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CEOs

3 Things Investors Look for in a Consumer Goods Company

A strong management team. A clear path to growth. Financial stability. These are traits investors look for in companies, regardless of industry or business model.

For investors interested in consumer goods companies, there are additional factors that can make or break a deal. We talked to Pierre LeComte, managing director at TSG Consumer Partners, to get a sense of how the firm evaluates consumer goods companies. The firm’s notable investments include PopChips, Vitamin Water, Smashbox Cosmetics, and Pabst Blue Ribbon.

Here are three questions TSG considers before making an investment.

1. Is distribution strategic?

LeComte says companies should look to diversify their customer concentration. However, he notes that “you don’t have to be everywhere, but you do have to sell really well where you are.” He urges companies to think carefully about their strategy for introducing their brand into new places. For example, for beauty care companies, “don’t just go into Ulta and Sephora as soon as you can. Think about when your brand will have the ability to achieve the best presence possible. Be strategic about how you deliver and supply those accounts.” For example, perhaps entering Ulta one year and Sephora the next will enable your company to merchandise and devote resources successfully for a successful launch in both stores.

2. Does the brand inspire an emotional connection?

“There are very few barriers to entry” in many consumer goods categories, LeComte notes. “You could start a peanut butter business out of your garage today if you wanted to. But ultimately, there’s very limited shelf space. The biggest challenge as an investor is picking the winners.”

Differentiation is key. Does a brand inspire an emotional connection in consumers? Is packaging thoughtful? Does it stand out? There’s a real difference between a product consumers buy just because they found it in passing at a local store, and a product that inspires customer loyalty and leads people to seek it out proactively. “Make sure you have a brand that has a compelling point of differentiation and will be strategically desirable in a few years,” says LeComte. TSG looks for brands that have “momentum that can be sustained as it grows beyond their current footprint.”

3. Where is the brand concentrated?

Contrary to popular belief, “It doesn’t matter if your brand isn’t national,” says LeComte. “What matters is that your brand has a lot of momentum in the markets it is in.” TSG prefers a company in fewer markets, with strong depth and retailer support, than one whose products are spread thinly nationwide.

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