Consumer markets: US Deals 2023 midyear outlook

Consumer markets M&A summary

Consumer-facing companies are contending with a dynamic environment that includes constantly changing consumer preferences and evolving technologies as well as optimization of brand portfolios, pricing and scaling. This environment of rising interest rates, inflation, tightening of capital markets and geopolitical uncertainty creates disruption and opens key strategic opportunities. That makes M&A an important strategic capability for consumer markets (CM) companies. Even though recent deal volumes and average values have declined from 2022, they are in line with similar deal volumes from 2020, which was a normal deal volume year. However, the hospitality and leisure subsector, along with fourth-quarter 2022 megadeals in the grocery store and specialty retail spaces, has been a recent bright spot in CM.

CM companies remain resilient and have various deal levers to pull. Divesting non-core assets or unprofitable brands or products can expedite the reallocation of capital assets and increase value creation. Frequent proactive portfolio reviews, validated with data-driven insights and completed with speed, are key to informing decision-makers in today’s uncertain environment. Retailers are continuing to innovate: They are using technology and store spaces differently, focusing on customer loyalty programs and catering to ever-evolving customer preferences.  

Transformative acquisitions — followed by successful integration that requires a focus on key talent retention — are enabling companies to diversify offerings and tailor them to consumers' needs, helping to drive value creation.

Explore national deals trends

Domestic deal activity dominates

Two CM megadeals (each $5 billion-plus) announced in fourth quarter 2022 in the grocery store and specialty retail subsector positively impacted the average deal value. While average deal values have dropped 31% from fiscal year 2021 to the last 12 months of fiscal year 2023, unprecedented and record-high transaction multiples have prevailed. Deal values are expected to continue to normalize as transaction multiples drop, valuations become more attractive and the speed of dealmaking returns to a typical pace. However, it is unclear if that will occur in fiscal year 2023 or 2024.   

CM deal volume has declined in the first half of the year, as expected, due to persistent macroeconomic impediments and a slower than anticipated rebound during the start of fiscal year 2023. Nevertheless, overall deal volumes have remained consistent in the last 12 months in comparison to fiscal year 2022.  

Financial and strategic acquirers alike have focused on domestic deal activity, which represented approximately 75% of deals in the last 12 months.  

Across subsectors, we still expect to see a healthy level of fiscal year 2023 M&A activity in the latter half of the year, as businesses’ focus remains on increased profitability, portfolio diversification and optionality for consumers. The quickest way to achieve these goals is the successful execution of transformative acquisitions. However, deal values and volumes may not return to 2021 levels until 2023 or 2024.

Successful M&A integration themes

Companies are increasingly turning toward transformative acquisitions, according to a new PwC M&A integration report. Successful integrations across strategic, financial and operational measures are increasing, though they are still broadly elusive. Experience and sustained investment in key value drivers throughout the integration process drive success. However, survey respondents also noted that talent retention, a detailed value creation plan and the acceleration and integration of technology were also notably important to integration success.

Companies noted that the toughest hurdle was cross-functional integration, which has been especially true in transformational deals. Companies can use digital accelerators to enhance the integration of cross-functional areas, which successful M&A organizations overwhelmingly did. These organizations ultimately saw greater achievement in their go-to-market objectives — providing a roadmap for others to follow for a more successful M&A integration.

Learn more about leading practices and transformational mindsets in PwC’s new M&A integration report.

Key deal drivers

Necessity for business reinvention

Business reinvention, which can take a variety of forms, is the lifeblood of growth. Take divestitures for example. PwC’s recent divestiture study found that achieving value creation and capital reallocation through divestitures is contingent on the ability of executives to identify and act when a brand or product no longer fits within the portfolio. Data-driven insights and customer analytics should be at the crux of the assessment. Consumer packaged goods (CPG) companies, with their multitude of brands and product lines, need frequent portfolio reviews, with timeliness, speed and proactivity as key drivers.

A proactive approach is not without challenges. Stranded costs — particularly retail real estate, human capital, manufacturing footprint and potential entanglements — can significantly impact divestiture decision-making. Consumer markets executives must understand whether reluctance to separate a brand is due to a justifiable concern (e.g., distribution channel scale economics or profitability) or an individual bias around the loss of prestige (e.g., due to lower store count or total revenue dollars), personal impact on a management incentive program, inexperience in the divestiture process or overconfidence in their ability to revive the performance of an unprofitable product or struggling brand.

Consumer preferences are ever-changing, and businesses that succeed understand their customers’ evolution and focus their business accordingly. Divestitures will remain a critical component of adapting to customer expectations in order to help create value. 

Capital allocation

A challenging macroeconomic backdrop and ever-evolving geopolitical risks have put capital markets on edge. To maximize shareholder value, companies must take a value-based approach toward portfolio optimization. This involves defining value creation opportunities, using data to identify the highest value business outcomes and then developing a roadmap to create value in a way that maximizes total shareholder return.

As consumer spending habits shift between goods and services, and as risk exposure to cost inputs evolves (i.e., producer price inflation and the ability to pass these costs on to consumers), it is essential for consumer markets companies to identify product lines, service offerings, etc., where they are market leaders versus laggards and where there are opportunities for profitable growth. Developing a value heatmap, which is driven by data and benchmarked to the market/peers, can yield meaningful results.

Once the heatmap has been created, it is imperative to determine where and how to deploy capital in the wake of rising interest rates. Companies should deprioritize or divest products or businesses where there are natural owners who could better monetize the assets, and then look for ways to put that capital to work in parts of their businesses with above average growth and returns on capital, supplementing this with acquisitions where appropriate. Chilly IPO markets provide corporates with an opportunity to acquire high-growth companies at more attractive multiples compared to recent years.

Travel boom spurs new opportunities

The hospitality and leisure sector has been riding a wave of success recently, as travelers return to hotel rooms, restaurants and event venues following the depths of the pandemic. Shifting consumer behaviors have pushed more dollars into services and experiences, providing tailwinds for the leisure travel sector, with volume and daily rates in hotels returning to — or exceeding — their pre-pandemic levels in the first quarter of 2023. This has been buoyed by the slow but steady return of business travel, including both individual travel and group business events, with several Las Vegas operators recently reporting record attendance in the city’s convention halls.

Against this backdrop, it’s no surprise that operators in the sector are looking to cash in on some of the trends emerging from the pandemic, particularly those with the highest growth profile, such as extended stay hotels. This includes organic growth strategies (i.e., capital allocation focused on maximizing the highest growth brands in a portfolio), as well as inorganic, with recent M&A activity focused primarily on lower-risk joint venture investments and partnerships with international operators. As the macroeconomic picture continues to evolve, we could see more M&A activity focus on brands that cater to budget-conscious customers, as companies look to develop relationships with customers who are affected by a potential recession but are still focused on putting dollars to work on travel and experiences in the wake of the pandemic.

Feeling squeezed, consumers trade down

As brands continue to increase prices, consumers see persistent pressure on their wallets, forcing them to make trade-off decisions in their purchases. For many consumers, this has resulted in trading down in brand and quantity across essential categories, and has forced some to delay buying many non-essential categories. Consumers are increasingly looking for discounts across categories to stretch their wallets even further.

From a brand perspective, there is a hyper-focus on profitability as CM companies come out of the supply-chain issues of the past years and see continued high interest rates influencing their investments. The carryover of these supply chain issues has driven brands to invest in supply chain assets to provide greater control and improve profitability overall.

Elevated inventory levels in CPG companies have become increasingly common. Based on various economic factors, companies look to pre-stock items to proactively address ongoing supply chain issues. They also purchase in bulk or overinvest in inventory to obtain favorable pricing — in order to address inflationary headwinds and obtain future margin benefits once that inventory is sold through. Or they simply bolster inventory to build on existing sales growth, especially in niche categories already experiencing pronounced sales growth.

Companies are also working to ensure they have the right scale and channel balance to reach their end consumers in the most effective way. Brands continue to focus investment on reaching their consumers in an omnichannel manner, which has driven investments in technology and customer experience.

With this enhanced focus on profitability, brands and investors are expecting continued emphasis on maintaining scale, diversifying portfolios and shoring up capability gaps internally.

Resilience and innovation for growth and sustainability

For years now, challenges for brick-and-mortar stores and disruption from e-commerce have forced retailers to innovate. Today's reinvention involves broadening the concept of a "store" and the ways it can deliver value to customers. Retailers are using technology and space differently to increase optionality for pick-up, sorting and last-mile delivery, blurring the lines between a store and a warehouse/logistics hub. We are also seeing increased partnering with brands and other retailers for meaningful “store within a store” relationships that drive cross-sell, revenue expansion and satisfactory customer experiences. M&A is enabling and accelerating these transformations and needs to focus on drivers of value creation.

Restaurants are not immune to these challenges and trends. The proliferation of food delivery apps has made engagement a necessity and has driven increased competition via the rise of ghost kitchens. Whether it is new ways to order in-store or automating food preparation (robot chefs?), quick-service restaurants are at the cutting edge of this reinvention to drive top and bottom lines. Since not all players have the capabilities to develop this technology organically, many may look to acquire cutting-edge innovations.

“Frequent and proactive portfolio reviews, validated by data-driven insights and disaggregated by product or brand, will aid decision-makers in navigating uncertainty and global headwinds. Divestitures and transformational acquisitions remain crucial for innovation, profitability and ultimately, value creation - for consumer and shareholders alike.”

— Alberto W. Dent, US Consumer Markets Deals Leader

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