Consumer markets deals insights: Midyear 2020

M&A activity persists in the recession, with $40.6 billion of Consumer Markets investments in the first half of 2020, and more is on the horizon

The recession and COVID-19 pandemic has changed the playing field for M&A, shifting the buyers and sellers, and accelerating the changes underway in the industry. Private investors lead sector investments as the availability of capital and low interest rates have created a favorable investment environment. Strategic acquirers need to focus on building supply chain flexibility, strengthening e-commerce and last-mile capabilities, and investing in emerging tech as consumer behaviors and demands continue to evolve through the pandemic and its aftermath. 

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The dispersion of impacts within and across the subsectors will create pockets of strength, distress, and resilience that will shape the M&A landscape. Of the three CM subsectors, consumer continues to drive M&A activity and represented 50% of all deals announced in the first half of 2020. The food and beverage (including alcohol) category constituted 42% of the 264 consumer deals announced in the period, which also increased by 29% from H1 2019 to reach $8.8 billion in investments H1 2020. Four of the 10 largest deals announced in H1 2020 belonged to the category, led by PepsiCo Inc.’s acquisition of Rockstar Inc., an energy drink manufacturer, for $3.9 billion. As consumers spend more time at home, at-home cooking occasions are on the rise. Indulgent foods, snacking, and off-premise alcohol sales have become fast-growing sectors within the food and beverage category. In the household category, items like paper towels, disinfecting wipes, and other cleaning products, will continue to see increased demand as consumers ensure they can keep their homes clean and safe during the pandemic. Companies with available capital in the food and beverage, and household and personal care categories will continue to scale operations by acquiring adjacent businesses, particularly in fast-growth segments, that complement core operations across North America and international markets.

Investments in the hospitality and leisure subsector remain strong and reached $15.2 billion in H1 2020, accounting for 37% of all Consumer Markets deal value. The hospitality and leisure subsector has been significantly impacted by travel restrictions and government mandated lockdowns in an effort to prevent the spread of the COVID-19 virus. In response, casino and gaming players temporarily ceased operation, while hotel and lodging companies have reduced their workforce in an effort to cut expenses as travel demand remains suppressed. Two of the three largest deals announced in H1 2020 belonged to the hospitality and leisure subsector: Blackstone Group’s acquisition of IQ Student Accommodation Group, a rooming and boarding houses operator, for $6.1 billion, and the acquisition of the Grand Las Vegas assets of MGM Resorts International by an investor group comprised of MGM Growth Properties LLC and Blackstone Real Estate Income Trust Inc. for $4.6 billion. Together, both private equity deals represented 70% of total investments in the subsector. Under current market conditions, we expect subsector M&A activity will remain positive in the near-term as corporations continue to divest under-returning businesses to boost liquidity and reduce debt.

Retail investments were the second largest contributor to M&A volume and accounted for 34% of all transactions disclosed in the first half of the year. The largest retail deal announced was Just Eat Takeaway.com NV’s pending acquisition of Grubhub Inc., a provider of online food delivery services, for $7.3 billion. The internet/ e-commerce category led deal value and accounted for 72% of total subsector investments. E-commerce has experienced rapid growth as consumers are affected by stay-at-home orders. Accelerated demand for consumer staples and food delivery has led retail players to increase investments in strengthening their supply chain and e-commerce fulfillment capabilities. Additional investments in cold storage warehouses and distribution centers, emerging tech, and last-mile delivery will help build a competitive advantage and capture market share as online sales soar. Apparel and footwear brands, and department stores that have dealt with tariffs and rising competition over the past year and a half will further experience financial distress from store closures related to COVID-19. As the shift to online and digital shopping continues, we expect additional divestments of underutilized physical retail assets in 2020 as well as secondary banners and brands. Retail investments will focus on customer-facing online operations to improve the overall shopping experience and boost loyalty. Improving the profitability of online operations will be top-of-mind as retailers need to create the right channel mix and meet consumers where they are without sacrificing the bottom-line.

The economic burdens and uncertainty brought on by the COVID-19 pandemic have led to rapid shifts in consumer behavior, including changes in daily routines and discretionary spending. The new ways of being impact how we consume, how we work, and broader behavior patterns.

• Working from home has become ubiquitous due to the closure of schools and businesses and either fully remote or hybrid remote/office work may become a permanent option for some after the pandemic ends.
• Over 48 million workers have filed for unemployment since March 2020. However, the US job market is rebounding as economies phase out of lockdown. We anticipate there may be stops and starts with resurgence of cases but that the economy will continue to recover.
• Social distancing from family and friends has led to increased use of social media and streaming services increasing the importance of digitally native brands.
• New hobbies such as home fitness, baking, and arts and crafts have emerged as gyms, movie theaters, and other recreational and leisure establishments remain closed. While some of these will decline when away from home options return, home fitness will likely impact gym member retention.
• Local and international travel has rapidly declined as consumers are forced to stay in their homes, or choose to do so as a precaution. Domestic travel is seeing signs of recovery as travelers feel safer staying closer to home, but international travel will likely remain depressed for some time.
• Consumers are shopping less often, but basket sizes are growing as shoppers continue to stock up on essentials, particularly non-perishable groceries, and household and cleaning products. As shoppers experienced limited supplies for a prolonged time, consumers will likely continue to stock up on essentials in the near future.
• Households are increasingly relying on curbside pickup or home delivery. This shift in the experience is here to stay

Evolving consumption patterns, coupled with the current state of market volatility and overall uncertainty, will generate numerous M&A opportunities in 2020. M&A will be active through positions of strength, distress, and resilience that will shape the landscape.

• Distressed companies will focus on operational efficiency and financial discipline. To generate liquidity, divestments of non-core and under-returning assets will continue. In the retail subsector, we expect department stores and restaurants will continue to examine their footprint and offload underperforming locations.
  
• Innovation remains paramount, both in terms of the offering and the experience. Startups and direct-to-consumer brands will continue to thrive as traditional CPG brands struggle to keep up with demand and shifting tastes. Today, half of consumers are trying new brands, creating an attractive M&A opportunity for incumbent CPG players. 
• As consumers increasingly shop online and buy goods in bulk, retailers and CPG players alike will need to invest in their supply chains and logistics to boost the profitability of e-commerce operations, and improve inventory availability. 
• Investments in cold storage warehouses and distribution centers, particularly in urban areas, are necessary to meet the growing demand for grocery delivery.
• To reduce supply chain risks and disruption, CM companies need to boost nearshore manufacturing and operations. Localized supply chains allow for increased control of production and improved speed to market.
• Curbside pickup and last-mile capabilities are now essential for building a successful channel mix and elevating the consumer experience.
• In life’s new normal, consumers will demand more “contactless” services to protect their health and safety. Emerging technology, particularly AI, drones, and robotics can help automate operations to minimize human contact, adapt the customer experience, and impact operational cost models.