Based on information available as of Oct. 23, 2022 from PitchBook Data, Inc., consumer products closed deal activity continued to slow, contracting for the third consecutive quarter. Current economic challenges, including inflationary pressures and the resulting shift in consumer discretionary spending, growing concerns for a potential recession in 2023, as well as a challenging lending environment with heightened costs and scrutiny, point to continued uncertainty for the remainder of the year.
Consumer products companies that benefited throughout 2021 from robust consumer spending are left with an uncertain outlook as that spending shifts away from discretionary goods and more towards services and lower price points on non-discretionary goods. With consumers maintaining more than $1.5 trillion in excess savings compared with January 2020, the resources are available for consumers to utilize, however with growing fears of a 2023 recession, continued consumer retrenchment is possible. Additionally, the ongoing actions of the Federal Reserve to tame inflation through hikes to the federal funds rate have also led to a tenuous lending environment.
That being said, there are still opportunistic cash-flush buyers and attractive assets available that display strong operational capabilities with sustained growth. In addition, we expect to see continued asset sales as companies reevaluate their brand portfolios and optimize their routes to market. 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 closed transactions continued to fall in the third quarter, albeit only slightly, as uncertainty of input costs, especially as food at home prices continue to run hot, increased 13.0% on a year-over-year basis in the September Consumer Price Index reading. Further, food inflation has continued to spread throughout the grocery store, affecting shelf-stable products in addition to price increases on outer aisle produce which has been a staple of grocery shopping since early in the pandemic. This is most evident in cereals and bakery product prices that increased 16.2% on a year-over-year basis in September 2022 versus a 2.7% increase one year ago. These factors and broader cost inflation have combined to strain purchases of non-essential products and have begun to drive consumers to trade down as cost pressures show little evidence of abating in the near term.
The third quarter was highlighted by the sale of Clif Bar & Company and General Mills’ sale of its Helper Main Meals and Suddenly Salad Side Dishes business, furthering the evidence emphasized over the last several quarters that convenient, better-for-you products continue to be a hot commodity for investors. Additionally, we still expect brands with a focus on better-for-you, better-for-all product offerings with strong customer connectivity to garner investor interest for the remainder of 2022 and beyond, especially as consumer behavior shifted towards these products throughout the pandemic. Further, companies that are capitalizing on consumer shopping habits by providing value offerings in a period of heightened financial uncertainty will be a focus of consumer dollars and resulting investor interest.
As consumers re-evaluate both their willingness and ability to spend on discretionary items, consumer goods closed deal activity has been detrimentally affected. Significant declines in deal activity in the last two quarters have appeared to stabilize in the third quarter, with closed deal activity remaining static from the second quarter. However, significant macroeconomic headwinds remain, most notably sustained declines in new home sales and cash-out refinancing volumes, which are a catalyst for much of home products activity, as well as stubbornly consistent pricing pressures which have forced consumers to pull back on real spending for discretionary goods. Pandemic-era consumer shopping habits that largely benefited consumer goods companies (retrofitting homes for a hybrid work and at-home school environment, home gyms and outside living spaces) have returned to pre-COVID levels. Discretionary dollars have shifted toward elevated grocery and energy bills as well as travel and other services.
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. Companies focused on pet ownership continue to be an area of interest for investors driven by pandemic-driven adoption and owners’ willingness to spend on pets despite higher prices. As travel continues to rebound from pandemic lows and return-to-work gains momentum, we expect to see strength in branded and luxury products across beauty, apparel and accessories, and travel categories. Further, as consumer demand pulls back, consumer goods companies with elevated inventory levels will need to demonstrate an ability to liquidate excess product without significant margin erosion.
Retail and restaurant
Retail and restaurant deal activity was not immune to the broader pull-back in consumer products closed deals as sector transactions declined in the third quarter, after an increase in the previous quarter.
The recently announced planned acquisition of Albertsons by Kroger—the first retail megadeal of 2022—is the culmination of recent activity among smaller convenience stores and grocers, as companies seek to combat margin pressure from the dual impact of high inflation and changing customer behavior around e-commerce. Consolidation is likely to continue in the sector as smaller operators look to compete through scale and increase their customer data knowledge to further personalize shopping experiences.
The restaurant space will likely continue to benefit from the transition towards consumers’ experiential spending, as demonstrated by the shift back towards service spending after the pandemic-driven goods spending surge. With consumer prices increasing at restaurants at a slower rate than in grocery stores, this transition will benefit restaurants as consumers travel and dine out even as other sectors are affected by a broader pullback in consumers’ discretionary spending. The appetite for good restaurant brands from both private equity and corporate consolidators has not waned, and we expect to see this trend continue for the remainder of the year and into 2023.
Key transactions that illustrated these trends during the third quarter
- Mondelez International acquired Clif Bar & Company, a producer of energy and protein bars, candies, sports drinks and other snacks in August 2022.
- Eagle Family Goods acquired Helper Main Meals and Suddenly Salad Side Dishes, businesses from General Mills in July 2022.
- Sapporo Holdings acquired Stone Brewing, a craft brewery operating based in California, in August 2022.
- Cencosud acquired The Fresh Market, an operator of a chain of grocery stores in July 2022.
- MTY Group acquired BBQ Holding, a franchisor of multiple casual and fast casual restaurant brands in August 2022.
RSM contributors: Tom Martin, Kunal Bhatt, Paddy King, Ryan Schloer