13 Jun 2019
What do Cineworld, JD Sports, and Fever-Tree have in common? The answer lies in transformational strategies across the pond.
Type ‘Brits abroad’ into Google and it’s fair to say that the content and imagery is hardly flattering. Let’s face it, we don’t have the best reputation overseas.
I’m not just referring to the wretched perception of our travelling football fans and the quality of our cuisine. For a number of consumer-focused businesses, UK companies have tried but miserably failed to light up Broadway.
So what’s the problem? Well, for starters, competition for consumers’ attention is fierce in the US, with buyers uncompromising in their demands. Many companies have crossed the Atlantic and failed to adequately understand and analyse the market, while facing difficulties in elevating the status of their business. Arguably, these prior attempts to conquer the US have been let down by management showing naivety around corporate strategy.
For me, capturing market share early is crucial. This is exactly why it makes more sense for a company to seek an acquisition as a route to market. This is arguably more cost effective, provides greater insight on pricing, and acts as an effective building block for management to allocate capital later. While this may mean they have to spend heavily in the early years, it does allow the company to do so from an existing revenue base and profit pool.
The latest British invasion
In more recent times, market commentators were quick to write off the prospects for both Cineworld and JD Sports following their respective acquisitions in the US of Regal Entertainment in December 2017 and Finish Line in June 2018. Upon these announcements, it was interesting to note the scepticism from both analysts and investors. While it was clear that both deals represented transformational strategies, history provided a reasonable rationale for caution.
Yet despite this wider uncertainty, the deals struck me as a great opportunity for two strong UK businesses to turn around these stale US franchises. Of course, it’s likely that the value created by the acquisitions of the number-two American players in the cinema and sporting-goods markets will need a degree of shareholder patience and investors may require a longer time horizon to see these deals truly bear fruit. Supportive consumer trends nevertheless provide cause for optimism, while both Cineworld and JD Sports can leverage the strength of their existing business models.
From our recent conversations with management, such a huge opportunity in the US represents a potentially lucrative market for both companies. They are applying sensible aspirations for improving these businesses, seeing ample scope for both evolution and growth through capital deployment and greater operational efficiency.
Just the tonic
The same is also true of premium mixer business Fever-Tree Drinks. No opportunity is more exciting than the sheer scale of the US, where the company recently completed a number of distributor changes to facilitate its recent strategic partnership with Southern Glazer’s Wine & Spirits. While the ink on this deal has only just begun to dry, this will significantly bolster Fever-Tree’s attempt to create a premium market for on- and off-trade mixers.
As proven by early indications from the first-quarter earnings season, current trading in the US for each of these companies is clearly positive for market sentiment. Future growth from disciplined capital allocation, alongside the benefit from a marked improvement in the product mix and offering, should help drive demand and spending. Importantly, this helps build conviction on the asset quality and growth credentials.
Yes, there is much work to be done, but the signs are positive and the opportunity is vast. While these businesses weren’t born in the USA, they could well conquer it.