Is Private Equity Good for Consumers?

Private equity firms are becoming increasingly entrenched in the day-to-day lives of consumers, acquiring many of our favorite products found on store shelves.  Should consumers care?  What happens to brands under private equity ownership?  These deals often elicit negative reactions.  A common view is that private equity firms try to squeeze out increased profits by raising prices, hurting shoppers.  In this study, we comb through a universe of consumer product data to see what actually happens.  We compile complete, weekly, store-level sales and price data from Nielsen Research for nearly 2 million unique products—everything from green beans to motor oil to vacuum cleaners—sold in over 40,000 grocery, drug, and mass merchandiser stores across the United States between 2006 and 2014.  During this period, private equity firms closed on 145 deals, gaining control over approximately 4% of these products.

What happens to products and brands after private equity acquisition?  We have three main findings.  First, private equity firms raise prices on existing individual products by about 1% in the five years post-acquisition relative to competitors on store shelves.  Competitors themselves raise prices by about half a percent, but only in stores where they face the PE brand.  Combined, this overall average price increase of 1.5% in the five years following a buyout does not appear to support the conjecture that private equity firms lead to significant prices increases for consumers.  At the overall brand level, average PE firm prices increase by an additional 2-3% relative to competing brands, but this is due to a composition effect; PE firms introduce new products that are higher priced.  This is linked to our second finding: after a private equity buyout, brands innovate more, introducing new varieties and extensions at a significantly faster rate than their competitors.  Third, compared to competing brands and products, private equity goods expand more quickly to new stores, chains, and cities.  This increased innovation and availability leads PE-backed firms to increase revenues by 20-30% more than their competitors, despite the minimal increases in price.

What is the channel through which these changes occur?  Of note is the fact that our findings hold most strongly for private firms acquired by private equity.  Public firm targets are relatively unaffected and at times even show contraction in geographic presence relative to competitors.  Because private firms tend to be more financially constrained, this suggests easier access to funds is a key mechanism private equity firms bring.  Connections and managerial know-how may also contribute to brand growth post-buyout.