Consumer products and retail companies give green light to deals in search for growth
Deal intentions reached an all-time high in the latest edition of the Global Capital Confidence Barometer. 61% of consumer products and retail (CPR) executives not only indicate that their companies are actively pursuing M&A, there is an expectation that there are more deals to come. The hunt is on for assets that can help CPR companies address a myriad of challenges in a fast-changing market.
Although deal fundamentals remain supportive of M&A, some negative pressures are emerging as the confidence levels drop in the number and quality of acquisition opportunities. Part of the issue may be that companies are having to look for acquisitions that are different than their existing portfolio.
When it comes to dealmaking, quality over quantity is top of mind
With executives citing new product or service innovation and reacting to competition as their top strategic drivers for pursuing transactions, joint ventures or alliances outside of their sector, companies may not have the same innate understanding of the deals they are targeting. This may also explain why pipeline levels have dropped.
Six months ago, 45% of CPR companies had five or more deals in the pipeline. Now, 50% indicate that they only have one deal on the go. Declining confidence in the quality of available assets may also be a contributing factor. With fewer high-quality acquisition opportunities coming to market, 40% of CPR respondents expect valuations to increase over the next 12 months for higher quality assets.
In an era of continuous change, executives must be open to new cues
Over the past two years, the primary focus has been on consolidation and mega deals — the Kraft Food Group-H.J. Heinz merger in 2015 for US$46b and the Anheuser-Busch InBev-SABMiller deal for US$101b in 2016 are two examples.
And although 64% of CPR executives surveyed indicate that their focus is on smaller, deals in an effort to grow market share, move into new geographies, or consider disruptive transactions in the form of corporate venture capital, joint ventures or alliances, we expect 2017 to be another year for mega deals.
From the 1970s to the 1990s, CPR companies grew at or above GDP rates. Investors could put their money into a mutual fund of CPR companies and achieve a high single-digit rate of return. The introduction of the Internet and the changing habits of millennials have turned that model on its head. For the last 18 quarters, a number of incumbents have struggled either to produce low single digit or negative returns. Without apparent sources of organic growth, companies are feeling the pressure to get out and deal.This trend also explains why 69% of CPR executives say they’ve increased the frequency of their portfolio review process. However, despite conducting more reviews, their effectiveness may not be as robust as it needs to be as many CPR companies are not reading the cues —what may have worked in the past is not working now. CPR companies need to do more than review their portfolios — they need to be modernizing them, making the hard decisions to divest products that consumers no longer want.
Digital disruption high, but not high enough on the boardroom agenda
Although the appetite for M&A is on the rise, the majority of industrials companies continue to view organic opportunities as their best avenue for growth. However, organic top-line growth is difficult to attain, and previous focus on operational improvements and working capital leaves little room for additional organic margin improvement. As a result, industrials are increasingly shifting their attention to M&A to improve sales and earnings.
Although industrials companies are centering their attention more toward acquisitions, joint ventures (JVs) and alliances continue to provide a source of innovation opportunities and avenues for market expansion. These types of deals are particularly favorable in emerging countries, where deal environments can be more complex and involve higher levels of geopolitical and economic risk.
It would appear that CPR companies are also slow to adapt to the disruption posed by digital technology. In the search for growth, 37% of CPR respondents cite future-proofing their business in an age of constant change and disruption as the most important question business leaders need to find answers for. Digital now accounts for 45% of all media spend at Clorox,1 32% at L’Oréal,2 30% at Coty,3 28% at Church & Dwight,4 20% at Danone.5 Diageo announced that digital spend will be up fivefold in 2017.6
As one EY client recently said: “Digital, analytics, ecommerce and social media analytics, and emerging business models have become increasingly important on the agenda of every board meeting.” Yet only 21% of respondents say that the impact of digital technology on their business model is the most prominent issue on their boardroom agenda over the next six to 12 months.
One recent high-profile pending acquisition is seeking not only to seize a digital advantage, but also potentially disrupt an entire CPR subsector. The US$13.7b Amazon acquisition of Whole Foods has certainly put the grocery industry and likely other sub-sectors on notice. For both companies, it appears to be a win-win. In penetrating further into the food business, Amazon acquires instant credibility through Whole Foods’ significant brand equity and socially responsible supply chain.
For Whole Foods, it’s a chance to gain access to Alexa, giving consumers access to high-quality food from a source they can trust with the sound of your voice. Currently, the grocery segment remains one of the most under-penetrated ecommerce categories. The Amazon-Whole Foods merger is about to change that.
Executives look to capitalize on growth opportunities and remain relevant to customers
As we look ahead, 96% of CPR executives see an economic outlook that is stable to improving, and with corporate growth expected to accelerate, we believe that CPR companies will be more active in the deal market as the year progresses, looking to capitalize on growth opportunities and remain relevant to consumers in an environment of policy uncertainties and constant change.
- The Clorox Company, 2017 CAGNY Conference, 22 February, 2017, https://s21.q4cdn.com/507168367/files/doc_presentations/2017/CAGNY_2017_Final_Website.pdf.
- L’Oréal, L’Oréal’s Financial Information Meeting, 10 February 2017, http://edge.media-server.com/m/s/93itvabo/lan/en.
- Thomson Reuters Streetevents, Edited Transcript, COTY – Q2 2017 Coty Inc Earnings Call, 9 February, 2017, phx.corporate-ir.net/External.File?t=1&item=VHlwZT0yfFBhcmVudElEPTUyNDc1ODV8Q2hpbGRJRD02NjAyNjE=
- Church & Dwight Co., Inc., Church & Dwight Co., Inc. at the Consumer Analyst Group of New York Conference, 23 February 2017, http://investor.churchdwight.com/phoenix.zhtml?c=110737&p=irol-EventDetails&EventId=5249488.
- Thomson Reuters Streetevents, Edited Transcript, BN.PA – Full Year 2016 Danone SA Earnings Call, 15 February 2017, http://danone-danonecom-prod.s3.amazonaws.com/user_upload/danonetemplates_filewithpicture/BN_PA-Transcript-2017-02-15T08_00.pdf.
- Diageo, Diageo Interim Results, Six Months Ended 31 December 2016, 26 January 2017, https://events.webeventservices.com/Diageo/2017/01/26/F17%20Interim%20Results%20Presentation.pdf.
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