The good news for American industry is that the US consumer continues to spend, despite the trials and tribulations of Covid-19. The bad news is many of these products are taking a very different path to market. This has caused a lot of disruption and financial distress.
Consider food expenditures. In 2019, Americans spent 9.5% of their disposable income on food. This was divided by purchases of food consumed at home (4.9% of disposable income) and food consumed away from home (4.6%). An appropriate supply chain evolved to meet this demand, ranging from grocery stores to food service distributors and various restaurants. Roughly half of consumer spending flowed down each channel, enhanced with relevant value added services.
When the pandemic struck, it didn’t reduce aggregate demand for food. The same numbers of people have continued to eat on a daily basis, notwithstanding a few extra drinks and snacks. What changed is the distribution channels and – in some cases – the services bundled into the offering. Instead of enjoying lunch at a nice restaurant (with table service) many of us are wolfing down a sandwich in our basement as we hop between Zoom meetings. The ingredients of that sandwich weren’t moved by a food service distributor, they came to market through the grocery channel. The net effect of this change is a closed restaurant and a packed grocery store.
On a related note, consider the impact of these changes on the manufacturing supply chain. While the ingredients inside a consumer package may be the same as the institutional version of that product shipped to a food service customer, the packaging equipment is very different. We had too much capacity to produce institutional products and not enough for the grocery stores. The product mix shifted. This started to create bottlenecks in the supply chain.
Finally there’s the challenge of the retail environment itself. Prior to the pandemic, interactions with customers were not perceived as a business risk. In fact, it was generally good for sales. People like to buy from people. The topic of keeping employees separate from customers and customers separate from each other wasn’t on the agenda. This mindset cascaded down to basic interaction points in the retail experience, such as the touch screens at the checkout line.
And then, in the course of a few weeks, everything changed. Workers abruptly shifted from office roles to working from home. E-commerce boomed. And consumers abruptly redirected their attention and spending from group activities to more individualized pastimes. The Home Improvement industry had a strong spring, fueled by consumer spending redirected from an afternoon at the ball game or an evening at the local bar. Retailers and professionals rebuilt their businesses to cope with the new reality, helping keep their clientele safe from the virus.
Leveraging a culture that already embraces change, private equity portfolio companies were early movers in helping American retailers adapt to the new environment. One of these is PowerHouse Retail Services, a portfolio company of Lincolnshire Management. They are a leading player in the retail remodeling and facilities management space. Needless to say, business has been brisk for their retail services unit.
With over thirty years in the private equity business, this isn’t the first time that Lincolnshire Management has had to lead their portfolio companies through an economic storm. They’ve been invested in the middle market through the dot-com crisis, 9/11, the housing crisis, and other tumultuous periods. We were able to catch up with their leadership to explore how their investment model was helping PowerHouse Retail Services create value for their retailer clients.
Investing From a Position of Strength
While you can’t predict when and where the next crisis is coming from, it helps to have your house in order. Lincolnshire positions their companies for success by selecting strong managers, equipping them with a well financed balance sheet, and offering easy access to operational advice. Lincolnshire fields a full operating advisor team, from C-level executives down to the Associate level. This has been one of the firm’s core competencies and a key source of value creation in the past.
“Our broader goal is to evolve our relationship with our portfolio companies into being more than a mere provider of capital,” commented Michael Lyons, Lincolnshire’s president, ”Our investment team does its part to ensure a deal is reasonably priced, using as little debt as possible. Once we’ve got that settled, we put a high focus on building the right relationships. There’s tremendous value in partnering with the right people and giving them the tools to win.”
When Your Customer Needs You, Pivot Quickly
As the crisis started to unfold, a large share of the burden of making a retail store safe for business fell upon the facility managers at these national chains. The team at PowerHouse Retail Services listened closely to their customers and stepped forward with solutions.
Leveraging capabilities from within their existing network of building services contractors, Powerhouse rapidly assembled a package of services in March 2020 to help protect a building and its people from coronavirus. Their offering covered everything from redesigning workspaces to installing protective Plexiglas barriers in retail store environments to protect employees from the public. Powerhouse’s technology platform for managing big retail rollouts proved invaluable in this effort, offering clients a way to manage projects at a national scale.
Looking beyond remodeling, Powerhouse recruited a group of subcontractors to offer a package of interior and exterior sanitization services. These partners helped their clients meet a growing need for deep cleaning and disinfecting work areas where an employee had tested positive. The offering was an immediate success. Building on this momentum, they found a technology partner with a unique chemical for preventing coronavirus infection from surfaces. This new program launches this fall.
“We’re very pleased with the progress our partners at PowerHouse have made in creating a unique offering for their retailers”, Philip Kim, a Lincolnshire managing director, commented, “In fact, we see a lot of growth potential in this space. We think a similar offering could create a lot of value for customers in healthcare and lodging.”