Consumer products M&A: Cautious buyers limit activity

The first half of 2024 continued the downward trajectory of consumer products deal volumes. Cautious buyers weighed economic and political uncertainty, softening consumer demand, and the lack of clarity on the timing and extent of interest rate cuts against continued high seller expectations and limited availability of assets.

Additionally, concerns over the ability to close larger transformative deals due to anticipated Federal Trade Commission scrutiny and a weak initial public offering market have contributed to a softer-than-expected deal environment in the first half of the year.

However, the Federal Reserve’s pivot to lower interest rates in September, combined with signs that corporate acquirers are reentering the deal market, supports the expectation of increased deal activity in late 2024 and a strong deal market in 2025.

Interest rate relief does not mean a return to zero

While interest rate cuts will be welcomed by investors (RSM’s current forecast points to two more 25-basis-point cuts for the remainder of this year), it should be noted that this reduction does not mean a return to the zero interest rate policy that remained for much of the period following the Great Recession of 2008−09.

The expectation of higher-for-longer interest rates will continue to drive the themes we’ve seen emerge since the surge in deal activity in 2021 and 2022. Most notably, add-on acquisitions will be a continued focus as  the most effective way for investors to close geographical, channel or product-specific gaps through acquisitions.

This strategy is most notable within home services (home improvements and renovation; personal wellness and services) and consumer services (primarily wellness, medical and automotive) as buyers look to build scale 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 inconsistency in reporting.

Additionally, we continue to see transactions leveraging earnout provisions to help bridge valuation gaps and product buyers and align interests post-close. We expect these trends to continue in the near term.

Activity within the food and beverage sector declined in the first half of the year even as macroeconomic pressures on food companies eased.

Consistent with 2023, margin performance and the ability to maintain pricing continue to be key areas of focus for investors as the grow-at-all-costs model fades and investors focus on operational value, integration synergies and customer connectivity. Falling commodity prices (in general), stabilized employment and labor rates, and continued investments in automation are driving margin expansion across the board.

The permanence of shifts in consumer buying habits is also under the microscope as demand for private-label goods continues despite the easing of food inflation as pandemic recovery-era spending patterns take hold over a longer term. We expect contract manufacturers and those with strong private-label businesses will continue to garner investor interest.

Some areas that have seen elevated interest are in the agricultural space (most notably in protein) and the dessert category (ice cream and other frozen goods, and bakery products).

The potential return of corporate acquirers within the food and beverage space should drive more activity in the market, especially with the expectation that those acquisitions will focus on closing geographical or product category gaps, resulting in down-market acquisitions.

We expect companies will continue to evaluate overall brand portfolios and look to divest brands not aligned with long-term strategies, to provide debt relief and drive operational margins on stronger-performing brands. Buyers are also carefully monitoring the ability to close deals within the grocery and convenience channel.

Consumer goods deal activity continues to face increased pressures, including uncertainty on the trajectory of consumer spending habits. This trend is most notable within brands that focus on the mass market.

Companies that cater to lower-to-middle-income consumers continue to face year-over-year comparison challenges as the robust consumer spending of 2021 and 2022 fades and consumer buying habits shift toward private-label goods or discount shopping. The ability to pass through pricing increases has likely passed, and in many cases those costs need to be subsidized through promotional activities; therefore, discretionary goods companies will need to demonstrate sustained volumes, or strong direct-to-customer strategies and mass retail penetration, to garner investor interest. Sellers appear optimistic when sustainable trends can be demonstrated; there are encouraging signs that discretionary goods companies are preparing for sale, and we expect to see more assets enter the market in 2025.

That said, the most active sector has been home services and consumer health. We anticipate continued strong home services as aged operators look toward exit strategies and investors aim to consolidate largely fractured sectors, including lawn/outdoor maintenance and home services contractors providing roofing, plumbing, electrical, garage doors and HVAC.

Beauty and apparel brands continue to garner investor interest, especially those that have successfully diversified into brick-and-mortar locations and have strong consumer connectivity.

Retail and restaurant M&A continues to show signs of recovery. While the increase in activity is most notable in roll-ups of franchisees, we have observed a significant uptick in activity with high-unit-growth franchisors as new openings have accelerated during the recovery from the pandemic and the related strain on building resources.

Traditional retail, most notably consumer services companies (health and wellness facilities as well as the automobile industry), has been very active as companies look to build scale and expand into new geographies. Continued pressure on mall-based operators has created opportunities for well-placed buyers to add to their portfolios and implement recovery strategies.

Restaurant strategy has centered on quick-service restaurant roll-ups, which attracted significant investor focus in the first half of 2024. This strategy is facing headwinds of slowing unit growth as price-weary customers drag traffic down and increase the pressure on franchisees that continue to face higher input costs.

Systems that can demonstrate sustained traffic aligned with strong value propositions for customers or with better-for-you themes continue to attract strong investor demand.

Additional RSM contributors:  Kunal Bhatt, Tom Martin, Doron Neuman and Ryan Schloer