For consumer products-focused investors, 2023 will be one to forget as closed deal activity fell to the lowest level since before the COVID-19 pandemic. The robust deal market of 2020 and 2021 feels like a distant memory as well.
A combination of economic uncertainty and inconsistency on recessionary predictions, sustained higher interest rates from the Federal Reserve’s inflation busting campaign, as well as valuation gaps between buyers and sellers were all key drivers in the cool mergers and acquisitions market.
As we begin 2024, however, business themes that began to emerge in the second half of 2023 appear to be taking hold, including: leveraging existing credit facilities to finance transactions, decreasing control cash infusions and the comeback of earn-outs to help close valuation gaps. In addition, notable shifts in buyer and lender acceptance around growth projections are present in the market as investors continue to fight for seemingly scarce high-performing assets and a more cautious approach on assets that will require significant operational attention.
Interest rate stability makes way for election uncertainty
While the hope for interest rate cuts in March has dissipated, the market anticipates that 2024 will see some interest rate easing, welcome news for investors. However, with rate cuts likely not beginning until May or June, interest rate concerns will shift to political uncertainty in the second half of the year as the 2024 election may cause investors to further delay dipping their toes back into the deal market.
Add-on strategy continues hot trend
Add-on acquisitions are continuing to account for a larger share of deals recently. These acquisitions will be attractive for buyers given their cost effectiveness, especially during periods of elevated borrowing costs.
These strategies are being embraced particularly within consumer service businesses, including home improvements and renovation, as well as discretionary wellness concepts. The ability to quickly scale the number of locations while centralizing back-office operations and marketing support are making these assets particularly attractive to investors.
The macro trend of small business owners looking to exit businesses started decades ago and will provide a continuous supply of these highly coveted assets. Expect 2024 to continue this trend as sellers evaluate exit opportunities and transition options for long-held businesses.
Food and beverage
Food and beverage activity plunged in the second half of the year, even as food inflation has eased to a more than two-year low. Year-over-year food-at-home price inflation fell to 1.2% in January, the lowest level since June 2021, according to the U.S. Bureau of Labor Statistics.
Themes from the first half of 2023 remain. Investors are hyper focused on sustained profitability, while operators have shifted towards improving integration planning and synergy realization rather than the grow-at-all-costs model of years past, an area that potentially drove increased activity in distribution companies with local and regional footprints. This trend appears to be accelerating in 2024.
Difficult year-over-year sales comparisons slowed branded product activity, particularly as investors carefully continue to monitor higher discounting activity and easing inflation. This slowing on branded products contributed to the demand for private label goods. That demand will in turn continue to spur investor interest in contract manufacturers and companies with strong private label businesses.
We expect these same themes to continue for 2024 as the focus on margin growth further renews companies’ focus on portfolio optimization. Further divestitures of brands not aligned with long-term strategies, or that do not meet internal growth and/or profitability thresholds, should be expected.
Finally, the grocery and convenience store space eagerly awaits the decision of the Albertsons and Kroger merger, which will affect broader grocery and convenience store consolidation and will shape the performance of many packaged goods brands.
Consumer goods
Consumer goods activity continues to show signs of stress—especially for businesses catering to mass market and cost-conscious consumers—as the downward trajectory of closed deal activity remained through the second half of 2023. The sector continues to navigate a challenging macroeconomic environment as lower-to-middle income consumers’ buying habits have shifted towards private label goods or discount shopping. Even with strong retail and consumer spending results throughout the 2023 holiday season, investors have been cautious with home products and apparel brands.
That being said, the most active sector has been home services and consumer health. As investors have continued their home service platform rollups, and have expanded from HVAC and lawn maintenance, to roofing, plumbing, garage doors, and various services to homeowners.
We expect 2024 activity to be largely driven by home services transactions as baby boomers look to exit and capitalize on strong multiples.
Home services aside, we see strength and anticipate continued interest in higher-end apparel, beauty and personal care, and experience brands that demonstrate the ability to meet consumers where they are and capitalize on strong direct-to-consumer channels. In addition, strong beauty brands will continue to garner investor interest, especially those that successfully diversified into brick-and-mortar locations.
Retail and restaurant
Retail and restaurant M&A activity continued to be hit hard through the end of the year, with deal count declining each quarter, before a slight uptick in the fourth quarter. The improvements there provided some hope that larger transactions will be the catalyst for more activity, particularly within higher-end concept restaurants that were hardest hit during the pandemic.
The bright spot of activity remained further consolidation across franchise systems driven by first-generation franchisees retiring, consolidation among grocery, convenience stores and quick service restaurants (the Albertsons-Kroger merger notwithstanding). Consistent with consumers increasingly prioritizing health and wellness, we also observed and anticipated continued, sustained investment in consumer services, most notably in multi-unit beauty salons, med spas, and other health and fitness concepts. This trend of focusing on companies offering wellness-oriented products and services in the retail sector will likely accelerate as more investors enter the space in 2024.
RSM contributors: Tom Martin, Kunal Bhatt, Ryan Schloer and Doron Neuman
