Consumer products M&A update: Rebound remains out of reach

Despite a handful of headline-grabbing consumer products business transactions—such as Mars Inc.’s planned acquisition of Kellanova, PepsiCo’s acquisition of Poppi and Siete Foods, and The Hershey Co.’s acquisition of LesserEvil snacks—a broader expansion of middle market consumer products deal activity remains elusive.

Hopes for a boom in mergers and acquisitions—based on the promise of a more relaxed regulatory environment and lower interest rates—faded due to tariff uncertainty, which suppressed investors’ appetite for deals. That continued uncertainty and ongoing elevated interest rates have forced investors to reevaluate deal participation.

Softening economic data (seen most recently with the July jobs report) and the potential impact of tariff policies on inflation and consumer spending have also curtailed investors' optimism that the Federal Trade Commission would ease regulations.

Recent developments, most notably from framework agreements with the European Union, Japan and Vietnam, have provided some clarity on tariffs. But ongoing negotiations with Canada, Mexico and China are still creating uncertainty for consumer products companies, especially those with overseas manufacturing, as the back-to-school season ends and the critical holiday shopping period approaches.

While investors had expected clearer interest rate policy by now, they must now wait until September or December. In addition, there is growing concern about consumers’ ability to continue to drive growth and absorb price increases. But companies that cater to higher-income consumers, who account for the majority of spending, are likely to continue to garner investor interest, as there is little evidence that those consumers have retrenched.

Opportunities expected to drive deal volumes

That said, deals initiated during the robust M&A activity of the 2020−22 pandemic era are starting to mature, which we believe will be a catalyst that breaks the levees and drives deal volumes higher in the second half of this year and into the next. Investors waiting for improved performance may be forced to divest for lower returns than they’d hoped for as limited partners look for liquidity from aging portfolios.

We expect the themes that have emerged over the last two years to persist, most notably the focus on add-on acquisitions. This trend has been driven by explosive growth within home services (home improvements and renovation along with personal wellness and services) and consumer services (primarily wellness, medical and automotive) as baby boomers look to exit businesses started decades ago. (Note: Activity within this sector is not fully reflected in consumer products deal counts given inconsistent reporting.)

Corporate activity, which supported the deal market over the past 12 months, is expected to continue, most notably in the “large beauty” and “big food” sectors. With organic growth for many companies remaining stagnant, the best opportunities for top-line growth are acquisitions, which generally allow for quick integration, and divestiture of noncore brands, such as Conagra Brands’ disposition of Chef Boyardee and General Mills’ sale of its yogurt business.

Another trend we expect to continue in this environment of uncertainty is the use of earnout provisions to help bridge valuation gaps, as well as align interests post-close.

Food and beverage companies continue to face elevated input costs (e.g., for coffee beans and cocoa), which have been a consistent drag on earnings and could lead to the acquisition of smaller brands that would immediately benefit from purchasing scale.

In addition, companies within the space are grappling with the impact of GLP-1 weight loss drugs on snacking habits. As consumers snack less and shift their dollars to products in the gut health and protein categories, companies facing lower sales volumes are focusing on margin performance. Beverage companies continue to be attractive assets, anchored by Olipop’s minority raise, PepsiCo’s acquisition of Poppi, and Celsius Holdings’ acquisition of Alani Nutrition LLC.

Food and beverage companies have not yet felt the impact from cuts to the Supplemental Nutrition Assistance Program, or SNAP, within the One Big Beautiful Bill Act. We expect this will drive further regional consolidation of grocers as they grapple with lower spending by certain consumer segments. This will only further enhance investor interest in private label products, as sustained pricing pressures appear to have permanently shifted consumer buying habits, and less government assistance for grocery purchases will result in lower-income consumers looking to stretch grocery budgets with shelf-stable or lower-cost products. We expect the attractiveness and activity of contract manufacturers and companies with strong private label businesses to accelerate in this environment.

Even as consumer goods activity rebounded somewhat in the second quarter, overall it continued its downward trajectory in the first half of the year. Pockets of activity emerged within beauty and personal care brands and long-dormant categories, including furniture and home furnishings and larger apparel deals.

Large beauty and personal wellness brands that have long been on the sidelines have emerged as active players, especially within the fragrance and hair care space, as these companies look to attract younger shoppers, even as pressures from lagging international sales weigh on existing portfolios.

Price pressures remain an issue for lower-to-middle-income consumers, and shifts in buying patterns toward discount shopping appear to be holding firm, evidenced by the pull-forward of back-to-school shopping by consumers anticipating potential price increases from the impact of tariffs.

A concern for companies in this space is whether the significant purchases made in the first quarter to mitigate the impact of tariffs on pricing will be a drag on working capital and financial performance in the coming months. Investors will want to see either companies’ ability to sell through products that were acquired prior to the implementation of tariffs or strategies to reduce higher inventory levels.

Additionally, to garner investor interest, companies will need to demonstrate the ability to maintain profit levels with lower volume. Retail bankruptcies and unit consolidations will put more pressure on companies’ ability to demonstrate sustainability within the wholesale channel.

In addition, the uncertainty of tariff policy will continue to impact this space, as many goods are sourced from international suppliers. This uncertainty will benefit companies that successfully restructured their supply chains postpandemic and those with locally made and sourced products.

Following its rebound last year, the restaurant sector experienced a slight year-over-year decline in M&A activity in the first half of the year, driven by persistent macroeconomic challenges such as inflation, tariff uncertainty, rising labor costs and volatile capital markets.

A major driver of this downtrend is that consumers are becoming increasingly price-sensitive due to continued inflation and a decline in household savings. Many are cutting back on dining out or seeking more affordable options, and accordingly, we are observing a divergence in performance, with value-oriented chains generally outperforming premium dining restaurants, particularly in lower-income markets.

Franchise systems have shown resilience by leveraging scale to manage supply chain disruptions and support operators with pricing and labor strategies. Meanwhile, financial sponsors, particularly private equity firms, remain active, targeting scalable restaurant concepts with strong unit economics. Their growing involvement signals a broader middle market recovery and a renewed appetite for strategic investments.

Following the trend of the second half of last year, we observed a surge in franchise-related M&A, particularly in sectors like quick-service restaurants, health and wellness, home services, youth enrichment, and senior care.

These industries offer scalable models and recurring revenue streams that appeal to private equity and strategic buyers. Franchisors that can demonstrate their ability to scale quickly, prioritize franchisee relationships, embrace innovation and align with evolving consumer trends are well positioned to capitalize on this favorable investment climate. Given valuations expectations, securing investors’ confidence in the company’s ability to ramp units to maturity and deliver on pipeline are paramount to success.

Overall, dealmaking in the restaurant sector is expected to accelerate into next year as regulatory clarity improves and cost pressures ease.

The first half of this year also saw a decrease in M&A activity in the retail sector, driven by strategic, financial and macroeconomic factors, along with ongoing volatility. A key driver of ongoing activity has been the cash stability of certain retail businesses, which enabled them to pursue acquisitions while discretionary segments faced pressure from shifting consumer sentiment. This has attracted activist investors and highly involved private equity sponsors that have the operational expertise and experience to navigate the current environment.

Retail companies that align with trends such as digital transformation, supply chain optimization and corporate clarity are particularly well positioned to attract investment and drive consolidation.

RSM contributors include: Doron Neuman, Kunal Bhatt, Mary Loera, Ryan Schloer and Tom Martin