The coronavirus pandemic has put a damper on a lot of things, but wellness M&A is not one of them.
Consumer interest in being healthy has never been higher, experts agree, and during the COVID-19 pandemic that has translated into higher sales in categories like supplements, at-home fitness and self-care. Deals have followed, with Lululemon paying $500 million for Mirror, an interactive at-home fitness service, Grove Collaborative acquiring Sundaily, a gummy supplement brand centered around skin health, and Nestlé Health Science agreeing to buy a majority stake in Vital Proteins, which makes collagen supplements, beverages and food products.
“Wellness has become the number-one priority for consumers through COVID-19, and likely to remain the top priority for consumers after COVID-19,” said William S. Hood, founder and chief executive officer of William Hood & Co., an investment bank that specializes in the supplements space. “Any consumer product that functions as an ingredient to a healthy lifestyle has generally performed well through COVID-19 and is positioned to perform very well [going forward]. Obviously supplements are one ingredient, but others [are] functional food and home fitness.”
Experts agree that COVID-19 isn’t the only major shift in 2020 that’s going to affect M&A in the traditionally white-dominated wellness world. The surge in the Black Lives Matter movement prompted by the police killing of George Floyd is also changing the landscape — shifting both consumer dollars and investor attention to Black-owned wellness businesses, but also consumer consciousness around business practices like diversity and inclusion.
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“The movement has exposed how under-represented the [Black] community is from multiple directions — the number of Black-owned businesses, the number of Black employees in companies, the number of brands truly serving the Black consumer and so forth — and is holding companies accountable for effecting change,” said Janki Gandhi, managing director at Goldman Sachs. “It has already triggered a major push to invest in and spend money with the types of businesses mentioned and we anticipate that diversity will remain top of mind for investors and buyers going forward and will become a part of how they assess an opportunity.”
Where consumers go, investors follow, pointed out Robin Tsai, a general partner at private equity firm VMG, which backs better-for-you food, beverage and beauty businesses, including Briogeo.
“Strategics and private equity and everybody follows consumers, so I’d expect that there’s going to be more activity in the [wellness] space,” Tsai said. “There’s beauty wellness, but there’s also physical-fitness wellness. Wellness sits in a Whole Foods, it sits in a GNC, it sits in Sephora and Ulta — there aren’t that many categories that do that.”
COVID-19 “has created a structural change in the amount of interest in the space,” agreed Coye Nokes, partner at OC&C Strategy Consultants. And while other consumer-facing categories have struggled due to retail closures and changes to consumer spending, wellness has “been pretty resilient, if not growing, as a result of the COVID situation,” Nokes said.
Sources said there are a number of deals in the market right now. Two names being cited are Tonal, another at-home fitness system and service, and nutritional supplement manufacturer Adaptive Health. Tonal declined to comment for this story. While dealmaking in other consumer categories stalled in the early days of the pandemic, wellness was not one of them, sources said, and many transaction conversations that would normally have been held in person have merely transitioned onto Zoom.
Interest in wellness-oriented companies is broad, sources said, and spans supplements, immunity, over-the-counter medications, telemedicine, fitness services and products and Millennial mom products, meaning cleanly formulated versions of motherhood staples, like Frida Mom’s post-partum care kits and Natalist’s prenatal vitamins and pregnancy tests.
Strategic buyers are focused on consumer health, and wellness, broadly speaking, continues to be a high priority to them as it relates to where they’re looking to do deals and where they’re going to invest dollars, said Susan Roddy, managing director at Houlihan Lokey.
“For strategics, getting access to that Millennial mom is so critical,” Roddy said, noting that moms are behind most household purchasing decisions and are often the first entry point into a family. “Many strategics have very old, tired brands that resonate with 50- and 60-year old women but not with 20- and 30-year old women…that younger demographic is much more educated and focused on wellness for herself and her family than anyone was prior to her.”
Brands to watch in that space include SmartyPants, a vitamin business; Mommy’s Bliss, a mom-and-baby medication business, and Beekeeper’s Naturals, which makes honey-oriented throat sprays and other products, sources said.
More broadly in wellness, sources called out brands like superfood blend brand Golde, adaptogenic wellness brand Moon Juice, Wellements baby vitamins, and Nuun hydration tablets, as potentially interesting to investors or buyers.
Many investors also vocalized interest in online fitness platforms, like Obe.
“Fitness will be forced to come back in a different manner, largely at the expense of gyms and boutique studios” said an investor whose portfolio includes chain fitness studios. “There may be no more 60-seat spin studios.”
While a plethora of online fitness options has emerged since mid-March, when many in the U.S. started working from home, the ones that are able to foster loyalty and encourage repeat visits will be more attractive to investors, the source noted. “How sustained is the loyalty? These [platforms] need to create real businesses, or you’ll see that same switching behavior you see in boutique fitness.”
A fitness industry report from Houlihan Lokey noted that there’s a strong possibility of fitness enthusiasts trading down for both COVID-19 safety and financial reasons. “There is also a possibility that consumers will shift away from more expensive boutique offerings or full-service gyms to those offering a high-value, low-price model,” the report states.
That shift is likely to result in restructuring and bankruptcies, as well as consolidation. “We believe certain fitness providers and/or financial investors will seize the opportunity to acquire companies at discounted valuations when compared to those observed before the crisis,” the Houlihan report states.
While consumers may be temporarily ditching their gyms, they aren’t ditching wellness routines overall, experts agree.
“Consumer behavior is changing. The one place they’re going to continue to invest and not pull back on likely is wellness,” said Kelly Dill, principal at venture capital firm Imaginary Ventures, which backs supplements line Hum Nutrition, baby food offering Cerebelly and fitness app Fitplan. “We’ve realized how important immunity and self-care and taking care of yourself is in all of this, so if you’re going to pull back on one thing, it’s probably not your health and wellness.”
Supplements in particular have demonstrated staying power in consumer consciousness, data shows. Searches for vitamin D, for example, are holding steadily above where they were at this time last year, Google Trends data compiled by Jefferies shows.
Data from Jefferies also showed a massive spike in Google searches for “Black-owned brands” in June, and that brands like Briogeo and Golde, which are both Black-owned and wellness-oriented, saw web visit upticks in early June.
Some investors said that the Black Lives Matter movement is likely to shift the way brands are scrutinized, as well as the way private equity firms and venture capitalists allocate money in the wellness community,
It’s no longer enough for businesses to simply use Black models. “It has to be 360 — you cannot just rely on representation in imagery or people will be talking on Instagram and Twitter, said Lucie Greene, trend forecaster and strategist. “Are there any people of color on your board or in your executive leadership? Is there a pay disparity? With this era of hyper-transparency, this has already started to go even further, given the core consumer is more ethnically diverse than ever.”
“Wellness is one of those things that doesn’t discriminate. Everyone’s trying to be a little better,” Tsai said. “We in general would love to be supportive of the [BLM] movement, be supportive of founders, be supportive of consumers along that bent, too.”
“I’m optimistic with an asterisk,” Dill said, when asked about the role the BLM movement will have on the wellness industry in dealmaking. “I want to do the work to make sure that happens. I want Imaginary to do the work. I want the venture community to do the work, and that is giving access to Black founders within wellness. The talent is there, the product is there, the founders are there, so there’s really no excuse,” Dilll said.
How brands have navigated through 2020 is likely to play a big role in dealmaking processes. Some experts say that M&A activity may get tougher for brands that may not have had a hard time getting a deal done pre-COVID-19.
“Brands that have grown rapidly through COVID-19 will generate strategic valuations,” said Hood. “Even though it’s explainable, a brand that flatlined or declined during the pandemic is not considered a strategic asset — those businesses will be impacted.”
A different financial source added that companies that decide to go through deal processes this year will be left defending their numbers no matter what — prospective investors are likely to attribute both sales spikes and declines to COVID-19, and to be looking for an idea of what steady-state figures may look like.
The distribution investors are looking for has changed, too, with less of a focus on retail distribution, according to Franklin Isaacson, founding partner at Coefficient Capital. Even as wellness trends have taken off, vitamin and supplements retailer GNC filed for bankruptcy earlier this year with plans to close up to 1,200 stores.
Isaacson said he’ll be looking for consumer wellness brands that don’t solely rely on retail, have affordable price points, and have proven efficacy, in anticipation of a consumer with less disposable income and little desire to shop in-store.
“We want brands that are doing a good job overcoming all the barriers that exist today,” said Isaacson. “The consumer is going to think twice about that $80 jar of supplements that promises to firm up skin.”
Hood noted that having experienced founders who are “strong” and “disciplined” is going to be critical for deal-seeking brands, especially in an era where accountability at the hands of the consumer has never been higher. “Are they doing the right things and able to manage the business the right way?”
“Mission-driven businesses are going to perform very well,” Hood said.
Three Key Takeaways:
1. Wellness M&A has continued through COVID-19 and is only expected to accelerate, especially in categories such as supplements, online fitness and better-for-you consumer goods geared toward Millennial moms.
2. The Black Lives Matter movement is expected to have a lasting effect on the wellness category. Consumers are paying attention to company practices around diversity and inclusion, and investors say they will do more to invest in Black-owned wellness brands.
3. Brands with a strong digital presence and online sales are going to be more attractive to investors as consumers continue to be wary of in-store shopping throughout the global pandemic.