Consumer markets: US Deals 2024 outlook

Consumer markets using creative tools to get deals done   

As we move into 2024, many consumer-facing companies seem to be taking a “wait and see” approach to pursuing impactful capital market transactions. One reason may be that they are unsure what effect the Fed's recent anti-inflationary policies will have on consumers and consumer-facing companies. Against this backdrop of economic uncertainty, we have seen deal market activity contract throughout 2023 by about 20% versus 2022, with active dealmakers being forced to get creative and use tools such as earnouts and private credit to close valuation gaps.

Despite the current economic climate, consumer-facing companies cannot become complacent. To remain competitive amid shifting consumer trends brought on (or accelerated) by COVID-19, changing demographics and the ever-present forces of transformative technologies such as artificial intelligence, operators in the consumer space need to reinvent their business models. Strategic M&A activity presents companies with an opportunity to meet these challenges by accelerating their reinvention.

To execute successful M&A in 2024, dealmakers will be required to develop value creation plans at the onset, use effective screening and diligence capabilities to identify the right targets, and then act decisively to seize opportunities. By doing so, companies can use a period of broad uncertainty to create separation between themselves and their competitors while also developing a platform for success if M&A and capital markets rebound to levels seen in 2021 and 2022.

Explore national deals trends


Note: The primary M&A data source used in the year-end outlook is S&P Capital IQ. This is a change from our past outlook reports.​


Key deal drivers

Creative financing helps address capital allocation challenges

As interest rates have remained high and both M&A and LBO activity have slowed, dealmakers have turned to creative financing solutions. Private credit has flourished, but other structures such as all-equity backstops, sellers’ notes, paid-in-kind financing and convertible notes have also gained popularity.

Within consumer markets, deals increasingly deploy tools to defer some of the purchase price through various constructs such as earnouts and seller notes. Contingent consideration in the form of an earnout can help bridge valuation gaps between buyers and sellers and/or manage financing needs at the close of the transaction. Seller notes can be an effective way to mitigate differences in a seller’s valuation expectations and a buyer’s financeable purchase price by offering a form of private credit via the seller. 

Strategic buyers continue to re-evaluate their portfolios to find the right balance of holdings, which has led to a significant number of divestitures within consumer products companies (notably within the food and beverage category) and a refocus of acquisitions on synergistic and capability-driven deals, all of which need the right balance of capital for success.

Business reinvention sparks return to brick-and-mortar roots

For years, retail decision-making has been in emergency response mode, first to the rise of e-commerce/omnichannel, then to the pandemic and supply chain woes. Adapting to macroeconomic challenges was key to survival.  Today, the opportunity exists for intentional business model reinvention that can be transformative, ambitious and strategic. Retailers are asking the question, “Who do we want to be in 10 years?”

For some, this reinvention starts with a return to their roots — embracing brick-and-mortar stores. After a decade of focus on e-commerce and digitization, retailers are recognizing the pivotal role that the in-store experience plays in building customer loyalty. In response, they are adding experiential and interactive elements that drive engagement. Department, home improvement and furniture stores are altering layouts to make space for the sale of design services. Grocers are even considering lowering reliance on self-checkout not only to combat shrinkage but also to bring back the personal touch of a cashier. 

Larger-scale reinventions are also occurring as retailers use M&A to expand their reach geographically, technologically and by product category. In luxury apparel and grocery/discount, consolidations and portfolio realignments are happening now. As deal volumes return next year, we expect companies’ transformative aspirations will be made clear, through either gradual strategic add-ons or megadeals.  

Benefiting from action amid uncertainty

Stubbornly high inflation and the looming risk of a potential recession have kept many dealmakers on the sidelines in 2023. However, acting before — or in the first phase — of a potential recession can provide a significant competitive advantage.

In times of uncertainty, consumer market operators using a well-thought-out value creation plan can gain access to attractive new technologies and/or acquire underinvested and underpenetrated brands, especially as companies looking to raise cash are pushed to liquidate attractive assets at cheap valuation multiples relative to recent historical levels. Having an experienced deal team that can act quickly as these opportunities present themselves allows companies to use the current economic environment to augment their existing product / brand portfolio and broaden their capabilities.

Rather than taking a “wait and see” approach, companies should explore how they might exploit current market conditions in ways that would enable them to generate financial outcomes more quickly. Doing so would, in turn, fund further transformation and build the institutional muscle required to achieve successful M&A results.

Hospitality innovating to boost growth

The challenges faced by the hospitality sector in recent years inspired rapid and significant innovation. Although hospitality companies formerly lagged other sectors in development, when driven by a global emphasis on health and safety they quickly adopted mobile and contactless technologies. As we see a return to travel and events at rates surpassing those of pre-pandemic levels, hospitality suppliers are under pressure to adapt further. In response, they are seeking opportunities to push the boundaries of their service offerings and differentiate their brands.

The travel and leisure subsector faced similar challenges, requiring companies to innovate to sustain their competitive advantage. For example, management system solutions have been instrumental in smoothing the reservation process and capturing customer relationship data for connected, sophisticated experiences. Competition among online travel agencies has forced suppliers to integrate with their client-facing counterparts by striking exclusive relationships and either developing technology organically or acquiring advanced solutions. Increased partnering among entertainment brands has led to more cross-selling, revenue expansion — and greater customer satisfaction. Among travel and leisure companies, M&A centered on value creation can enable and accelerate both technology transformation and service expansion.

Creating value through divestitures

As brand fragmentation continues and competition within and across categories for share of wallet intensifies, consumer brands continue to look for ways to improve both topline and bottom-line growth. To that end, many large consumer packaged goods (CPG) companies have already begun strategic portfolio reviews, with data-driven insights and customer analytics at the core, to identify opportunities to divest subsets that may be taking focus away from their core business. Divestures are likely to remain critical strategic options for these companies in 2024, particularly if consumer spending continues to soften.

With the right mindset and valuation, such divestitures can create real value for buyers. Many divested brands have been under-invested from a marketing and advertising perspective or from an innovation perspective but still have strong consumer affinities. Acquiring a divested business unit requires coming in with eyes wide open in terms of true separation costs. It also calls for a roadmap to value creation, untangling business performance relative to market performance and precise forward-looking projections.

“Despite a slower 2023, we believe deals are a strategic imperative for consumer market companies and 2024 will bring increased deal activity and new opportunities for value creation for both companies and consumers alike.”

— Alberto Dent, US Consumer Markets Deals Leader

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