In the last few years, there has been a spree of acquisitions in the retail and consumer goods industry, with about a 45% rise among the top 50 consumer goods companies worldwide. The US market dominated the M&A landscape both as an investor and as a destination. Prima facie, it is the slowdown of organic growth that has been making big players turn to smaller companies with nimbler cultures and groundbreaking product propositions. These target companies are not just ahead on the innovative curve, but also find it structurally easier to pivot their business models and alter their supply chains to meet ever-changing consumer expectations. Beyond innovation, the other challenge that established retailers and CPG companies grapple with is the technology debt arising out of historical capex in technology.
A quicker way forward for both challenges has been to acquire innovative companies equipped with new business models that can rapidly reorganize marketplace relationships and redistribute value in the industry across products, channels and demographics. It also goes beyond consumer product companies with innovative business models. When it comes to battling technology obsolescence and need-for-speed in the digital era, we also see the acquisition trend of new-age technology companies focused on platforms, data and digital IPs. For instance, in 2018, Nike Inc. acquired Invertex Ltd, a 3D technology and mobile applications company. Nike wanted to leverage 3D technology to build customized products for specific consumer needs. HGGC, a tech-focused private equity firm invested in retail software provider Mi9 Retail and merged with MyWebGrocer to create a unified experience across online and in-store channels. This helped HGGC get an edge using data analytics and gain insights into consumer purchase behavior.
One of the dampeners for the M&A trend in the CPG industry has been the surge in the debt side of the balance sheet. To overcome this, companies will have to continue to adopt the strategy of consolidation and convergence. While they proactively pursue targets, master innovative go-to-market models and new technologies, they also need to realize that M&A is seasonal. The first quarter of the year is usually a letdown as compared to the fourth quarter of the previous year. This is exactly when companies should keep an eye out to acquire candidate firms. During well-performing quarters, the optimism is high, hence the valuation goes high as well. As a result, other companies also have the resources to bid high. The best performing companies use booms to accumulate cash and pay down debts. They then acquire in slower times when the prices are at fire-sale levels. If companies have cleared their debt during boom season, they can have the borrowing capacity during more sluggish quarterly cycles.
In short, M&As in CPG will continue to be driven by the priorities of revenue growth via new customers/new products coupled with profitability via operational excellence. Let’s look at some recent examples from the industry:
Proximity to consumers and expanded geographies – Offerings like meal kits service are relatively new categories that are challenging well established restaurants and grocery chains. For Food & Beverage majors, this is an opportunity to get close to new sets of consumers as well as tap into a new buying behavior within their traditional consumer base. Unilever is backing San Francisco based startup Sun Basket, a subscription-based meal delivery service provider. Walmart acquiring Flipkart for $ 16bn was the biggest deal of 2018. This acquisition helped the company to jump headlong into a small but fast growing e-commerce market with about 100 million active customers.
- Cutting edge technology and better operational efficiency – On-time order fulfilment is a major differentiator in the retail industry. However, even for cutting-edge retailers, it might not be their core area of expertise. That said, from a customer experience viewpoint, fulfillment excellence especially last mile delivery and inventory optimization would continue to be in focus. Recently, Target acquired Shipt to champion the ‘same-day delivery’ model. Kroger acquired online grocer Ocado to get deeper into warehouse automation. Every player wants to have flexible, low-cost operations and achieve scale efficiencies, hence the logic in investing into a niche platform. Macy’s, aleading American departmental store, acquired New York based store concept Story. Through this investment, Macy’s got access to use the company’s software platform and launched its own experiential concept, The Market @ Macy’s.
- New product categories – A large retailer can build a strong portfolio of brands through acquisitions without cannibalizing one another. For instance, before the split, Reckitt Benckiser added a slew of home and personal care products to its portfolio through acquisitions. It had identified a group of 19 key products called ‘Powerbrands’. With this, it intended to cater to home and personal care needs without impacting the share of its existing product categories.
The industry is optimistic of M&A activity reigniting growth among the consumer and retail market leaders. While legacy players will continue to have a sharp eye on top-line growth, it is important to balance short-term revenue targets and long-term strategic shifts. Newer innovative start-ups and domain players will continue to disrupt the retail and CPG space by foraying into agile marketing techniques to improve consumer journeys and broaden their consumer interfaces. Thus, the choice for the old guard is to drive growth by aggressively pursuing innovative companies that have mastered different consumer segments, adopt new-age go-to-market strategies, new technologies or brands and use their existing scale and reach as a force multiplier.