Retail, CPG Shakeup Has Led to the Hottest M&A Activity in 10 Years

Changing consumer behavior is key driver behind the flurry of deals

Author: Andria Cheng

April 20, 2017

Many retailers and consumer products companies, seeking to respond to disruptive changing consumer behavior, have been on an M&A binge. 

Deal activity in the US retail and consumer products space in Q1 2017 reached its highest level in the past 10 years, totaling 393 announced transactions that are valued at a combined $91.8 billion, according to a study by global accounting firm and consultancy PricewaterhouseCoopers (PwC), citing Thomson Reuters data.

PwC considers a transaction a US deal as long as either the acquirer’s or the target’s parent company is based in the US. It describes the retail and consumer space together as “consumer markets.”

This year’s deal volume followed nearly 1,400 deals last year, the study showed.

A variety of consumer behavior changes have culminated in a flurry of M&A activities—including M&M’s chocolate parent Mars’s January agreement to buy pet hospital chain VCA, and Woolite detergent parent Reckitt Benckiser’s February announcement to buy Enfamil infant formula owner Mead Johnson.

For one, traditional big industry players are seeking to diversify their business or acquire startup know-how to help them expand in growth areas such as ecommerce. Others are responding to millennial-led consumer preference for healthier, natural and more environmentally conscious food and consumer products.

“Consumer markets is one [sector] that’s changing faster than any others because consumers’ needs and demands have changed,” Dominic Ricketts, PwC consumer markets deals leader, said in an interview from London. “Traditional retailers are suffering, and there’s a huge competition for consumer discretionary spending. It’s a competitive market. You have to be continuously evolving and changing.”

“Traditional retailers are suffering, and there’s a huge competition for consumer discretionary spending. It’s a competitive market. You have to be continuously evolving and changing.”

And it’s not just the companies, or so-called strategic buyers, that are on the hunt. Record levels of capital and other available financing also have continued to cast private equity and other investment firms as key players in the M&A landscape, Ricketts said.

Bakery cafe chain Panera Bread, for instance, this month agreed to be sold to Germany’s JAB Holding Company, which also owns Krispy Kreme as well as Peet’s Coffee & Tea.

Against those and other backdrops, Ricketts said business has been the busiest in his 22 years of working on deals, and his M&A outlook remains positive.

At the same time, rising middle-class consumers across the world desiring US brands will continue to spur cross-border M&A shopping.

The PwC study showed that cross-border activity represented 81% of total deal value in Q1 2017, up 43% from Q4 2016. Looking at the number of deals, such activity represented more than a quarter of the total, up 36% from Q4. The key example here: In a $49 billion deal, tobacco company British American Tobacco (BAT) agreed to buy the remainder of US-based Reynolds American it didn’t already own.

Among areas that are prime for more M&A activity, Ricketts said ecommerce-related acquisitions will continue to be a highlight as consumers increasingly shop online—and more than ever—on their mobile devices.

For example, PetSmart, the largest US specialty brick-and-mortar pet retailer, this week agreed to buy six-year-old online startup Chewy.com, which a 1010data study suggested beat Amazon.com as the leader in 2016 online pet food sales. The deal was reportedly the largest ecommerce transaction ever.

Walmart, after acquiring Jet.com last year, in Q1 2017 bought online women’s fashion retailer ModCloth, which targets the coveted millennial consumer, as well as online outdoor retailer Moosejaw and shoe ecommerce site ShoeBuy. It’s also reportedly in talks to acquire online men’s clothing retailer Bonobos.

In total, there were 26 ecommerce-related deals in Q1, according to the PwC study. And that wasn't even where most of the activity occurred. The food and beverage and the restaurants sectors each had 93 deals.

The apparel, footwear and accessories sector is another hot zone for M&A-related activity, with 65 M&A deals in Q1, PwC found. The category has been hurt by factors including declining mall and department store traffic, increased online competition, consumers’ spending shifting to experiences over material things, and perhaps most importantly, retailers’ own failure to come up with must-have hit products. 

Kate Spade, which recently reported its first comparable sales decline in at least six years, is up for sale among its strategic alternatives, with rivals Coach and Michael Kors said to be among bidders.

"It's the sector that's got significant disruption," Ricketts said.

“It’s the sector that’s got significant disruption.”

One of the good ways for many of these retailers and brands to respond is to look for targets that “are attractive to the young consumers,” he said.

In one telling example, beauty products giant Estée Lauder in November bought makeup brand Too Faced, popular with millennials, for $1.45 billion in its largest purchase ever.

These are the brands “that are closest to social media and ecommerce platforms”—key to attracting millennial consumers, Ricketts said.