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Consumer markets: Deals 2022 outlook

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What's driving deals in 2022

PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for 2022.

Consumer markets M&A summary

Consumer markets (CM) M&A will remain active in 2022 as companies focus on top-line growth, portfolio optimization and greater shareholder returns. CM companies continue to enhance their digital and technology capabilities to access new markets and channels and to generate new business models. The integration of environmental, social and governance (ESG) components across products and operations remains a strategic priority, with diversity, equity and inclusion (DE&I) becoming increasingly important.

Competition for assets and an accelerated pace of dealmaking have helped create an attractive seller’s market. Consumer markets companies will continue to reassess their portfolios and divest underperforming assets to reinvest in core operations and high-growth segments.

Companies will also need to mitigate operational risks attributed to increased input costs, supply chain disruptions and a tight labor market. Data, analytics and technology will play a greater role in automating processes and reducing lead times. 

Deals rebound amid operational risks

Transactions have accelerated as acquirers build capabilities to help sustain pandemic-driven growth while addressing higher input costs, supply chain disruptions and competition for talent. Portfolio optimization has also become an attractive play in the current high-multiple environment. In the last 12 months, M&A volume grew by 17%, compared to all of 2020, led by consumer sub-sector deals, which constituted 49% of transactions.

Cash accumulated by strategic acquirers during the pandemic, coupled with high dry powder levels, have led to larger transactions. Deal value in the last 12 months increased by 34% compared to all of 2020. In the last 12 months, 8 megadeals with disclosed value greater than $5 billion were announced — increasing average deal size by 23% to $504 million for all of 2020.

Sub-sector outlook

Cost management, portfolio optimization

Consumer companies are building supply chain resilience to counter inflation across commodities, freight, packaging and labor costs — adding pressure to operating margins. Higher stockout levels have created longer purchase cycles. Cost management will be a short-term M&A driver, with transactions focused on building scale, achieving synergies and consolidating market share.

Long-term growth strategies will target digital commerce channels, including direct-to-consumer and subscription models, mobile payments and omnichannel consumer engagement. High valuations make divestitures an attractive play. Disposal of non-core assets will support investments across high-growth segments including eco-friendly, health and wellness and indulgence.

Inventory on hand, omnichannel shopping

Supply chains need to ensure product availability and enhance customer experience in stores and online. Acquisitions will continue to target vertical integration and digital capabilities.

Right-sized stores will focus on product discovery. Augment existing formats to integrate e-commerce, from same-day delivery and drive-through to in-store and curbside pick-up. Retailers are forming alliances to overcome last-mile challenges and leverage economies of scale.

To meet consumers — especially younger shoppers — where they are, use live-streaming and purchasing capabilities within social media to drive product discovery and sales. Alternative payments — including buy now/pay later options and cryptocurrency — can help build market share.

Slow travel recovery, loyalty programs

The US hospitality sector is getting a strong boost from reduced uncertainty that’s due to widespread vaccination, the continued strength of leisure travel and the recent reopening of US inbound international travel. The revenue per available room is now expected to largely recover, reaching back to 2019 levels by the end of 2022.

Despite the lingering uncertainty over the return of business travel to 2019 levels, deal volume has bounced back sharply. The gaming sector continues to experience a boost from the continued strength of leisure travel and expects to see more transactions in the regional gaming sector. Sector consolidation is trending as third-party hotel management companies combine. In both asset- and portfolio-level deals, as well as corporate M&A, investors are focusing on capabilities-driven transactions, such as deals that fill existing portfolios or capability gaps, or ones that create a more scalable platform to capture upsides created by sector tailwinds.

The buyer pool for hospitality transactions regained its strength in 2021, as real estate investment trusts (REITs) and other buyers sitting on the sidelines returned to the fray, even as private and institutional capital continued to lead acquisitions and privatizations. With a significant amount of capital and latent demand for hospitality as a “reopening play,” 2022 is anticipated to be an active year for targeted brand acquisitions, portfolio sales, privatizations and further sector consolidation.

“Consumer markets deal activity will remain active in 2022 with a focus on optimizing returns, digital and tech capabilities, and supply chain disruption.”

— Alberto W. Dent, US Consumer Markets Deals Leader

Key deal drivers

Digital capabilities, robust operations

Strategic portfolio reviews and the disposal of non-core assets continues to be a key focus in achieving long-term growth. By divesting underperforming assets, consumer markets companies can capitalize on rising valuations and high capital availability, while also reducing costs and redundancies to streamline operations. Divestitures related to sourcing simplification, SKU rationalization and alternative product formulations can reduce supply chain complexities and improve operating capacity and speed.

Proceeds from divestments should be reinvested to strengthen core operations and build the right capabilities — those needed to remain competitive and win consumers. Key investment areas include:

  • New markets and localized strategies
  • Supply chain agility and flexibility
  • Vertical integration for  greater control of operations
  • Digital and tech capabilities that enhance customer experience and back-office operations

Deploy capital to build a competitive advantage

Record levels of private equity dry powder and corporate liquidity have produced greater competition for consumer markets assets, driving up valuations. Acquirers need to consider how capital is deployed to maximize their return on investments.

High valuations may result in growth extending from cross-industry investments. To deliver sustainable profitable growth from adjacent sectors, markets and product lines, companies will need to leverage expertise across core capabilities and ensure core businesses are in good standing before extending out.

Special-purpose acquisition companies (SPACs) offer flexible hold periods and the ability for greater private investment participation, but SPAC activity has softened in light of new Securities and Exchange Commission (SEC) accounting guidance released earlier this year.

Identify and model synergies during pre-deal

The best way to ensure value capture post-deal is to have it top of mind in the pre-deal process. Synergies should be modeled at the most detailed level possible. Opportunities to transform the workforce, front and back-office operations or the supply chain should be accompanied by transformation plans developed and executed by an experienced, empowered team. Prior to an integration, companies need to carefully weigh the risks related to loss of brand identity, misaligned ESG goals and processes, and lagging innovation.

Companies need to take the opportunity to assess the balance sheet and write off over-valued inventory in purchase accounting to mitigate future risks. To generate long-term value, prioritize detailed internal assessments over quick wins that can only drive revenue acceleration in the short-term.

Shifting tax policy and antitrust scrutiny

With trade policy in a transitional state, consumer markets players remain agile and continue to build a more transparent and nimble supply chain, exploring nearshoring options and identifying alternative sources for products and raw materials. In addition, companies are set to benefit from reduced international trade barriers.

Evolving tax regulations, including an increase in capital gains tax effective January 1, 2022, will likely incentivize small and midsize transactions. Megadeal activity is expected to cool off during the first half of 2022 as consumer markets players navigate these new dynamics.

Antitrust scrutiny will remain elevated and will likely lengthen investigations and merger challenges. Companies need to ensure transactions have a valuable equity story and are able to frame their deal rationale with purpose. Cross-sector deals can build adjacent capabilities that create a competitive advantage without market consolidation.

Upskill employees, strengthen cybersecurity

Amid a tight labor market, companies must proactively address changing workplace expectations in order to retain and attract talent at nearly all skill levels. Automation and the use of robotics will be essential in supplementing human talent, particularly across “behind the store” roles. As operations become increasingly digitized, companies need to assess the digital literacy of their employees and establish an upskilling program that will maximize return on investments.

Acquirers and targets alike need to strengthen their cybersecurity systems due to consumers’ rising expectations over data privacy and security. Consumer markets companies are at greater risk due to the sensitive data generated from customer profiles and payment data. A ransomware attack can damage a company’s operations by generating the loss of sensitive or proprietary data, and suffering security breaches that can result in lost revenue, decreased  consumer confidence and a damaged reputation. Investments should focus on establishing standards, protocols and training to mitigate cyber risks and protect value in a deal.

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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