Tug of war: evolving power games will shape industrial growth
Investment houses must negotiate the power struggles between stakeholders in the industrial value chain to determine which sectors and companies will light up their portfolios.
The current global economic landscape, marked by high inflation, fluctuating consumer demand, and low employment, is significantly reshaping power dynamics across various industries. This rebalancing is not just a reflection of market forces, but also of the strategic responses by businesses to these challenges.
Power struggles have emerged among stakeholders in the value chain focused on who is best delivering this value. One ongoing tug of war incites changes in business models, drives industry consolidation, and other competitive measures. Other power shifts which are impacting profitability and growth prospects are those between businesses and their customers, with regard to pricing, and between employers and employees.
For quite some time, investors and businesses alike have sought growth for growth’s sake. This long period of uninterrupted growth has led many to expect this to continue indefinitely. But today the economic climate is far more challenging. From family offices to institutional asset allocators, investors need to be wary.
Evolving business models and consolidation
Firstly, investors must focus on competitive dynamics. The need to preserve margins and stimulate growth is driving businesses to adapt their models, and we're witnessing a divergence in industry trends. Some sectors are experiencing consolidation, while others face intense competition for customer attention. The economic pie is being redistributed, favouring those that deliver the most value.
Industry consolidation impacts the economic distribution among stakeholders, often enhancing the negotiating power of buyers. Companies that successfully merge or acquire competitors can gain a significant market share. In fragmented industries on the other hand, nimble players might carve out lucrative niches while incumbents focus their attention on surviving these dynamics.
For example, UK-based telecommunications provider Gamma Communications has observed channel partner consolidation, while property portal Rightmove noted agent consolidation, which only enhances supplier power. Conversely, private companies like Specialty Building Products have highlighted dealer consolidation, which has already impacted exclusivity arrangements.
Investors need to recognise which markets are consolidating, which are likely to become more fragmented, and how these dynamics require shifts in business models which can affect both industry leaders and emerging players. Understanding which companies are driving or adapting well to this tug of war can highlight long-term winners.
Shifting consumer dynamics
As investors, we are also seeing a shift in power back towards the consumer, indicating a more value-centric approach to consumer relations. For instance, vehicle accessories provider ARB Corp and premium furniture company Restoration Hardware – now known as RH – have acknowledged limits to their pricing power.
The trend towards direct-to-consumer (DTC) models is also accelerating, reflecting a strategic shift in how businesses engage and sell to their customers. Businesses are seeking to protect their margins through removing middlemen, and to control their broader value proposition and the overall experience. This ensures they provide greater value and can sustain higher prices.
For example, in travel, American Airlines is pursuing a DTC strategy in response to evolving booking platforms. In the US, beverage giant Constellation Brands is battling declining demand through DTC models like wine or spirits clubs.
Companies that skilfully manage their pricing power without alienating consumers are likely to sustain profitability, and investors should look for businesses that balance cost management with customer value. Meanwhile, those that have maintained a loyal customer base despite price adjustments could be indicative of strong brand value and customer loyalty – a positive sign for long-term asset owners.
Balance of power in the workforce
Key sectors also face distinct employment challenges. Technology sectors have over-hired, while travel industries are working to re-attract previous employees and manufacturers are struggling to find skilled labour.
Travel management company CWT faced labour challenges due to staff attrition and industry personnel moving away from travel sectors during pandemic shutdowns. In comparison, PWR Cooling, a manufacturer and supplier of cooling products, is an example of a company facing challenges finding skilled labour and has initiated grassroots talent development initiatives.
Global investors thinking long-term must consider how these dynamics could affect operational efficiency and growth prospects. Traditional industries like welding face labour constraints, while ‘modern’ sectors previously benefiting from flexible work arrangements are witnessing a shift towards more traditional employment structures.
A potential pivot towards employer empowerment is emerging, with remote work losing its primacy and companies increasingly advocating office attendance. This shift can signal a return to traditional operational models, impacting company culture, productivity, and ultimately, profitability.
Companies that successfully navigate this transition while maintaining employee satisfaction and productivity could stand out as attractive long-term investments. Most importantly, the ability of a company to attract and retain talent, especially in skilled sectors, is a key indicator of its long-term health and competitiveness.
The turning tide
In today's volatile environment, understanding the changing power dynamics within industries is crucial. For sophisticated investors, these dynamics offer insights into how companies are adapting to market pressures, the resilience of their business models, and their potential for sustainable growth.
Aligning business strategies with current market realities is paramount for resilience and competitive excellence. Companies are responding to economic headwinds by focusing on operational efficiency, resource utilisation, and customer-centric strategies.
Identifying which companies can weather these challenges while focusing on long-term growth will be key to navigating disruptions and defending the value of portfolios in uncertain times.
Jason Pohl (top) is partner and Dr Manny Pohl executive chairman at ECP Asset Management
