by Tom Allen
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The consumer goods sector experienced a record-breaking year in 2017 with total deal value equaling ~$350bn, a 25% increase from $280bn in 2016. This increase was driven by strong mega-deal activity in 2017 (transactions exceeding $5bn) with eight mega-deals amounting to ~$200bn (versus five in 2016 totaling ~$30billion) – a notable example being Amazon’s $13.7bn acquisition of WholeFoods.
Looking to 2018 and beyond, the sector is set to experience a similar level of deal activity. Consumer preferences, by their very nature, are continuously shifting. Preferences range from the actual product or service in question, how consumption takes place (e.g. in-store versus online) to the nature or timing of delivery. Indeed, the proliferation of the on-demand economy has enabled companies such as Deliveroo and Uber to disrupt traditional industries and serve customers via a few clicks of an app. Add factors such as a wave of digital transformation (think online grocery shopping and consumers seeking out exclusive promotions via apps), a trend for a lack of brand loyalty amongst millennials (with value being a key driver of consumption decisions) into the mix and one is left staring at an industry in flux.
As traditional market powers struggle, start-ups wage war and business models become reinvented, M&A – a time tested means for growth, reinvention and revitalization – will be central to the future of consumer-facing companies. With sector-change well underway, the companies affected will need to continuously assess how they can remain competitive. Complacency in this regard is not an option. No industry or company is immune to the shifting competitive landscape originating from digital disruption and changing consumer preferences. Accordingly, consumer-facing companies should consider the following three strategies.
1. Inorganic Growth and the Quest for Relevance
Building on 2017's deal-flow, consolidation and inorganic growth activity will accelerate further. Large corporates are being forced to evaluate their competitive positions as historically stable and defensible product or category leadership comes under assault. Young, agile upstart competitors are using technology to leap-frog traditional competitive barriers to market entry and gain traction quickly. Scale, production, manufacturing and delivery issues are more easily navigable via a combination of technology, e-business models and savvy partnerships and joint ventures.
Baker Mckenzie estimates that the aggregate of consumer goods (and retail) M&A transactions could reach ~$633 billion in 2018 - making these sectors set to lead the way for M&A growth this year. The question is why?
Traditional means of growth are disappearing. Companies are turning to M&A to find new scale, synergies and cost benefits to sustain growth targets. In the U.S., friendly tax and repatriation scenarios are freeing up cash and bolstering balance sheet health. Globally, private equity and shareholder activism is mounting. Both investors and corporate leadership are watching the double-digital growth of emerging consumer orientated start-ups, such as the Dollar Shave Club and Deliveroo. Together, this is driving internal and external pressure to examine product portfolios and then divest, merge, or acquire brands that offer stronger long term growth prospects and strategic potential.
Consider the sale of Unilver’s spreads business to private equity group KKR in 2017. In announcing the $8.8bn blockbuster transaction, Unilever outlined it represented “a step in reshaping and sharpening its portfolio." Fittingly, the deal came on the heels of their acquisitions of Schmidt’s Naturals, a plan and minerals-based deodorant, soap and toothpaste company. PwC labels this strategy as the “squeeze value” approach and suggests that it will drive a number of strategic divestments and thus, increased buying activity in the near term.
2. Reorientation to Meet Changing Consumer Tastes
The disruptive reality of rapidly changing consumer tastes and preferences cannot be ignored. Satisfying increasingly fickle and shifting consumer demand (especially among millennials) requires business readjustment, and in many cases, reinvention. With the information age, the rate at which opinions or ideas are shared, marketed and internalized is near-instantaneous. For consumers, what was once desirable, can literally change overnight. Corporates’ R&D and innovation cannot keep pace with the fluidity of consumer want. It is therefore inevitable that M&A activity will grow in response to companies searching for new revenue streams to capture sales growth and build market share as loyalty and patronage sway. While P&L attractiveness, economies of scale and portfolio continuity once drove deals, today's environment is different.
The dominant consumer theme for 2018 will certainly be health. Last year, ABInBev, acquired Hiball, a provider of organic energy drinks and energy waters. KPMG noted the conventional alcohol player’s morphing interest in ‘no-and-low-alcohol’ drinks to meet discerning want for a healthier lifestyle. Nestle, a brand synonymous with sweets, has shed its confectionary businesses, opting for acquisitions in healthcare, including Atrium Innovations, a Canadian vitamin maker and Sweet Earth, a vegan and plant-based food business. In a similar the vein, the company created a buzz by acquiring a majority stake in Blue Bottle Coffee, a high-end specialty craft coffee roaster. While the latter acquisition isn’t specifically health category driven, it is indicative of the consumer trend of eschewing ‘low quality’ products for premium ones believed to deliver better general wellness.
2018 is likely to end as a year in which large corporates are forced to reorient their focuses, ensuring premium, health-centered offerings are made available to consumers. Consumer demand for healthy, organic offerings in particular will drive deal activity this year as major corporates shift their M&A preferences to these burgeoning sectors.
3. All Digital, All the Time
Interconnecting with the above areas, is the advancement of digital technology. While the digital-first reality has been a steadily evolving one, today’s consumer goods companies contend with it at every turn. Seamless incorporation and adoption of digital are critical to consumer engagement.
In every sector, the advancement of digital technology has given rise to rapid scale, virtualization of physical goods or experiences and surprising ease of access to new market or channel expansion. At one time, complex value chains and logistics prohibited the entrance of new competition - with the advantaged few big companies that had the muscle and man power to solve these enjoying dominance. Today, this advantage is effectively gone and the playing field has leveled. Perhaps nowhere more so than within the consumer goods sector.
Digital capabilities are critical to possess but difficult to build internally. Large companies therefore increasingly require bolt-on functionality to help existing business models. Dozens of small company or technology acquisitions are easily in scope for the largest brands. Full e-commerce and technology driven platforms are now considered a bare minimum. Inc. reports that boardroom conversations will shift to the “identification of innovative investments” and that these will cover everything from website purchasing, mobile application and notifications to social media, virtual reality and A.I. driven intelligence. As a case in point, looking at some of Walmart’s 2017 acquisitions it is evident that digital was at the heart of deal-rationale. For instance, the acquisition of Parcel.com enabled the retail-giant to tuck-in a company providing “uniquely reliable, polished, and transparent service to online retailers looking to enhance their customer experience” into its portfolio. Similarly, the acquisition of Bonobos (the largest apparel brand ever built on the web in the US) increases Walmart’s ever-growing e-commerce offering (building upon the 2016 acquisition of Jet.com). Despite the purchase price of Bonobos being significantly lower than Amazon/WholeFoods ($310m versus $13.8bn), Forbes suggests the deal could be bigger in terms of what it means to the evolution of the retail economy and the competitive leverage it will bring to the world’s biggest retailer.
Incorporating digital tools unlocks value, even as product margins erode. In today's consumer goods environment revenue and growth targets won’t be hit simply on the back of pricing and being a “preferred” brand. Both are unsuited as long-term strategies. Taking casual dining as an example, the sector is struggling with the emergence of on-demand home delivery models such as JustEat and Deliveroo in Europe and UberEats or Postmates in the U.S. This revolution in dining, which pressures basic brick and mortar incumbents, only emerged in response to digital and mobile payment technology developments. Such digital improvements create industry opportunity and change, which ultimately encourages consolidation and deal activity. Incorporating digital tools is a central way to build or regain competitive advantage. This approach fosters lean transformation, continuous improvement and may ultimately clear the path to success in the new world of consumer goods.
Looking forward, traditional consumer-serving companies will continue to fight back in response to industry disruption and look for ways to remain competitive, drive innovation and grow. Former powerhouses are fighting for survival as they seek new markets and strive to keep consumers loyal. M&A provides the most obvious path to getting there.