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

The long-awaited rebound in consumer products deal volume remained out of reach in the second half of last year, according to data compiled from PitchBook, as themes that remained consistent throughout 2024 continued to affect transaction activity.

Uncertainty surrounding the direction of interest rates, continued weakness among select consumer demographics and stickier-than-expected inflation are weighing on market participants.

Further, the second half of the year brought additional uncertainties as the presidential election and the pending impact on the regulatory environment for deals likely delayed transactions.

Now, as the balance of power in Washington changes, the expectation of a more business-friendly regulatory environment should provide a tailwind for transactions and a loosening of the market for initial public offerings, which could serve as catalysts for deal activity to pick up later this year.

This optimism is welcome news to private equity investors who have been waiting to exit long-held investments. Hold periods across consumer products sectors have remained elevated, most notably within the apparel and household goods sectors, which now extend over six years.

However, investor enthusiasm has been dampened by policy uncertainty that has contributed to a slower than anticipated start to the year. Perhaps the strongest headwind is the reset of interest rate expectations as the Federal Reserve evaluates how the economy absorbs the impact of anticipated policy decisions.

Given recent Fed commentary, and with the 10-year Treasury yield hovering around 4.5%, we don’t expect interest rate relief in the near term. In addition, anticipated U.S. tariff actions and reactions from trading partners have caused investors to proceed with caution as they await the impact of these decisions to unfold.

Themes that emerged throughout last year are expected to remain, most notably a continued focus on add-on acquisitions, which are the most effective way for investors to close geographical, channel or product-specific gaps or gain economies of scale.

Nowhere has this strategy been more pronounced than within home services (home improvement and renovation; personal wellness and services) and consumer services (primarily wellness, medical and automotive) as buyers continue to quickly build scale eagerly supplied by small-business owners looking to exit businesses started decades ago.

Activity within this sector is not fully reflected in consumer products deal counts given inconsistent reporting.

We expect acquisitions to accelerate as corporations continue to look to expand market share, especially as pricing elasticity is challenged, particularly in the United States. While we anticipate an improved environment for larger transactions, many acquirers will focus on smaller strategic acquisitions and continue reevaluating brands, further driving the carve-out trend that started in the second half of last year.

Investors with the ability to quickly integrate new acquisitions and confidently carve out noncore brands will be well positioned to succeed in this environment.

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

Activity within the food and beverage sector declined modestly last year as macroeconomic pressures on food companies continued to pose a challenge.

Margin pressures are expected to remain a theme into this year, as elevated input costs (rising to historic levels for some products, such as eggs, coffee beans and cocoa) are expected to be a drag on earnings throughout the year.

In addition, as consumers appear unwilling to accept additional price increases, businesses are shifting their focus toward improving efficiency to drive margin expansion and earnings growth. A theme that emerged last year that we expect to continue is the acquisition of distributors by larger food and beverage companies as they look to control more of the value chain and cost structure.

Corporate acquirers are expected to be active, especially in the middle market, as they look to bridge product portfolio gaps, expand geographic and customer reach, and drive scale and efficiency.

With a conclusion to the long-considered Kroger-Albertsons merger, we expect more regional consolidation as larger grocery chains expand their footprint through the acquisition of independent shops and the development of new greenfield locations.

This will only further investor interest in private-label goods, as sustained pricing pressures appear to have permanently shifted consumer buying habits toward lower-cost food and beverage products. Contract manufacturers and those with strong private-label businesses will continue to garner interest by investors.

In addition, companies will likely continue evaluating their overall brand portfolios and aim to divest brands not aligned with their long-term strategies, in order to reduce debt or fund investments in both organic and inorganic growth opportunities. A winner in the beverage sector is expected to be nonalcoholic beverage brands, particularly those with better-for-you attributes, as well as ready-to-drink offerings containing caffeine or alcohol.

Consumer goods deal activity declined again last year as ongoing uncertainty surrounding consumer spending habits, and the impact of shifting policy positions, continued to affect investor appetite within the space.

Pricing pressures remain a key theme for lower- and middle-income consumers, and long-term shifts toward private-label or discount shopping remain a focus for mass-market consumers.

Now, a new challenge has emerged as retail bankruptcies increase and questions on the sustainability of wholesale channels affect asset attractiveness.

In addition, the uncertainty of tariff policy will continue to affect this space, as many goods are sourced from Asian suppliers. This uncertainty will benefit companies that successfully transitioned supply chains post-pandemic and will likely make companies with locally made and sourced products more desirable.

That said, we expect a rebound in certain categories that have remained stagnant over the past two years—most notably apparel—even with the uncertainty of the wholesale channel. Beauty and personal care companies are also reevaluating their product portfolios given the disruption of traditional sales channels, which will drive activity of larger market participants as pressures from international sales weigh on overall performance and a recalibration of product portfolios takes shape.

We continue to see home services and consumer health acquisitions take market share, a trend we expect to persist as generational change provides ample opportunities for consolidation in this highly fragmented sector.

Combined with the anticipated popularity of do-it-for-me services as well as millennials entering the housing market, we expect the service economy (lawn/outdoor maintenance and home services contractors providing roofing, plumbing, electrical, garage doors and HVAC) to thrive.

More than in any other sector, mergers and acquisitions activity in retail and restaurant illustrates the clear divide between winners and losers, driven by changing demographics, customer preferences and convenience.

Restaurants rebounded strongly last year, driven partially by the generational change in ownership and investors’ appetite to consolidate franchisees, particularly within the quick-service restaurant space.

We also observed a significant uptick in activity among well-placed franchisors, as new openings have accelerated since the pandemic and the related strain on building resources. This was particularly noticeable within better-for-you brands with strong customer connectivity. This trend is also affecting the convenience channel as larger players look to add scale and upgrade their product offerings.

Strong activity for retailers that provide consumer services (health and wellness facilities as well as services related to the automobile industry) will continue as companies look to build scale and expand into new geographies.

We anticipate several larger concepts within this space to come to market, as many investors have scaled their portfolios and are benefiting from continued organic growth.

The increase in activity within these sectors was more than offset by continued weakness in traditional and specialty retail concepts.

The pressure is most noticeable on mall-based operators of all sizes due to challenges in passing the increased costs of labor, rent and products on to customers to sufficiently offset continued traffic declines.

This secular trend continues to create opportunities for well-placed buyers to add to their portfolios and implement recovery strategies; however, buying opportunities are often limited to bankrupt or severely struggling sellers.

Sellers that have been able to maintain operations but have struggled to grow are often not finding valuations to their liking. Those that find receptive buyers usually have an engaged customer base and a portfolio of proprietary products, and have made investments in technology to better connect with customers.

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