The European consumer sector has seen a slowdown during the past 18 months, as a cost-of-living crisis squeezes wallets across the continent.

In the UK, for instance, Grant Thornton's Cut Back Economy 2023 report reveals that almost nine in 10 (88%) households plan to spend less, delay or cancel purchases in the financial year to April 2024.

That said, despite consumers becoming more selective in their purchasing, the wellness sub-sector – which includes plant-based foods, ethically sourced skincare and mental wellbeing apps – has remained robust throughout the period, according to many consumer deal doers.

Libby Gibson, founder and partner at Piper, a consumer investor on its seventh fund, cites more people wanting to take better care of themselves as a tailwind for certain companies: “There’s a whole body health movement, where it’s not about not ageing, but rather actually feeling that you’re feeding your body well and that you feel good instead of worrying about whether you've got lines or wrinkles.”

Partner at FRP Corporate Finance, Victoria Kisseleva, who has a particular specialism in the beauty and wellness industry, corroborates that consumers are continuing to spend on their physical and mental wellbeing: “They might cut back on some things, trade down a little bit, buy different brands, but they’re so used to using particular beauty brands on a daily basis so, overall, the industry is still going strong.”

There’s a whole body health movement, where it’s not about not ageing, but rather actually feeling that you’re feeding your body well and that you feel good instead of worrying about whether you've got lines or wrinkles

Tracey Huggett, co-founder and managing partner at Future Business Partnership (FBP), a consumer specialist impact fund with two investments so far, says her firm focuses its attention on non-discretionary consumer staples – food and drink, plus personal care – sold through mainstream distribution, such as supermarkets and drugstores.

“These are affordable everyday items and as such, they’re at the defensive end of consumer. Sailing into tough macro headwinds, typically these are the more resilient categories of consumption,” says Huggett. “Once you’ve got a nappy cream that’s good for your baby, is great value and hits your environmental conscience, it's probably one of the last things that you trade out of. It’s no coincidence this is where we've just invested.”

Piper’s Gibson notes, though, that investment in other areas of the wellbeing space can work in the current environment too: “Things like mental health apps – they're not consumer staples but think of the weight of demand. Because the agenda, for example, on mental health is so much more open than it ever was, there's a wall of clients who need help. There's just such demand that it doesn't make it difficult to invest – you’ve got the following wind.”

Green machine

A major driving force behind the wellness sub-sector’s success is a rise in the importance of sustainability for consumers, which has seen demand for green products grow steadily in recent years.

“These products and services are good for you, good for business and good for the planet,” says Gaëlle d’Engremont, partner and head of food and consumer at PAI Partners, which has made five investments in her area of focus this year. “Consumers are increasingly making purchasing decisions based on the environmental and ethical impact of products and services. Our investments in eco-friendly food companies such as Ecotone have thrived because of this growing sustainability consciousness.” 

FBP’s Huggett agrees that the structural trend in responsible consumption is a fundamental driver of demand, adding: “Based on what we see in our portfolio and across our pipeline, the emergence of more and more eco consumers is actually, despite the pressures of inflation, an effective hedge against people trading down and out of eco.”

From the entrepreneurs' side, many are longing for ethically aligned capital, which bodes well for the impact fund’s pipeline as it naturally appeals to businesses and founders with impact at the core of their DNA.

Once you’ve got a nappy cream that’s good for your baby, is great value and hits your environmental conscience, it's probably one of the last things that you trade out of

“If a founder is looking for that ethical alignment and consumer specialism to help them prosper financially, then FBP’s proposition is tough to beat,” says Huggett. “The reason we are able to sit at the table with businesses, quite uniquely off-market, is by virtue of our very differential strategy.”

Both of FBP’s deals to date – Big Green Smile and Naif Care – are B Corp businesses, which also applies to many of the companies the GP speaks with. Discussing how these businesses are often wary of private equity’s involvement and how it impacts their brands, Huggett says: “In each case, the founders were looking for an impact fund, allowing them to take on the investment and not be seen as ‘selling out’. From a brand point of view, this is very important because it's how they differentiate in the market.”

Savvy consumers

Perhaps unsurprisingly, market players have observed a generational divide in sustainable spending.

“Younger consumers are particularly prioritising the sustainability element of wellness products. They are more aware of the long-term environmental and health implications of their choices,” says PAI’s d’Engremont. “However, it's not limited to just younger people; there's a broader shift towards sustainable and healthier options across age groups.”

Quite simply, increased access to information has enabled consumers across the age demographics to choose solutions to climate change. For instance, Gibson attributes the growth of period care company Here We Flo to consumers caring more about whether their sanitary products are being chucked into landfills.

She adds: “Consumers are much more savvy about greenwashing than they were, so you've got to be doing sustainability properly. It's not good enough just to say it’s all very nice, green and sustainable, if it’s not truly green and sustainable. Consumers have got really wise to the fact that people say they are when they aren’t.”

However, the premium price positioning of wellness products, services and experiences has seen consumer values being tested as they cut back on their spending. To that, Huggett responds: “Provided the efficacy is there – the product works and performs – the consumer is demonstrating that they would rather make an eco-friendly choice.”

Consumers are much more savvy about greenwashing than they were, so you've got to be doing sustainability properly

Citing a Piper portfolio company, Gibson echoes Huggett’s sentiment: “Wild Nutrition is not the cheapest supplement on the market, but consumers prioritise effectiveness. They're on a mission, so they're going to spend, if they can, as much as it takes to get the right supplement to support them. In certain areas, where the need is very great, such as fertility, people will spend.”

Tread carefully

While GPs and businesses strive for sustainability, FRP’s Kisseleva cautions against the careless use of the word so as to avoid inauthentic green claims.

“During my time at Manzanita, I did a sustainability review of our portfolio and learned that what is perceived by the consumer to be sustainable is not necessarily always better for the environment,” says the corporate finance partner.

“For example, people don’t like synthetic fragrances because they want a natural fragrance, but natural fragrances are bad for the environment because you have to source them from kilos and kilos of flowers. It’s the same for candles; paraffin is said to be bad, but soya is equally bad as you need so much water to grow it. Another example: should you use plastic or glass containers? Glass is more sustainable but it takes much more energy to create and recycle. It's a difficult decision and there is no clear answer.”

With Piper and a handful of its brands having gone through the B Corp certification process, Gibson also stresses the challenges of achieving ‘sustainability’.

“It’s not impossible to be a green business but, more than anything else, it's very time consuming,” she says. “It is just getting to that first base of understanding your carbon footprint or understanding where the line is in the sand and then working to improve it. What a lot of people did to begin with was to set enormously unrealistic targets, saying: ‘We’ll be carbon net zero in 2025.’ They’re actually rather regretting it because it’s really hard to do that. Now, people have learned that they need to take small steps. We all want to go faster but it does take time.”

The demand for healthier food options and sustainable products has grown steadily in recent years, resulting in regular dealflow

All in all, PAI Partners sees the wellness sub-sector as remaining robust, adding that it has a particularly strong pipeline in food and consumer.

“The demand for healthier food options and sustainable products has grown steadily in recent years, resulting in regular dealflow. In particular, we see consumers placing emphasis on convenience, social responsibility, focus on self, family wellbeing and differentiated experiences,” says d’Engremont.

What has changed in the dealmaking environment relative to previous years is the increased focus investors are putting into Ebitda, says Kisseleva: “If there’s no profit, you can’t put debt in the company, and where you can put debt, it is expensive. Before it was growth at all costs, but profitability is more the focus now for investors, and has become key to making an investment decision.”

Gibson attests: “Gone are the days where you could just say: ‘Fantastic, we’re growing at 50-100% per annum and losing a lot of money.’ The strategics certainly don’t want to back that.”