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Consumer markets deals insights: 2021 midyear outlook

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What's driving deals in 2021

PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for the rest of 2021.

Transformative strategies fuel deals in consumer markets

Increasing investor confidence and accelerated transformation strategies are driving deals activity in consumer markets. Companies are acquiring digital capabilities and integrating environmental, social and governance (ESG) initiatives to deliver a differentiated customer experience, access new revenue and increase transparency. 

Strengthening core operations remains a priority. Supply chain disruptions and inventory scarcity, which were a hallmark of the COVID-19 pandemic, remain prevalent, though the products and subsectors impacted have shifted. Consumer and retail companies are building agility and flexibility across their operations to minimize future risks. In light of labor shortages, workforce availability and redeployment considerations may become a deal catalyst, while emerging tech, such as robotics and automation, will play a greater role in generating efficiencies and optimizing operations.

The pressure to create shareholder value continues to encourage the reconfiguration of business models and the reshaping of portfolios. Increased cross-sector convergence will enable product and service innovation — along with content and customer experience — to generate long-term value through customer acquisition and retention.  

Economic tailwinds affect dealmaking

Broad capital availability, low interest rates, steady vaccine deployment and a recovering US economy have provided tailwinds for consumer markets dealmaking.

During the past 12 months, deal value grew by 18% compared to full year 2020, representing the highest disclosed M&A value reached over the past five years. There were eight megadeals with a disclosed value greater than $5 billion during the past 12 months. That contributed to a 25% increase in average deal size compared to the entirety of 2020.

Based on the number of deals closed, M&A volume during the past 12 months remained on par with full year 2020 levels. However, all indications are that deal volume will continue to rise this year based on the number of buyers and sellers in the market and the threat of potential US tax policy changes. Increased antitrust scrutiny and geopolitical shifts may temper this growth as the second half of the year unfolds.

Sub-sector outlook

Reshape portfolios, strengthen brands

Consumer companies continue to reshape their portfolio with high-growth brands that strengthen their core market positions. As consumers increasingly seek products that are healthier and sustainable, attractive targets include better-for-you, plant-based alternatives, as well as eco-friendly and socially conscious brands.

Disposing of non-core assets is essential for achieving long-term growth and strategic fit. In addition, higher valuations under current market conditions will further incentivize strategic divestments. Other key factors driving sell-offs include reducing supply-chain complexities and targeted debt reduction.

Meanwhile, companies that benefited from demand shifts are facing increased pressure to sustain pandemic-driven growth levels, despite the fact that increasing commodity costs threaten profit margins. Building scale and achieving synergies will help generate efficiencies that may offset some of the lost profits due to raw material inputs.

As vaccine deployment progresses, workers will start to return to the office and consumers will spend more money on services outside of the home, which may slow certain subsector growth rates. Personal care and beauty brands stand to benefit as consumers spend more time in social settings and mask requirements are lifted. To meet demand and keep consumers engaged, companies will need to expand e-commerce and direct-to-consumer capabilities, as well as partnerships with digitally native brands. 

Innovate and mitigate supply-chain risks

Retailers should build capabilities and competencies that create a differentiated customer experience. Investments in digital tools — such as virtual sizing, interactive product selection or trials and live streaming channels — can boost engagement by delivering a more personalized online experience.

Building supply-chain resilience is imperative as retailers face inventory and labor shortages. Localized operations and vertical integration may become an attractive M&A play that can improve supply-chain visibility and control costs. The acquisition of robotics and automation tech will complement human talent and help drive operational efficiencies. Enhanced reverse logistic capabilities remain top of mind for improving the profitability of e-commerce operations, which often involve returned items.

Retailers are also exploring new business models and capitalizing on data and analytics investments to generate alternative revenue streams and build deeper relationships with consumers. As shoppers return to physical stores, retailers need to rethink the role of the store and may need to right-size their footprint to better serve consumers with omnichannel options.

Opportunities in hospitality and leisure

The hospitality and leisure subsector is beginning to show signs of recovery, led by pent-up demand for domestic leisure travel. Widespread vaccine rollouts, easing of travel restrictions and more flexible booking terms will continue to increase consumer confidence and boost near-term travel plans. The premiumization of services will create a competitive differentiator, as consumers seek safe, high-quality experiences.

Hotel and leisure assets associated with the outdoors, beaches and drive-to local destinations will generate strong value. Properties that cater to business travel in major cities will likely see a slower rebound, and some may go on the market at compelling valuations to attract private equity buyers and create smaller market consolidation opportunities.

Online and sports betting targets continue to carry high valuations as these assets can help traditional casino owners quickly build and scale digital capabilities, attract younger users, diversify product offerings, generate new revenue streams and expand into new markets. As the legalization of sports betting expands across the US, strategic and private equity acquirers will continue to pursue partnerships and acquisitions in this space.

“Deals will continue to be a headline for the Consumer Markets sector. When and where you do your deals will be driven by your strategy; the value created will be a function of your ability to see the possible and execute.”

- John D. Potter, US Consumer Markets Deals Leader

Key deal drivers

Capital availability boosts competition

Greater corporate liquidity — due to increased revenue in certain subsectors, the issuance of debt during the pandemic, record levels of private equity dry powder and historically low interest rates — has extended capital availability and created greater competition for available consumer markets assets. Potential M&A targets are commanding high multiples in the current sellers’ market, and the ability to create value organically is becoming increasingly difficult.

Special purpose acquisition companies (SPACs) remain a popular alternative to traditional dealmaking and IPOs as they typically allow greater private investment participation. However, SPACs have also increased the complexity of the deal process because consumer markets companies must now assess multiple track options to ensure they execute the optimal deal strategy. 

ESG and D&I are key to growth strategies

Consumer markets companies are facing increased pressure from shareholders to integrate ESG practices into their strategy and operations to generate value and drive long-term growth. In addition, consumers' purchasing decisions are increasingly influenced by purpose and value. As such, companies must be transparent with their sustainability and diversity and inclusion (D&I) objectives to build trust with consumers — or risk losing competitiveness.

In response to the pandemic, consumer markets companies have increased workforce investments (including higher wages), expanded healthcare benefits, and offered flexible work arrangements and paid time-off options. These investments allow companies to attract talent and stabilize retention levels amid a tight labor market, but the added costs put pressure on bottom-line growth.

Tech investments drive innovation

Consumer markets companies have accelerated digital investments to optimize operations and improve front-office capabilities in order to meet consumers’ heightened expectations and create a differentiated shopping experience. Upgraded e-commerce infrastructure and a growing presence across emerging channels, such as live streaming and social media commerce, have allowed companies to meet demand right where it is and give consumers new ways to shop.

New business models have also emerged in efforts to diversify offerings, generate new revenue streams and attract and retain customers. For example, companies are finding new ways to monetize customer data. The convergence of digital content, technology and commerce continues to drive new experiences and product innovation.

The acquisition of digitally native and smaller competitors will likely persist as this gives traditional consumer markets players the ability to scale newly acquired technologies and tools and transform their legacy service and business models.

Uneven recovery, tax changes impact M&A

Unequal global vaccine deployment will slow international economic recovery and create a challenging operational environment for multinational consumer markets companies. Developing markets that generated the most growth potential prior to the pandemic remain embattled with resurging COVID-19 cases.

In the US, monetary and fiscal policies have reactivated consumer spending, with discretionary goods and services showing signs of recovery. US domestic deals will dominate M&A activity in the near term, as localized strategies are prioritized and heightened antitrust scrutiny remains in place.

Potential changes in US tax legislation could accelerate consumer markets M&A activity during the second half of 2021. Retail and hospitality portfolios may come on the market as private equity investors exit investments and offset the impact of tax changes regarding capital gains. In addition, a higher corporate tax rate may reduce the liquidity levels of potential strategic acquirers. Lastly, as state and local governments review their revenue sources, potential property tax shifts could cause expense concerns for hospitality and leisure players.

Inventory, labor shortages are obstacles

Consumer markets players are experiencing inflationary pressures due to global supply-side disruptions, while surging consumer demand and spending have exacerbated these challenges. This has resulted in shipping delays, rising commodity and transportations costs and greater inventory stock-outs. Consumer and retail companies that sustained higher inventory levels stand to benefit as prices continue to increase, while those with lower inventory levels will lose top-line and EBITDA growth opportunities.

As the US economy reopens, labor scarcity has become an issue across the value chain for most consumer markets subsectors, particularly those in retail, food service and hospitality. These operational obstacles can be a distraction from the pursuit of an M&A strategy, though savvy dealmakers may find solutions through partnering and acquisitions. For example, robotics and automated manufacturing investments could help curtail rising labor costs and offset staffing shortages. 

Contact us

John D. Potter

Partner, Consumer Markets Deals Leader, PwC US

Amanda Giordano

Partner, Deals Practice, PwC US

Lea Kuschel

Director, Deals Practice, PwC US

Russell Monco

Director, Deals Practice, PwC US

Chris LaPorta

Director, Deals Practice, PwC US

Marjolene Nowicki

Manager, Intelligence, PwC US

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