Hot today, gone tomorrow. So is the lifespan of most consumer products, and anyone that has dabbled in the space knows just how unpredictable the sector can be. It’s the reason some products will go from its having their own display at a Wal-Mart entrance to a few months later being relegated to one of the metal bins at a nearby dollar store.
Private equity shops have frequently moved in and out of the consumer product space, and for every success there has seemingly been a parallel collapse. Main Street Capital saw its Stiffel lamp business fall into bankruptcy protection, AEA Investors could not keep Rand McNally from buckling, and Kohlberg Kravis Roberts & Co. could only watch as World Kitchen sank into bankruptcy protection. Questor Management, meanwhile, experienced the same fate with Schwinn/GT and Huron Capital Partners was just as stymied in its investment in World Bible Publishers.
Removing the Warts
Lest there be any doubt, the sector can certainly leave some bruises. However, TSG Consumer Partners (f.k.a The Shansby Group), since its founding in 1987, has targeted the space exclusively and managed to emerge from each of its consumer product investments in the black. The firm has never booked a loss on any of its deals, despite battling through burps in consumer spending, consolidation among the retailers and two economic recessions. Not to mention, the population has gone from wearing Vuarnets, drinking Jolt Cola, and playing with Rubik’s Cube keychains to today wearing Oakleys, drinking Red Bull and playing Tetris on their cell phones.
It’s safe to say you need to be up on the trends to succeed in the space, and TSG has proven to be a trendsetter among its PE peers. The firm was the first investor in the natural food space, the first in the functional food category, the first in the Mexican-American food space, the first to create a successful rollup of orphaned brands, and one of the first investors in the refrigerated food space.
This trailblazing was made possible thanks to TSG being among the first private equity groups to focus entirely on one specific niche. That, in turn, has made the firm the buyer of choice for a number of companies in the consumer product sector and has given TSG the inside track on new industry trends.
“We pride ourselves on finding the emerging opportunities in the space… There are a lot of firsts in our portfolio, and that is a result of us being as focused as we are on the consumer segment,” TSG CEO and Managing Partner Charles Esserman says. “We do a lot of research and thinking on the sector, and because of this work we have the capability to understand the next opportunity with great growth, great margins, great branding prospects and that will appeal to strategic buyers.”
While TSG has had a number of big wins, there are a few that stand out. Take the firm’s investment in Mauna Loa. When TSG acquired the business it was bleeding $10 million in losses a year, but the investors still saw the company as a dominant player with a number of growth opportunities that weren’t being realized. The firm first expanded the brand from just nuts into the confectionery products market, and used the Mauna Loa brand to sell macadamia cookies and chocolate covered nuts. The firm expanded distribution in North America by almost 100%, while at the same time managed to rein in the costs. Last year, TSG sold the business to Hershey Foods Corp. in a $130 million deal. TSG had paid just $30 million for the company four years earlier.
Meanwhile, TSG’s investment in Medtech demonstrated just how hands on the group can get when working to build a company. Compound W, Medtech’s wart remover brand, had been stagnating under Wyeth when TSG bought the company in 1996. Once TSG acquired the business (along with 11 other over the counter brands), the firm pushed hard to make the product evolve, and Compound W soon came out with medicated pads and later unveiled a cryogenic solution that freezes off warts. Additionally, TSG revamped the product’s packaging, giving the brand a fresher look. With each successive new product for Compound W, TSG was able to goose the price point, which improved both profits and margins for the once dusty brand.
If TSG is making it look easy, buyout shops would be wise to do their homework before jumping into the consumer product space. “Every company has bumps along the way,” Esserman says. “Even the most successful companies have situations like packer issues, distribution mishaps, things such as a fire in a manufacturing plant.”
Its Biggest Rebranding Initiative to Date
With all its experience in branding, TSG has gone on the initiative to rebrand itself. The firm started out with the name Montgomery Consumer Fund as a captive in Montgomery Securities in the late 1980s. Then soon after its launch, the firm changed its masthead to The Shansby Group, coinciding with its spinout from the investment bank. Now, with its new name, TSG is trying to differentiate itself from the generalist firms while at the same time demonstrate that the partnership is evolving into an institution above and beyond the buyout shop launched by Gary Shansby and Esserman almost two decades ago.
Alongside the new name, TSG also announced that Gary Shansby would assume the role of chairman at TSG while Esserman would become the president and CEO. Each will also remain as managing directors.
Esserman dismisses that the new moves were spurred in part by succession planning and says that it would be a misconception to think otherwise. “Our roles and responsibilities have changed over a long period of time,” he says, noting that the new titles merely reflect how those responsibilities have morphed over the past 18 years. He adds that “Gary is very much still involved in our business.”
Looking ahead, along with the name change, TSG is expanding its franchise. The firm recently hired Golub Capital Vet Clarence Schwab, and the firm is breaking ground on its first New York office in the coming months.
While TSG is expanding its reach across the U.S., the firm’s focus will remain as narrow as it has always been. “We’ve gone outside of the branded consumer sector a couple of times early in our history, and that is when we lost some principal [in certain investments],” Esserman says. “But in terms of the consumer products space, our average return is approximately 60% per year, and the lowest return we’ve ever realized over the past 18 years is 8 percent. We’ve made some 40 other investments in the sector and they’ve all produced positive returns. It’s hard to replicate that track record of great returns and low standard deviations in other industries.”
TSG Consumer Partners