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Recent macroeconomic and geopolitical events have eroded consumer confidence, which in turn has led to a softening of M&A activity in the first half of the year, especially compared to record levels of deal-making in 2021. However, we expect that changing consumer preferences will continue to create opportunities for M&A as companies seek to transform business models and reposition themselves for future growth.
Sector hotspots such as consumer health, health and beauty, pet products, grocery and e-commerce—which achieved rapid growth during the pandemic—are still attracting M&A interest. However, following the easing of lockdowns, more consumer spending is shifting from goods to services. Inflation is also impacting spending decisions, with durable and discretionary categories more likely to see a reduction in demand, in favour of staples and non-discretionary categories.
As a result, deal processes are taking longer, and we are seeing heightened scrutiny from investors—they are facing difficult-to-analyse recent historical performance and uncertain near-term outlook. More extensive, data-driven reviews are required to support valuation inputs such as future demand, pricing and cost mitigation strategies and resulting margins.
The major themes—demergers and divestitures, supply chain and logistics, and online platforms and e-commerce—will continue to play key roles in driving M&A through the remainder of 2022. Additionally, events that took place in the first half of 2022 have led to some new themes and hotspots emerging alongside the existing ones.
‘Interesting times lie ahead for dealmakers in consumer markets as inflation signals lower consumer spending—but companies still in the race to adapt their business models to meet changing consumer preferences will keep M&A as a key part of their overall strategy.’
Online and quick commerce face growth headwinds
Many consumers who had not purchased online before the pandemic continued to buy online even after lockdown restrictions ended, attracted by the convenience and wide selection available. But as inflation has increased prices, concerns around the cost of living are leading consumers to reassess their buying choices. They’re focusing more on value and returning to stores for lower-cost options, particularly in the value retail and discount grocery sectors.
Based on US Census Bureau data, online spending—which was at 11% pre-pandemic—peaked at 16% in 2021 and has now declined to 14% in 2022. We believe omnichannel retailing will be more important than ever—and will continue to evolve. An incredible 81% of respondents in PwC’s June 2022 Global Consumer Insights Pulse Survey indicated they have shopped across at least three channels (e.g., in physical stores, online via a computer, or online via a mobile phone or smartphone) over the last six months.
The shift from online back to brick-and-mortar stores has led to a decrease in valuations in the e-commerce and quick-commerce sectors, in particular in ultrafast grocery delivery, which had seen rapid growth over the past two years. In a crowded market, with lower growth potential than hoped for, consolidation is already taking place, and more is inevitable, with distressed M&A or restructuring also likely in the coming months.
In Europe and the US, a number of quick-commerce start-ups have been acquired by competitors over the past six to 12 months. Investors no longer appear willing to fund these cash-hungry businesses, leading several start-ups to face the choice of finding a buyer or filing for bankruptcy. Major players appear well-positioned to win in the fast delivery space in the longer term due to their wide consumer reach and available capital, whereas remaining smaller players will need to diversify their operating models in order to survive.
Supply chains continue to disrupt
Supply chain disruptions have been triggered by a combination of lockdowns, specific incidents and rapid changes in demand patterns, and they are set to persevere, as the consequences of the Russia–Ukraine conflict play out. These include direct impacts on the supply of specific raw materials and energy, and secondary effects in terms of heightened tensions with speculation and exports controls going up across most commodities.
The Russia–Ukraine conflict has led many multinational consumer companies to re-examine their ties with Russia amid pressure from stakeholders. Some have taken action by pausing sales, closing stores or even unwinding their investments in Russia altogether. According to a survey of international consumer-focused businesses operating in Russia by the Yale School of Management, 30% of respondents had decided to dig in or buy time, 50% had scaled back or suspended operations, and 20% had withdrawn altogether by the end of May 2022. Investment decisions in businesses with significant links to Russia are consequently being negatively impacted.
More broadly, the retreat from globalisation has led business leaders to assess their supply chains as they re-evaluate their overall risk profile. We expect to see vertical integration and other actions aimed at rebalancing supply chains during the second half of 2022, such as acquiring key suppliers, implementing operational changes (e.g., onshoring or near-shoring production closer to end markets) and exploring potential alternatives for existing inputs.
Capital availability and valuations
- Capital markets: Although capital markets have tightened and debt issuances have decreased due to the economic uncertainty, capital remains available for M&A. With global IPO markets practically shut and special purpose acquisition company (SPAC) activity at significantly lower volumes than in 2021, companies seeking an exit may look for alternatives, including extending venture capital funding or exploring a private sale.
- Private equity: With record levels of dry powder available to invest, private equity (PE) remains extremely active in the consumer markets sector. In the second half of 2022, we expect an increase in public-to-private transactions—with PE firms attracted by the relatively lower retail valuations—and in PEs buying brands put up for sale by large corporates that will continue to divest non-core assets as part of a portfolio optimisation strategy. We also expect a preference for lower-risk deals such as bolt-ons and structured deals.
- Corporates: A number of corporates have established venture-capital arms to invest minority stakes in start-ups, including in promising areas such as innovative or tech-focused businesses. We are also seeing increased use of partnerships or joint ventures to gain access to capabilities such as cyber, and to explore emerging areas such as non-fungible tokens (NFTs) and the metaverse. We also expect increased opportunistic deal-making as financial stress leads strategically sound but financially weak businesses to seek external backing.
ESG as a source of value creation
The trend of “conscious consumerism”—a commitment to purchasing decisions that have a positive societal impact—is reshaping business models and leading companies to rebalance portfolios with more sustainability-focused businesses. Business leaders are also looking at all aspects of their operations—including product sourcing, packaging and recycling—finding opportunities for circularity in value chains and ways to create value for shareholders. For example, some grocery retailers have acquired waste management companies or partnered with packaging companies to reduce, reuse and recycle waste. These actions help them not only to deliver on their environmental, social and governance (ESG) commitments but also to position themselves in strategically important segments of the value chain and offset scarcity-driven cost risks, as may be the case for recycled materials in some markets.
Mid-year M&A outlook for consumer markets
Despite a more uncertain outlook ahead for consumer spending, business leaders are focused on value creation, and capital remains available for M&A. We are optimistic that demand for consumer markets assets will ensure a healthy level of deal-making for the remainder of 2022, albeit not at the record levels experienced in 2021.
Explore our local M&A trends in Consumer Markets from the following countries:
Want to know the M&A trends we expected we expected in Consumer Markets at the beginning of 2022?
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