The market for mergers and acquisitions in the consumer products industry has cooled from the frothy levels of a year ago. Closed deal activity slowed for the fourth consecutive quarter, according to data from PitchBook. This trend has continued as investors remain cautious given the uncertain economic outlook and continued headwinds facing consumer products companies. These headwinds include persistent inflationary pressure, the decline in sales volumes as consumers reevaluate their discretionary spending, the rising risk of a recession, as well as a challenging lending environment amid heightened costs and scrutiny.
The volume of consumer spending on discretionary goods fell for much of the second half of last year, with the exception of a surge in spending during the holiday season when retailers deeply discounted products to offload excess inventories.
While consumers maintain more than $1 trillion in excess savings compared with January 2020, before the pandemic, much of that balance (roughly 85%) sits with the top two income quintiles. Even with price pressures from gasoline declining from last summer, persistent inflationary pressures on groceries and other fixed monthly bills are forcing lower-income consumers to reevaluate purchases. Additionally, the Federal Reserve’s efforts to tame inflation with interest rate increases have led to a tenuous lending environment.
We expect overall deal activity to remain subdued in the first half of this year as investors and sellers evaluate market conditions, assess the impact of the Fed’s rate hikes and keep a close eye on consumer behavior. In the meantime, we anticipate ongoing add-on acquisitions activity as investors look to shore up gaps in investment portfolios through more cost-efficient acquisitions.
Still, there will still be opportunistic cash-flush buyers willing to deploy capital as well as investors who will shore up investments or fund growth through alternative fundraising methods.
In addition, we expect to see continued asset sales as companies reevaluate brand portfolios, optimize routes to market or deleverage balance sheets. The economic uncertainty and cautious capital markets will place greater scrutiny on sellers to fully demonstrate the viability of their equity stories to investors and will drive investors to reevaluate long-term investment theses.
Food and beverage
Food and beverage activity last year was largely affected by consistent pricing pressure, as year-over-year food-at-home prices remained above 10.0% from March through the end of the year, based on the Consumer Price Index.
Further, as food inflation has continued to spread throughout the grocery store, consumers have begun reevaluating purchasing habits, which is having an impact on branded and private label goods, especially as grocery stores evaluate shelf space of branded versus less-established brands. We expect to see an increase in discount rates to entice consumers to spend on experimental products during a sustained period of strained purchasing power.
The strategies that shaped corporate M&A activity last year are likely to continue, with a focus on portfolio optimization and a willingness to divest assets that are not aligned with longer-term strategies.
Corporations are focused on reinforcing existing scaled brands with strong margins and resilient consumer demand, while smaller, underperforming or more volatile brands are monetized. As consumers return to pre-pandemic activities, we expect the macroeconomic trends of convenience and customer connectivity will reemerge in 2023.
Consumer goods
In the second half of last year, as consumers re-evaluated their spending on discretionary items, consumer goods closed deal activity declined.
Continued macroeconomic pressures, including a sustained decline in new home sales and cash-out refinancing volumes that are a catalyst for home products activity, forced apparel brands to deeply discount products. Consumers pulled back on the significant sales volume growth experienced throughout the pandemic and broadly shifted away from goods purchases and toward services like travel and dining out.
To continue to garner investor interest, consumer goods companies will need to display strong customer connection, including through sustainable offerings and better-for-all product appeal, and capitalize on growth in consumer recreational activities, including consumer facing technology. Companies focused on pet goods and services will continue to be an area of interest for investors as the pet adoption boom throughout the pandemic will be a driver of sustained cash flow for these businesses over the next few years.
We expect to see continued strength in both luxury goods and beauty, as price pressures are unlikely to affect consumers in this space. Perhaps the largest tailwind for luxury products is the pending re-opening of China and re-entry into the United States. Asian consumers, who are flush with excess savings, are likely to be a catalyst for these brands this year.
While luxury beauty is expected to perform well, mass market beauty is unlikely to experience the same level of deal flow as 2021 and last year, as strategic investors pause to evaluate past acquisitions and as companies within this space are more acutely focused on pricing strategies.
Further, more importance will be placed on beauty brands to demonstrate the ability to maintain or expand direct-to-consumer momentum, as well as the ability to develop sales performance within retail channels in order to drive investor interest.
Inventory will continue to be a focus for investors, as those brands that were unable to unload excess inventories through deep discounting around the holiday shopping season will need to demonstrate an ability to liquidate excess product without significant margin erosion.
Retail and restaurant
Retail and restaurant deal activity was the lone bright spot within consumer products as sector transactions remained relatively static in the fourth quarter.
We expect the planned acquisition of Albertsons by Kroger will be a catalyst for additional activity within the grocery and convenience store space; as companies leverage operational capabilities across a larger footprint of physical stores. Additionally, the restaurant space, which has been a focus of recent consolidation efforts, is expected to continue this trend as franchisors focus on rightsizing footprints and reevaluate brand diversification.
Further, we expect plenty of activity within the experiences/services space as these businesses attract additional consumer dollars amid the shift in spending from goods to services. We anticipate continued strong activity within the personal care and auto services spaces, while investor interest grows within emerging franchises such as pet grooming and boarding, and home services. It remains to be seen how sustainable demand for these services will be as a potential recession is looming in the second half of the year.
Key transactions
- Astorg, Solina Group acquired Saratoga Food Specialties, a producer of dry spine blending’s that was previously part of Smithfield Foods portfolio, in November 2022.
- MTY Food Group acquired Wetzel’s Pretzels, a quick service food franchise restaurant, in December 2022.
- Better For You Holdings, Clearlake Capital Group acquired Popchips from VMG Partners in November 2022.
- CapitalSpring acquired Bell American, an operator of fast food restaurant chains, in December 2022
- Digital Brands acquired Sundry Clothing, a lifestyle apparel brand, in December 2022
- Norwest Mezzanine Partners, Sentinel Capital Partners acquired L2 brands, a designer and manufacturer of college, leisure and corporate apparel, in November 2022.
RSM contributors: Tom Martin, Kunal Bhatt, Paddy King, Ryan Schloer
