The first half of 2024 continued the downward trajectory of consumer products deal volumes. Cautious buyers weighed economic and political uncertainty, a softening consumer, and the lack of clarity on the timing and extent of interest rates against continued high seller expectations and limited availability of assets.
Additionally, concerns over the ability to close larger transformative deals due to anticipated Federal Trade Commission scrutiny and a weak initial public offering market have contributed to a softer than expected deal environment in the first half of the year.
However, recent comments by Federal Reserve Chairman Jerome Powell and other economic indicators suggest interest rate relief in September, which would be a welcome sign for investors. Expected interest rate cuts combined with signs that corporate acquirers are reentering the deal market both support the expectation of increased deal activity in late 2024 and a strong 2025 deal market.
Interest rate relief does not mean return to ZIRP
While interest rate cuts will be a welcome sight for investors (RSM’s current forecast points to three 25 basis point cuts for the remainder of 2024), it should be noted that this reduction does not mean a return to the zero interest rate policy (ZIRP) era, that has remained for much of the post-Great Recession period since 2008.
The expectation of higher for longer interest rates will continue to drive home the themes we’ve seen emerge since the surge in deal activity in 2021 and 2022. Most notably, a continued focus on add-on acquisitions that are the most effective way for investors to close geographical, channel or product specific gaps through acquisitions.
This strategy is most notable within home services (home improvements and renovation, personal wellness and services) and consumer services (primarily wellness, medical and automotive) as buyers look to quickly build scale eagerly supplied by small business owners looking to exit businesses started decades ago. Activity within this sector is not fully reflected in consumer product deal counts given inconsistency in reporting.
Additionally, we continue to see transactions leverage earn-out provisions to help bridge valuation gaps and product buyers, and align interests post-close. We expect these trends to continue in the near term.
Food and beverage
Activity within the food and beverage sector declined in the first half of the year even as macroeconomic pressures on food companies eased.
Consistent with 2023, margin performance and ability to maintain pricing continue to be a key focus for investors as the grow-at-all costs model fades and investors focus on operational value, integration synergies and customer connectivity. Falling commodity prices (in general), stabilized employment and labor rates, and continued investments in automation are driving margin expansion across the board.
The permanence of shifts in consumer buying habits is also under the microscope as demand for private label goods continues despite the easing of food inflation as pandemic recovery era spending patterns take hold over a longer term. We expect contract manufacturers and those with strong private label businesses will continue to garner investor interest.
Some areas that have seen elevated interest has been within the agricultural space (most notably in protein) and the dessert category (ice cream and other frozen goods, and bakery products).
The potential return of corporate acquirers within the food and beverage space should drive more activity in the market, especially with the expectation those acquisitions will focus on closing geographical or product category gaps, resulting in down market acquisitions.
We expect companies will continue to evaluate overall brand portfolios and look to divest brands not aligned with long-term strategies to provide debt relief and drive operational margins on stronger performing brands. Buyers are also carefully monitoring the ability to close deals within the grocery and convenience channel.
Consumer goods
Consumer goods deal activity continues to face increased pressures, including uncertainty on the trajectory of consumer spending habits. This trend is most notable within brands that focus on the mass market.
Companies that cater to lower-to-middle income consumers continue to face year-over-year comparison challenges as the robust consumer spending of 2021 and 2022 fades, and consumer buying habits shift towards private label goods or discount shopping. The ability to pass through pricing increases has likely passed and in many cases need to be subsided through promotional activities; therefore, discretionary goods companies will need to demonstrate sustained volumes, or strong direct to customer strategies and mass retail penetration to garner investor interest. Sellers appear optimistic when sustainable trends can be demonstrated as there are encouraging signs that discretionary goods companies are preparing for sale, and we expect to see more assets enter the market in 2025.
That being said, the most active sector has been home services and consumer health. We anticipate continued strong home services as aged operators look toward exit strategies and investors aim to consolidate largely fractured sectors, including lawn/outdoor maintenance and home services contractors providing roofing, plumbing, electrical, garage doors and HVAC.
Beauty and apparel brands continue to garner investor interest, especially those brands that have successfully diversified into brick-and-mortar locations and have strong consumer connectivity.
Retail and restaurant
Retail and restaurant M&A continues to show signs of recovery. While the increase in activity is most notable in roll-ups of franchisees, we have observed a significant uptick in activity with high unit growth franchisors as new openings have accelerated following the pandemic and related strain on building resources.
Traditional retail, most notably consumer services companies (health and wellness facilities as well as the automobile industry) have been very active as companies look to build scale and expand into new geographies. Continued pressure on mall-based operators has created opportunities for well-placed buyers to add to their portfolios and implement recovery strategies.
Restaurant activity has been focused on quick service restaurant roll-up strategies, which has seen a significant focus for investors in the first half of 2024. This strategy is facing headwinds of slowing unit growth as price weary customers drag on traffic and put increased pressure on franchisees that continue to face the reality of higher input costs.
Systems that can demonstrate sustained traffic aligned with strong value propositions for customers or aligned with better-for-you themes, continue to attract strong investor demand.
RSM contributors: Tom Martin, Kunal Bhatt, Ryan Schloer and Doron Neuman
