Global M&A Industry Trends in Consumer Markets

M&A will be a key driver of economic recovery as businesses look to repair and reconfigure

Dealmakers in Consumer Markets have been challenged by the geopolitical and economic trends impacting the world for several years now. COVID-19 spread against a backdrop of economic fragility and uncertainty following Brexit, decline in US-China trade relations, growing concerns around the environmental and social impacts of consumption, rising nationalism and digitalisation. In addition, up until February, mergers and acquisitions (M&A) valuations in Consumer Markets were high, leading to more selective dealmaking and an increased focus on M&A strategy underpinned by growth potential.

COVID-19 has reinforced these macroeconomic trends. As a result, large conglomerates will continue to create value and deliver growth through engaging in acquisitions and divestitures as part of ongoing portfolio reviews aimed at constantly redefining their core. This will hold particularly true for large fast-moving consumer goods companies (FMCGs) and grocery retailers.

The shift in consumer preferences towards digital solutions has accelerated, with the future belonging to agile businesses. Direct-to-consumer models with well-established online platforms and businesses, centred around health and wellbeing as well as sustainability, will emerge as winners. Those that lag behind, such as traditional bricks-and-mortar non-food retailers, will see an uptick in distressed M&A restructuring activity and in some cases failures, which will result in increasing consolidation among larger players.

Businesses will also look to crisis-proof themselves for the future by embedding operational and financial resilience, often through mergers and acquisitions. We expect to see large corporates turn towards divestitures to maintain adequate liquidity and a surge in buyers and sellers engaging in creative deal structuring to facilitate deal execution, particularly in the short to medium term.

While the full impact of COVID-19 will unfold in the months to come, overall we believe M&A will be a key driver of economic recovery, supported by high levels of private equity (PE) dry powder and a recovery in consumer sentiment.

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“Consumer Markets has found itself uniquely positioned, with consumer spending shifting between its sub-sectors. M&A will bounce back – either as the more successful look to capitalise on recent growth or as the less successful encounter distress, resulting in consolidation.”

Neil SuttonGlobal Consumer Markets Deals Leader, partner on secondment to PwC Hong Kong

M&A trends in the first half of 2020

Deal volumes and values in the retail, consumer, and hospitality and leisure industries in 2019 were somewhat muted compared to 2018, reflecting geopolitical and economic uncertainties.

In the first half of 2020, COVID-19 directly impacted deals activity across Consumer Markets, with all three sub-sectors seeing a decline in both deal volumes and values.

Global Consumer Markets Deal Volumes and Values
Global Consumer Markets Deal Volumes and Values

However, Consumer Markets saw some notable deals announced during the period, such as Tesco’s divestiture of its Thai and Malaysian operations, PepsiCo’s acquisition of Rockstar, the strategic partnership between Coty and KKR, the joint venture between Carlsberg and Marston and, more recently, Puig’s acquisition of Charlotte Tilbury with private equity backing.

Retail, hospitality and leisure businesses have been particularly hard hit by the current economic uncertainties. As such, we expect these sub-sectors to experience heightened restructuring activity over the next 6-12 months, driving M&A activity through distressed asset sales and consolidation. This, together with big corporates carrying out portfolio reviews, will continue to drive overall deal activity in the sector.

M&A hotspots

Our insights indicate three big themes will drive M&A hotspots in the retail, consumer, and hospitality and leisure sub-sectors:

Constant redefinition of the core

  • Big FMCGs and grocery retailers will continue to rethink their strategies and engage in M&A either through bolt-on acquisitions or by exiting non-core markets and product categories.

Buying into the new “rule-breakers”

  • Disruptive trends towards e-commerce, direct-to-consumer, subscription models, automation, sustainability and a preference for “experiences over things” will accelerate and businesses will reconfigure as a result.
  • Categories such as food (grocers and manufacturers) and health and wellness will remain in demand and continue to attract investor interest. Others, such as traditional bricks-and-mortar non-food retailers (particularly apparel and department stores) and certain pockets of hospitality and leisure, will be looking to repair and reconfigure and will see an uptick in distressed M&A restructuring activity and some consolidation.
  • COVID-19 will enhance consumer focus on environmental, social and governance (ESG) issues and create new “rule-breakers” – disruptors in the sector – that are likely to become potential M&A targets for investors.

Building in super-resilience

  • Businesses across Consumer Markets will look to achieve operational and financial resilience, often using M&A to diversify their markets, channels and suppliers.
  • COVID-19 will likely see territories retreat from hyper-globalisation. This will lead to increased on-shoring and domestic or regional M&A.
  • The fragility of certain businesses, combined with lower stock market valuations and significant capital availability among financial investors and certain corporates, will drive opportunistic deals or M&A underpinned by creative deal structuring.
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Key themes driving M&A activity

Constant redefinition of the core

Retail, consumer and leisure businesses have been focused on value creation strategies through constant redefinition of the core and striving for growth. Such M&A transactions have shown resilience during the recent economic uncertainty and will be around for the foreseeable future.

For some, striving for growth means bolstering their portfolios through acquisitions in growing categories, markets and channels. Others may focus on technology, talent and supply-chain acquisitions. The purpose is to fill portfolio gaps and strengthen market position, supply chains and routes to market. Pernod Ricard, for example, through the acquisition of Castle Brands gained a brand portfolio which it believes will allow it to offer its consumers the broadest line-up of high-quality premium brands. Another example would be PepsiCo looking to develop a complementary product offering and a direct route to market in China by acquiring a leading online snacking business, Be & Cheery.

Acquisitions are one growth strategy; another is leveraging divestitures to achieve the “perfect core”. FMCGs are exiting non-core categories and retailers are applying geographical retrenchment. The last 12 months have seen an emerging trend of European grocers exiting overseas (Asian) markets. Tesco announced the divestiture of its Thai and Malaysian operations in 2020, marking the company’s exit from Asia. This followed Metro and Carrefour both announcing divestitures of their Chinese operations in 2019.

Corporate vendors tend to use the cash proceeds from divestitures to reinvest in their core operations, as well as to implement transformation plans, deleverage balance sheets and pay dividends to shareholders. Deal values tend to be substantially higher for transactions that are asset-backed. 

Explore the other key themes driving M&A activity.

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Buying into the new “rule-breakers”

“Rule-breakers” are disrupting the traditional landscape of retail, consumer and leisure businesses. In addition, these sectors have been facing digitalisation and ESG challenges. Such factors, coupled with a significant shift in consumer behaviour, are forcing businesses to adapt and rethink their core offering and go-to-market strategy.

Millennials have shown they prefer to spend more money on experiential purchases such as eating out, travel and going to sporting events, than on material possessions. This shift in behaviour over time has led to the growth of the sharing economy and the rise of companies such as Uber Eats and Airbnb – category disruptors in their respective markets.

Health and wellness is another focus area for consumers, with disruptors emerging in all categories from beauty products to health supplements, exercise equipment and activewear.

Growing concerns around the social, environmental and health impacts of consumption have seen another type of challenger emerge: “clean”, free-from and sustainable consumer brands. These are popular among both consumers and investors, as seen in the case of Shiseido snapping up Drunk Elephant, a “clean beauty” brand focused on the North American market.

Explore the other key themes driving M&A activity.

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Building in super-resilience

Faced with increased uncertainty, companies will look to “crisis proof” by building operational and financial resilience into their business models.

M&A could facilitate operational resilience through on-shoring and supply-chain diversification, vertical integration, digital transformation, automation, AI, optimising or right-sizing the cost base or tapping into new markets and synergies.

Financial resilience is typically achieved through having adequate liquidity and deleveraging balance sheets, and companies often turn to divestitures to achieve this.

In the current fragile market conditions, companies are more likely to resort to creative deal structuring to get deals completed. We note a growing trend for vendors to retain significant minority stakes, particularly in the case of complex carve-outs. This approach allows them to retain exposure to future growth as well as facilitate deal execution.

Metro and Carrefour, for example, each retained 20% stakes when they sold their Chinese supermarket operations.

More recently, Coty’s strategic partnership with KKR for its professional beauty and haircare business (a 60:40 split between KKR and Coty respectively) is indicative of how investors and corporates are likely to join forces in future. The partnership with KKR will enable Coty to deleverage its balance sheet and focus on delivering long-term growth, while KKR has acquired a controlling stake in an iconic beauty brand with a global presence and scale.

Explore the other key themes driving M&A activity.

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Global M&A Industry Trends in Consumer Markets

  • The retail sub-sector has been on a transformational journey for some time now, with digitalisation impacting traditional models. The need to have a strong online offering accelerated during the lockdown period as shoppers changed their habits. We expect this trend to continue, and in some instances drive cross-industry mergers and acquisitions as retailers pursue tech-enabled solutions.
  • While grocery retailers and e-commerce giants benefitted from increased demand during the pandemic, non-food retailers saw greater variations in performance: home improvement, home furnishing, fitness technology, health and wellbeing products and athleisure were prioritised by consumers. These trends are expected to continue as people focus more on their homes and wellbeing.
  • Apparel, footwear and cosmetics did not fare so well. Fashion brands, particularly those operating in the mid-market, face a challenging outlook and will see an uptick in distressed M&A activity.
  • Consumers will increasingly choose retailers that embrace sustainability throughout the value chain (supply chain, raw materials, packaging, recycling) as well as those that show agility and have high ESG standards. The latter trend may see some e-commerce giants selectively move into bricks-and-mortar stores driven either by regulatory pressures or opportunistic M&A.
  • M&A will provide further opportunities for consolidation and collaboration in the sub-sector as a way to share platforms and capture efficiencies.

  • Relatively speaking, the consumer sub-sector has not been as hard hit as retail, hospitality and leisure, which have felt the full economic force of the lockdown measures taken to suppress the spread of the coronavirus.
  • Certain pockets of the sub-sector have held up reasonably well, including food (particularly canned, frozen and shelf-stable products), meal kits, consumer health and wellness (skincare, clean beauty, health supplements, personal hygiene and health products), pet products, household cleaning products and disinfectants. These trends are expected to drive opportunistic mergers and acquisitions by cash-rich corporates as well as carve-outs stemming from portfolio reviews.
  • Many FMCGs have had to grapple with the unpredictability of demand, exacerbated by a lack of flexibility in their supply chains. Consumer behaviour will continue to evolve, pushing businesses to improve their demand forecasting capabilities, rethink their pricing and promotional strategies, gravitate towards digital engagement channels and gain consumer trust.
  • Investing in automation will help companies improve their agility and resilience. Business strategies focused on diversifying or shortening supply chains will boost transparency and visibility and future-proof businesses.

  • The sub-sector has essentially focused on survival through cash and job preservation over the past few months. Going forward, it will need to adapt swiftly to the new and emerging consumer trends. Operators equipped with strong balance sheets, that successfully navigate out of the crisis, could become consolidators.
  • Never before have consumers relied as much upon online food-delivery platforms as in the past few months. For many consumers this was their first taste of online food delivery and some of this behaviour is likely to stick. This provides something for multi-site restaurant players to think about, particularly when re-assessing underperforming sites and formulating growth plans.
  • To burn off the calories, consumers across the globe have tuned in to virtual fitness classes, allowing traditional fitness operators a chance to add a sustainable online revenue stream to their businesses.
  • Travel and hospitality is likely to bounce back in the long term, being in pole position to capitalise on the ongoing shift in consumer preferences towards experience-led purchases.
  • Others such as gambling, pubs and brewers are likely to see M&A driven by consolidation.

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Consumer Markets M&A Outlook

Businesses will need to stay agile amid changing consumer behaviour and trade restrictions in order to preserve and create value. For some, this will involve constant re-evaluation of the core, for others it means embedding resilience into their business models and/or a complete reinvention to become the new rule-breaker on the block.

We believe that the already-challenging outlook for bricks-and-mortar retailers, particularly in traditional department stores, mid-market apparel and footwear, will lead to consolidation among larger players and an increase in distressed M&A and restructuring activity. 

The direct impact of COVID-19 on hospitality and leisure businesses will inevitably cause casualties, particularly in the short to medium term. However, we expect the growing numbers of consumers prioritising “experiences” over possessions to restore long-term strength of the sector. 

In the coming months, retail, hospitality and leisure businesses will have to wean themselves off a reliance on government aid and relief measures, as well as the forbearance shown by lenders and other creditors. This will reveal a clearer picture of which businesses will be in play for M&A activity.

M&A activity involving FMCGs and conglomerates has been more resilient, and we believe that portfolio reviews and carve-outs will continue to dominate for the foreseeable future. Several strategic reviews are already in the public domain, such as Unilever’s tea business and Philips’ domestic appliances business. Corporates with deep pockets will also be on the look-out for opportunistic deals.

Consumer Markets businesses will need to work hard to regain consumer confidence as territories ease lockdown restrictions. Those that keep consumer health and safety at the forefront will emerge as winners.

COVID-19 will reinforce nationalism and territories will seek to limit future vulnerabilities by reducing supply-chain dependence on China, in particular, and shortening or diversifying their supply chains to other Asian territories.

Finally, the last few months have been challenging not just for businesses, but also for the dealmaking process. Creative solutions for future dealmaking include:

  • Greater use of digital technology to conduct site visits and management presentations.
  • Greater focus on value creation, underpinned by enhanced use of data analytics.
  • Use of creative deal structures, such as greater retention of minority stakes by vendors, an increase in earn-outs and fewer locked-box deals.

While the importance of face-to-face interactions and building relationships between key parties will continue to be invaluable, particularly in crucial phases of transactions, we expect some of the aforementioned changes to last.

Read the cross-industry Global M&A Industry Trends

About the data
We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv as of 30 June 2020, and supplemented by additional information from Dealogic and our independent research. This document includes data derived from data provided under license by Dealogic. Dealogic retains and reserves all rights in such licensed data. Certain adjustments have been made to the source information to align with PwC’s industry mapping. We define megadeals as transactions with a deal value greater than US$5 billion.

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Neil  Sutton

Neil Sutton

Global Consumer Markets Deals Leader, partner on secondment to, PwC Hong Kong

Brian  Levy

Brian Levy

Global Deals Industries Leader, PwC United States

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