M&A trends in the consumer products sector

Despite encountering challenges, the consumer products sector is renowned for its adaptability. The industry, however, has been affected by the cost-of-living crisis, primarily due to high energy costs, interest rate fluctuations, and the onset of inflation, all of which have impacted consumer purchasing power. 

Frank Dunne, Consulting Partner at RSM in Ireland, says, “We are currently navigating the effects of interest rates on consumer purchasing power. Some homeowners have benefited from the protection offered by fixed-term mortgages, cushioning them from the immediate impact of rising interest rates. While this safeguard for consumers will eventually diminish, the consumer products sector continues to demonstrate its ability to adjust and evolve in the face of economic fluctuations.” 

The cost-of-living crisis impact on consumer behaviour 

The global cost-of-living crisis has prompted shifts in consumer behaviour, particularly within the consumer products sector. As a general trend, there is a definite shift in spending away from midrange products as consumers opt for either budget or luxury items. Some subsectors are facing a slowdown across the board, as consumers are choosing to delay their expenditures and extend the lifespan of items, such as household furniture and electronics. Self-care cosmetics, including products like deodorant, have shown greater resilience, as they fall under the category of essential items. 

In the food subsector, consumer demand has shifted significantly away from premium and organic foods towards traditional food items. For example, a large cheese company in Ireland supplying Dominoes recently found that many of their premium product ranges were being cancelled as consumers opted for cheaper pizzas. Ironically, the cheese company was able to shift its products into the frozen pizza market as other consumers opted to make premium pizzas at home rather than order in. 

The convenience of online shopping that accelerated e-commerce activity during Covid has remained a consistent feature of the market post-Covid. Some well-known high street brands are under severe pressure and even folding as consumers place their orders online for home delivery of a wide variety of products, from wine to consumer electronic products. Lee Castledine, Partner at RSM in the UK and member of the RSM Global Financial Due Diligence Leadership Team, says, “The decline in the high street is a feature of the current market – in part because people are no longer travelling into work every day and the ease of buying products online, delivered by two or three clicks.” 

Other shifts in behaviour are not directly related to the cost-of-living crisis. Post-Covid, consumers value experiences over products, leading to improvements in the hospitality subsector. “Consumers are choosing to spend their disposable income on things they could not enjoy during Covid.” says Eric Fougedoire, partner at RSM in France. “This shift reflects a growing preference for creating memories and enjoying activities, such as travel, dining out, and entertainment, rather than acquiring physical possessions.” 

A shift in focus from growth to profitability 

The landscape of valuations and investment strategies has been significantly reshaped by unforeseeable events, notably the impacts of Covid and the unexpected disruptions caused by the war in Ukraine's impact on supply chains and the cost of living. Some investors are undergoing necessary restructuring, aiming to steer these businesses towards improvements in profitability and cash flows to allow them to grow and develop. 

Debt financing is more difficult to raise in a subdued economy as lenders are necessarily more cautious. In this situation, the market becomes less competitive and buyers can afford to take more time in their due diligence and in particular keeping a close eye on current trading performance.

We are also seeing PE firms adapting their approach in this dynamic market. Mike Graziano, Director of Transaction Advisory at RSM in the United States, says, “In the current market, PE firms in particular continue to pursue roll-up strategies, especially with consumer services businesses that can be consolidated into a larger entity and gain operational leverage by reducing back-office support. This provides financial flexibility by acquiring several assets at potentially lower multiples and positioning the business for a higher return once sold.” 

Prominent deal features 

Similar to other sectors, many deals in the consumer products sector are taking longer to complete than previously. There are fewer competitors in the market, and buyers can afford to take their time and be more selective. Current due diligence processes have enhanced focus on current trading performance. Buyers can be willing to wait another quarter to compare the actual performance with projections before closing the deal. 

With valuation differences between buyers and sellers earnouts are becoming a prominent feature in negotiations. These tie a portion of the purchase price to the target company's future profitability, bridging the valuation gap between parties. This approach, while commercially sound, requires careful consideration and definition of earnout terms to ensure alignment of focus post deal. 

Despite the general challenges in the consumer products sector, there are bright spots of resilience, particularly in luxury and budget brands. 

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