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Over the past five years, small brands ($100 million to $1 billion in sales) have propelled growth in the consumer packaged goods (CPG) industry. Meanwhile, the combined market share of large CPG companies (more than $5 billion in sales), has fallen year over year from 48.7% in 2014 to 46.6% in 2019.
This change reflects evolving consumer preferences for more digital options and social awareness that require ever-more innovation, making emerging brands more attractive to large CPG companies seeking new areas for growth and innovation—while differentiating their portfolios.
In fact, PwC analysis reveals that tuck-in deals—in which a large company acquires a smaller brand for its unique product or technology—are proliferating in consumer-facing industries. They’ve almost tripled from 7% of total deals in 2016 to 26% in 2019.
Acquiring small brands can bring material value creation opportunities to large CPG companies by introducing new capabilities, brand innovation or premiums and by capturing new trends to strengthen existing portfolios. However, integrating brands with different business models and cultures can sometimes make commercial, operational and financial success elusive.
Growth in market share and access to new distribution channels, brands and products are the most important deal objectives, according to PwC’s 2020 M&A Integration Survey. However, these goals are fully achieved in less than a third of deals.
A well-defined integration strategy can improve the odds, as successful tuck-ins have shown. For tuck-in acquisitions of small, innovative brands, emphasize early and extensive discovery to appreciate the different capabilities of an acquired brand, then determine the integration approach best suited to preserving and leveraging those capabilities.
1. Provide extended market reach at speed
Growth acceleration is the key driver for tuck-in transactions, rather than cost synergies. Deliver growth at speed by leveraging the scale of the buyer’s distribution footprint and customer network to provide immediate access to new markets or channels (such as retail, big-box and D2C.) Measure expected new demand against existing supply chain capabilities to maintain balance and customer relationships.
2. Preserve the essence of the acquired brand
While cost synergies may offer advantages to the acquired business, they are less central to the deal thesis. Buyers are well-advised to make thoughtful decisions about which areas of the acquired business to integrate, and which areas to hold until a more appropriate time.
Each brand is distinctive in its own way. Some are known for endorsements from celebrities or influencers, while others thrive on a history of organic and natural ingredients. Make every consideration to maintain the essence of the brand, especially in the near term. Keep in mind, however, that over time, intentional evolution is the key to successful integration.
3. Merge the best of both
Smaller brands consistently bring innovative ideas, new ways of thinking and unique consumer engagement that offer compelling opportunities to a large CPG organization. Large businesses historically have mastered productization, scale, experience, customer relationships and supply chain excellence. Cultivate opportunities to infuse and cross-pollinate, bringing the best ideas to both businesses.
4. Creating compelling value propositions for key employees
Distinctive talent always underpins growing, high-potential brands. Identify which leaders, managers and specialists are critical to the combined operation, then find ways to inspire them to uncover synergies from the convergence. Assess how employee cultures contribute to success at target brands. Offer creative control to key leaders as an incentive for retention at the combined company.
5. Find the right reporting balance
Find the right balance to ensure reporting compliance without overburdening the tuck-in. Communication to management and key stakeholders about revenue and margin targets, cash trends, anticipated synergies and overall integration status is essential.
However, overburdening the acquired brand with reporting requirements, internal controls and complex financial processes (including budgeting and closing the books) may paralyze the tuck-in, affecting its ability to grow.
Set expectations early by agreeing on financial goals and reporting. Deploy dedicated resources to help the brand track these metrics. Creating or leveraging early-stage operating segments (incubators) designed to manage scale in new acquisitions, investments or partnerships may help maximize value.
No one-size-fits-all approach exists for successful integrations. For large CPG companies, an agile integration approach that considers the five success factors we’ve laid out above is essential. Savvy CPG dealmakers have a well-defined M&A playbook to execute a phased integration approach that delivers the right priorities at the right time. Connect with PwC Deals to learn more.
Partner, PwC US
Partner, PwC US
Consumer Markets Deals Leader, PwC US
Partner, PwC US