Q2 2019 Consumer Products Industry Spotlight
Deal flow in the consumer products (CP) space has continued to slow through H1 as macrolevel factors such as trade and tariffs remain of paramount concern to financial sponsors and strategic acquirers alike. However, the adverse effects of the trade dispute between the US and China has created stronger headwinds for the business activities of some firms more than others. With dealmaking in sectors such as apparel and accessories slowing as a result, retail has taken a harder hit overall for the past two quarters. This trend has largely materialized in line with RSM’s expectations, and the firm continues to see growth in CP, with omnichannel businesses and e-commerce, health and wellness, and cosmetics still proving resilient in the face of secular stagnation. Although dealmaking industrywide may be muted, the strongest set of investment and acquisition targets in these subsectors are outpacing the historical margins of their peers and continue to be an area of focus for those targeting the space. In particular, private equity (PE) has been a major investor in CP in the past and remains active in assessing opportunities. Likewise, corporations are still vigorously sourcing and reviewing potential targets, as corporate acquirers and strategic acquirers enjoying positive cash flows try to position themselves for any potential downturns in the near future. All the same, tariffs will remain a major concern for the foreseeable future, delaying some expected closings and weighing in on valuations.
Recent scholarly research has implied that trade policy changes are costing US firms and households an additional $3 billion per month, partly as a result of such tariff mitigation strategies. This could start slowing consumption as well as output. However, CP companies continue to diversify their sourcing channels and their supplier networks away from China by moving to nearby countries such as India, Thailand, Vietnam or Cambodia while others are looking to the Middle East and North Africa. Some consumer brand businesses selling products to retailers have started working to re-engineer certain products to either pull out components that have higher tariff inputs or engineer changes to reduce their weight and generate freight savings over a longer time horizon. Finally, CP companies are engaging customs attorneys to draft paperwork around the concept of first sale to exercise the cost of tariffs at the point of origin in China—as only inputs are subject to tariff—or finding ways to reclassify the imported goods. According to Bhatt, this strategy has perhaps gained the most traction in the home furnishing and furniture segment.
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