Deal activity in the consumer products sector contracted for the second consecutive quarter to the lowest level since third quarter of 2020, based on information available through July 22. The slowdown comes as market uncertainty curtailed deal urgency and valuations, and as participants continued to digest the record activity from the fourth quarter of 2021.
Current economic challenges include record inflation and the resulting pullback in consumer discretionary spending and a lending environment with heightened costs and scrutiny. Both point to more deal uncertainty for the remainder of the year.
Consumer products companies that benefited throughout 2021 from robust consumer spending that offset initial inflationary pressure are left with an uncertain outlook as spending across all income verticals proceeds cautiously, even as consumers maintain $2 trillion in excess savings through July, compared with January 2020. The Federal Reserve’s moves to tame inflation through aggressive hikes to the federal funds rate have made taking on debt more expensive.
That being said, there are still attractive assets available that display strong operational capabilities with sustained growth and opportunistic cash-flush buyers. The economic uncertainty and cautious capital markets will place greater scrutiny on sellers to fully demonstrate the viability of their business models to investors.
Food and beverage
Transactions that closed in the food-and-beverage sector continued to fall in the second quarter, held back by higher input costs, as food at home prices increased 12.2% on a year-over-year basis in the June Consumer Price Index. Further, food inflation has continued to spread throughout the grocery store, impacting shelf-stable products, as well as perishable products like produce, which have been a staple of grocery shopping since early in the pandemic. These increases and broader cost inflation have combined to strain purchases of non-essential products.
In the second quarter, alcoholic beverage transactions continued recent trends and experienced further consolidation. Additionally, larger food businesses have focused on add-on complementary acquisitions with an aim on expanding service offerings and capitalizing on consumer post-pandemic shopping habits. We still expect brands focused on convenient, better-for-you products with strong customer connectivity to continue to garner consumer and investor interest for the remainder of 2022.
As consumers re-evaluate both their willingness and ability to spend on discretionary items, closed deal activity in the consumer goods space slowed, evidenced by macroeconomic headwinds, including a decline in new home sales, lower cash-out refinancing volumes and pricing pressures, and have forced consumers to pull back on real spending (nominal spending adjusted for inflation) for discretionary goods as they look to stretch dollars and the life of existing products. Pandemic-era consumer habits, including retrofitting homes for hybrid work and at-home schooling, and transitioning to at-home gyms, have largely dissipated. Discretionary dollars are shifting 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 connections to the consumer such as offering sustainable and better-for-all products, and to capitalize on growth in consumer recreational activities. Additionally, companies focused on pet ownership continue to attract interest from investors amid higher pet adoption during the pandemic and owners’ willingness to continue to spend on pets despite higher prices. Further, as international travel re-opens, luxury brands are expected to continue to perform well as pent up international demand spurs consumer spending despite pricing pressures.
Retail and restaurant
Retail and restaurant deal activity is the lone bright spot in the second quarter. Specialty retailers catering to consumer experiences continue to perform well, underscored by the public’s renewed interest in leisure and wellness activities. Pent-up deal demand has translated to strong transaction activity in the gaming, spa and personal care categories. In addition, restaurants continue to recover overall, although dining-out levels vary by region, with southern states exceeding pre-COVID-19 levels and northeastern states still lagging.
Retail and restaurant deal volume has declined from 2021 highs, but the franchise space is a positive outlier. Activity continues to increase within the casual and fine dining categories. Rising inflation and consumer pressures on discretionary spending could impact deal activity in this niche.
Meanwhile, inflationary and supply chain constraints are beginning to cool the recent recovery of brick-and-mortar retail. Retailers are struggling to balance the beforementioned changes in consumer preferences with continued supply pressures resulting in excess inventories that require heavy promotional support to reduce surplus. Anticipated increased promotional spend through the summer will impact profitability for retailers that benefited from consumer discretionary spending that overlooked pricing pressures for much of last year.
Key consumer transactions, first quarter 2022
- SYSTM Foods acquired both Rebbl, a plant-based beverage company, and Chameleon Cold Brew, in May and June 2022, respectively.
- Constellation Brands acquired Austin Cocktails and Lingua Franca, two alcoholic beverage brands, in April 2022.
- BDT Capital Partners acquired Azzure Spirts, a manufacturer of alcoholic beverages based in Nevada, in June 2022.
- Dave & Busters acquired Main Event Entertainment, an event management company, in June 2022.
- Sun Capital acquired Go Ape USA, an outdoor recreational events business, in May 2022.
- Alpine Investors acquired Diggin’ Your Dog, a distributor of pet health products and treats, in May 2022.
RSM contributors: Tom Martin, Kunal Bhatt, Paddy King, Ryan Schloer