After a strong 2021, consumer products deal activity contracted in the first quarter as market uncertainty affected deal urgency. As we enter the second quarter, more recent activity points to a rebound in consumer products closed transactions.
Consumer products companies continue to benefit from somewhat strong economic indicators, including pent-up consumer demand and elevated discretionary savings. However, as warmer months approach and consumers travel and dine out more, there is an expectation that consumer dollars will shift some excess savings to services in 2022. Macroeconomic headwinds that affected company operations in the second half of 2021 are expected to continue throughout 2022, including:
- Geopolitical uncertainty
- COVID-19 and the impact from emerging variants
- Supply chain disruptions in acquiring materials and finished goods from abroad
- Continued elevated container rates on oceanic shipping
- Rising domestic ground freight and warehouse costs
- Price increases on raw materials
- Labor shortages and wage rate increases
As companies continue to work through these challenges and the related uncertainty caused by high inflation, brands with strong customer connectivity, pricing power, a focus on better-for-you (i.e., healthy offerings), and purpose-driven brands will continue to garner investor interest.
We anticipate solid deal activity throughout 2022 given the robust pipeline and strong demand based on the strength of strategics’ balance sheets and increasing dry powder. We do expect valuations may be somewhat muted by rising interest rates that will put more pressure on sellers to demonstrate the ability to create value and navigate current headwinds.
Food and beverage
Rising food costs that are expanding to center store products will affect how customers spend their dollars in 2022. Expect many consumers looking to stretch grocery budgets to shift to private label brands that offer lower cost alternatives while brand names with the ability to absorb rising costs will continue to be attractive to consumers. Additionally, we still expect brands focused on better-for-you products and offer convenience and strong customer connectivity will continue to garner consumer and investor interest in 2022.
In 2021, large multinational corporations reevaluated their brand strategy to ensure differentiation of their product offerings to meet evolving consumer dynamics. As a result, the year saw divestitures of larger household brand products which were used to free up capital and invest in future growth areas. Expect this trend to continue in 2022 as brands look to capitalize on consumers’ pandemic-era routines that have become the new normal as COVID-19 transitions to an endemic. This will also create opportunities for private equity buyers that continue to demonstrate a willingness to purchase well-known brands.
In order to continue to be attractive to potential investors, middle market companies will need to demonstrate strong consumer connectivity, the ability to meet consumers where they are through at-home delivery and subscription service plan options, as well as focus on healthy food and beverage offerings. Additionally, premium brands that were able to maintain margins during these challenging conditions will continue to attract investors.
Consumer goods companies continue to be affected by supply chain challenges, particularly from elevated shipping rates, that have declined from summer/fall 2021 highs, but are still elevated from historical levels. After a 12% rebound in closed transactions in the fourth quarter of 2021, deal volume remained fairly consistent in the first quarter of 2022.
Companies that have adapted to new consumer behaviors, including a hybrid working environment, recreational activities and a strong focus on sustainability product offerings, will continue to be attractive to investors. Further, pet ownership which increased during the pandemic, continues to drive investment in the pet subsector. Finally, as consumers travel, dine out and more regularly return to the office, expect beauty, health and wellness, and certain apparel companies to continue to be a focus for investors.
Similar to food and beverage companies, those companies that have demonstrated the ability to protect margins under current inflationary concerns, and that demonstrate supportable causes or environmental, social and corporate governance-based initiatives will garner interest from customers and investors alike.
Retail and restaurant
Specialty retail that caters to services and activities and those with strong name recognition had the highest deal flow during 2021 and the first quarter in 2022 as these businesses continue to drive foot traffic and clicks. Restaurants and traditional retailers continue to recover from the shock of the pandemic evidenced by consumers’ hesitation for in-person activities in the fourth quarter when news of omicron emerged. Going forward, restaurant performance will vary by region as data shows seated restaurant diners vary widely by location. Based on the latest data available, seated diners in northeastern states continues to lag 2019 levels, while southern states have largely returned to or exceed pre-pandemic activity.
While restaurant and retail deal activity started slowly in the year, toward the end of the first quarter investor activity picked up, which we believe will continue through the rest of the year; especially for quick service restaurants, which continue to be attractive as franchisors look to right-size their balance of corporate-owned versus franchised stores.
Key transactions that illustrated these trends during Q1 2022
- SilverBox Engaged Merger Corp acquired Black Rifle Coffee Company, a veteran-founded coffee company, in February 2022.
- Lifetime Brands acquired S’well Bottle, a designer, wholesaler and retailer of hard goods, apparel and other consumer products, in March 2022.
- The AMES Companies acquired Hunter Fan, a manufacturer and designer of ceiling fans for home or office use, in January 2022.
- Pon Holding acquired Dorel Sports Company, a manufacturer and supplier of bikes for hobbyist and enthusiasts, in January 2022.
- Jack in the Box acquired Del Taco, a franchisor of Mexican-inspired and American dishes in March 2022.
- Beirsdorf acquired Chantecaille Beaute, a beauty and cosmetics brand with a socially conscious purpose, in February 2022.
- Swedencare acquired Garmon, a manufacturer of pet supplements, in January 2022.
- Revolution Beauty acquired BH Cosmetics, a DTC cosmetics brand with an environmentally responsible product lineup, in February 2022.
- Procter and Gamble acquired OUAI Haircare and TULA, two personal beauty brands with a focus on natural ingredients, in January 2022.
RSM contributors: Tom Martin, Kunal Bhatt, Paddy King, Ryan Schloer.