Market from Sun Capital Partners. The restaurant industry is facing extreme challenges. Social distancing is restricting restaurants to take-out and delivery offerings only, and chains have seen a drastic drop in sales. “Engage Brands brings an enthusiastic, experienced, and successful ownership group to Boston Market, as well as access to resources that we need to continue to operate our business in this challenging environment,” said Eric Wyatt, CEO of Boston Market.

Steiner Leisure, an L Catterton affiliate, alongside funds advised by Neuberger Berman, has invested US$75m to support the management of OneSpaWorld Holdings Limited (NASDAQ: OSW), a global provider of health and wellness services and products on-board cruise ships and in premium destination resorts around the world.

L Catterton has also made a significant investment in ETVOS, one of Japan’s leading natural cosmetics brands, to bolster growth by expanding store-footprint and enhancing customer experience. Founded in Osaka in 2007, ETVOS provides 100% made-in-Japan mineral-based makeup products.

These trends will come to Asia – though Asian private equities are remaining more conservative for now.

BDA still closing deals

Notwithstanding the pandemic, BDA continues to help clients close transactions, including:

-The sale of Sichuan Huiji Food, a leading branded, better-for-you snack company in China, to Grass Green and New Hope Group

-The sale of Thinh Phat Cables and Dong Viet Non-Ferrous & Plastic to Stark Corporation PCL of Thailand

-The sale by Henkel of its Asian electronic cleaning chemicals business to Nippon Kayaku, a Japanese specialty chemicals company

-The acquisition by Rich Foods of the outstanding 50% equity in its Indian JV, Rich Graviss, a market-leading bakery ingredients business

We believe transaction activity will bounce back once the virus is contained. Opportunistic investors, particularly private equity firms who are holding record dry powder, are eager to find deals at the right valuation.

Investors will favor recession-resilient and defensive industries that will withstand the market downturn.

Sectors such as technology, healthcare, business services, essential consumer supplies, EdTech, and O2O businesses will receive increased attention

Deal valuations will be somewhat subdued for the coming months. The public markets have seen a lot of volatility as a result of uncertainty and panic selling induced by COVID-19.   Some major stock markets dropped by more than 20%, signaling a potential adjustment to company valuations, at least in the short term.

We expect to see more domestic rather than cross-border deals done in the near-term, until travel bans and prolonged lockdowns in major cities are lifted.

Download the full report

Contact the BDA Consumer & Retail team

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 24 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

BDA Partners has strategic partnerships with William Blair, a premier global investment banking business, and with DBJ (Development Bank of Japan), a Japanese government-owned bank with US$150bn of assets.

US securities transactions are performed by BDA Partners’ affiliate, BDA Advisors Inc., a broker-dealer registered with the Securities and Exchange Commission (SEC). BDA Advisors Inc. is a member of the Financial Industry Regulatory Authority (FINRA) and SIPC. In the UK, BDA Partners is authorised and regulated by the Financial Conduct Authority (FCA). In Hong Kong, BDA Partners (HK) Ltd. is licensed and regulated by the Securities & Futures Commission (SFC) to conduct Type 1 and Type 4 regulated activities to professional investors. www.bdapartners.com

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