Composed of companies that supply high-performance and aftermarket products for automotive, motorcycle and watercraft hobbyists among others, the enthusiast consumer market has been generating interest from private equity firms. High-profit margins and consistent revenue await funds that can successfully develop “the next cool thing” and deliver it to a loyal base of eager hobbyist customers.
Sensing the opportunity, New York-based Monomoy Capital Partners has focused on this market, employing an operationally focused strategy to help companies expand product development, enhance supply chains and reach enthusiasts. But investors in the enthusiast consumer market need to be aware of the challenges impacting this market including scaling difficulties and major demographic shifts. Watch our video.
Full video transcript below:
Monomoy Capital’s operations improvement strategy drives success in the enthusiast consumer market
Ted Morgan: The enthusiast consumer market is really comprised of consumers that are really excited about their products. They tend to be synonymous with things with words like loyalty, passion, excitement for these products, and they love telling their friends and their family and other enthusiasts about this. They love celebrating the things that they're excited about — these products.
Jaime Forsyth: The enthusiast consumer market tends to be more cycle-resistant. Customers tend to be less price-sensitive, and these companies weather the storm quite well. When I think about an example of the investment merits of an enthusiast consumer business, I think of Monomoy Capital Partners investment in Holly. Holly is a business that we bought in 2012 that we've since sold, and it's a market leader in performance products for engine and exhaust applications in the automotive aftermarket. The primary customers of Holly own classic cars like a '67 Mustang, project cars, and race cars, and they buy products from Holly to enhance the performance of their vehicles.
What we saw is that Holly's customer is eager to upgrade to the latest new product. So we took that information, and we improved the efficiency of the R&D process to bring new products to market faster. And when you think about that, when you think about the customer being so eager to buy the latest product whenever it comes out, and you're able to cut the speed to market in half, you can effectively double the size of your market. And that's powerful.
Ted Morgan: Some of the skill sets required to grow successfully in this enthusiast consumer market really all stem behind the product. So if you think about it, in the beginning, you have to be able to create product and develop product that people want. These enthusiast consumers always want the next best thing. Having flexible manufacturing, more advanced supply chains, that also brings in an element of complexity and challenge. But if you can do it right, you can really be successful in the market because you ultimately have lower production runs, you have higher skew numbers, more options for your customers.
Jaime Forsyth: Acquiring companies like these isn't always easy. Companies in the lower middle market may have less sophisticated systems, processes, general infrastructure, and go-to-market strategies to enable growth. However, our operationally focused investment strategy is aligned well with these types of value-creation opportunities.
Together with Plante Moran's support, we are able to bring operational and financial expertise to these companies during our ownership in order to drive value. Some enthusiasts consumer markets will be greatly affected by demographic changes. You have baby boomers aging and millennials becoming a growing and more relevant part of the population. This presents a challenge for companies who need to find ways to get younger people interested in buying a new motorcycle, for example.
Nowadays, it's all about constant connectivity, whether it's through social media, online forums, blogs, or other ways for these enthusiasts to share their passion.
Ted Morgan: The single most important thing to think about as an investor in the enthusiast consumer market is the true sensitivities of managing supply and demand. On the demand side, you have to come up with the latest and greatest product that your enthusiastic, passionate, and emotional customers want to have. That's a challenge.
In addition to that, you have to be able to supply it. And as we talked, this is becoming more and more complex as that almighty customer is expecting more flexibility, more options, more performance features in their products than ever before. If you can figure that out, you'll win in this market.
Jaime Forsyth: We love this space, and we look forward to finding more opportunities to invest in enthusiast consumer businesses.