Consumer markets: Deals 2022 midyear outlook

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Consumer markets M&A summary

Consumer markets (CM) M&A will remain active in 2022 as there is still sufficient undeployed capital despite macroeconomic headwinds. We expect a robust deal market as companies continue to optimize their portfolio, invest in technology, enhance the customer experience and leverage data. Companies will also have to cautiously navigate geopolitical uncertainty, supply chain challenges, inflation and changing consumer behaviors.

Companies are expected to focus on price elasticity, cost containment, supply chain resiliency and margin protection. Other strategic priorities — such as environmental, social and governance (ESG) and diversity, equity and inclusion (DE&I) efforts — will also be at the forefront of business and deal making decisions, as consumers continue to evaluate the companies from which they purchase products and services.

Business transformation, fueled by disciplined M&A strategies and aided by digital and technological investments, is still one of the fastest ways to mitigate risks and uncertainties, while generating long-term value creation.

Deals outlook is strong despite volatility

Following record-breaking deals activity in CM in 2021, the M&A landscape has slowed in the first half of 2022, reflecting the impact of macroeconomic headwinds, geopolitical uncertainties and a shift away from deleveraging by strategics. However, in the last 12 months, M&A volume dropped by only 3% compared to all of 2021. This decline of consumer subsector deals in consumer packaged goods (CPG) was offset by the rebounding of hospitality and leisure subsector deals fueled by the bounce back in travel. Retail deals led CM and constituted 48% of transactions. Cross-border deals increased approximately 5% from FY 2021 to the last 12-month period.

Deal value in the last 12 months fell 9% compared to all of 2021, but record-high transaction multiples are now starting to normalize. Strategic and financial acquirers have capital to deploy, but average deal size is likely to continue to trend lower as the focus shifts to smaller, faster-growing brands to complement portfolios. In the last 12 months, nine megadeals ($5 billion plus) were announced, with the majority of them in hospitality and leisure, reflecting the disruption and rebound from COVID-19.

Sub-sector outlook

Rethinking supply chains, managing inflation

Consumer-focused companies are responding to elevated and persistent inflation, increased costs across commodities, freight, packaging and labor. Many are also assessing the impact of price elasticity and their ability to push through pricing increases.

Transforming and securing supply chains have been key deal drivers, with alternative approaches being considered to curb uncertainties. To mitigate risks and ensure operational consistency, some companies have been acquiring distribution centers (to control volume and speed) or securing dedicated supplies. This shift should better position companies facing commodity, labor and geopolitical headwinds, but balanced inventory management will remain key.

Long-term growth strategies will target omnichannel consumer engagement. While digital commerce is growing, brick-and-mortar retail stores are experiencing increased foot traffic as consumers return to in-person activities.

E-commerce acceleration has slowed

Retailers continue to focus on e-commerce with direct-to-consumer (DTC) channels and digitally native brands. While there has been a marginal brick-and-mortar comeback as in-person activities have increased, most consumers will likely continue to view retail as omnichannel. E-commerce investments are expected to continue, including the integration of easy payment solutions and use of pay-over-time options for consumers. It’s likely that retailers will continue to make supply chain investments, and we will see increases in net working capital (NWC) and inventory levels, as companies pre-buy inventory or as inventory sits longer awaiting key components for completion.

On the distribution side, retailers continue to look for commerce partners, distribution centers and specialty logistics for fast delivery. To appeal to environmentally conscious consumers and employees, some will also focus on recyclable and/or alternative packaging and shipping materials.

Portfolio optimization will remain as companies assess their strategic positioning within categories and markets.

Recovery focuses on growth, development

The hospitality and leisure sector in the US is in a recovery period and appears to be largely resilient, thanks to a more positive outlook, growing demand for consumer and business travel around the globe, and publicly traded hospitality companies giving earnings guidance for the first time since the start of the pandemic. Confidence remains high due to the strength of the average daily rate and to expectations of revenue-per-available-room to return to 90% of 2019 levels by the end of 2022, as well as plans to reach pre-pandemic net unit growth in development. However, new challenges could cloud the recovery timeline.

Amid rising inflation, increased energy costs and higher interest rates, recovery remains a work in progress. When paired with demand, high fuel prices (jet fuel costs are up about 35% since the start of 2022 — a nearly 14-year high), created higher airfare costs, and hotel rates have risen with inflation. The ongoing labor shortage is impacting the ability to get to full occupancy and to provide the guest experience customers are demanding. Greater financial pressures could test the willingness of customers to spend on leisure travel in the months ahead.

Travelers continue to seek a unique guest experience, and boutique hotels can offer a more intimate travel experience. As larger hotel chains look to gain from the higher margins boutique hotels provide, targeted acquisitions of smaller boutique chains are anticipated.

“M&A activity is expected to remain strong in 2022 — although at a more moderate pace than we saw in 2021. Companies still seek transformational deals in response to changing consumer preferences, and labor and supply chain dynamics.”

— Alberto W. Dent, US Consumer Markets Deals Leader

Key deal drivers

Disciplined approach, competing for assets

Amid macroeconomic headwinds and tightening labor conditions, strategic acquirers remain disciplined and selective. It will be key to pursue acquisitions where there is strong strategic conviction or a desire to divest underperforming or non-core assets. Companies are weighing the benefits of holding or divesting such assets in the face of potentially declining transaction multiples. Reinvestment of capital may focus on core operations, strategic repositioning to improve supply chain resiliency, portfolio brand, market optimization and consumer satisfaction.

Recent declines in deal volumes have increased competition for assets, especially among financial acquirers and portfolio companies, which are expected to remain active with high capital availability.

Accelerating business transformation

Increasing interest rates, rising inflation, geopolitical volatility and potential regulatory changes pose challenges for the M&A environment. Increased costs in commodities, freight, packaging and labor are impacting operating margins and returns.

Consumer market players should address these uncertainties by adding capabilities and/or accelerating business transformation. Securing supply chains, embracing evolving technology, assessing tax implications and ensuring timely compliance should help mitigate risk and ensure operational consistency. Companies will also need to determine how to organize and run operations in Europe and Asia once a steady state emerges there.

M&A can be the fastest way to transform a business, and with thoughtful planning and execution, it can generate long-term value. Data, analytics and technology initiatives can automate processes and reduce lead times. Alternative supply chain options — including acquiring distribution centers or securing own-dedicated supplies — are a defensive and strategic option.

Focus on purpose, culture and digital

Three elements of deals that are often under-prioritized are purpose, culture and digital capabilities. Consumer brands with strong stances and an emphasis on ESG and DE&I initiatives are becoming increasingly valuable as consumers and investors feel a heightened sense of social responsibility. ESG-related campaigns — focusing on sustainable sourcing, a focus on health and eco-friendly packaging — are key deal drivers.

Digital capabilities and cutting-edge technologies help tailor the consumer experience to ever-changing people patterns and behaviors. For instance, “quick commerce” partners (e.g., distribution centers) can enable faster delivery to consumers, and direct-to-consumer subscription models, along with mobile payment and micro-financing, provide customer-centric options. 

Strengthen cybersecurity, retain talent

Consumer markets companies have greater data privacy and security risks due to sensitive data, including payment information and customer profiles. Companies need to strengthen their cybersecurity protocols and develop a cohesive strategy around their digital platforms. Going forward, companies may need to provide secure crypto platforms to address consumer expectations for payment options. Investments should establish standards, protocols and training to mitigate cyber risks and protect value in deals.

Recent global macro conditions have compounded supply chain challenges, causing some companies to seek alternative options to help mitigate disruptions and ensure timely, quality sourcing.

Given labor market challenges, companies have to address changing workplace expectations to attract and retain talent. This requires increased compensation, flexibility and choice.

Also, automation and digitalization require democratized upskilling to ensure employees’ digital literacy. 

Contact us

Alberto Dent

US Consumer Markets Deals Leader, PwC US

Amanda Giordano

Retail Deals Champion, Partner, PwC US

Josh Smigel

Consumer Deals Champion, Partner, PwC US

Jeanelle Johnson

Principal, PwC US

Lea Kuschel

Partner, Deals Practice, PwC US

Johanna Howles

Director, Deals Practice, PwC US

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