April - October 2014
Capital confidence barometer: consumer products
63% of respondents see the economy improving
57% of respondents see credit availability improving
42% of respondents say their focus is cost reduction and operational efficiency
61% of respondents expect an increase in deal volumes
Our tenth Capital Confidence Barometer shows that volatility is driving uncertainty and leading to a shift of focus to efficiency gains for consumer products (CP) companies.
Uncertain economic and geographic development
Despite continued economic and geopolitical shocks, economic confidence remains buoyed by strengthening business fundamentals across all sectors. The boardroom’s perspective on the economy remains optimistic, but CP has experienced some ups and downs recently through:
- Increased volatility in raw materials prices
- Increased volatility in emerging markets
- Stagnating but also restarting growth rates in developed economies
CP respondents’ views therefore are now slightly more polarized than the other sectors. Global rebalancing and slower growth in emerging markets are becoming important issues impacting their strategies.
Although still at a small percentage, the number of companies focusing on survival and maintaining stability has almost doubled, indicating that companies are increasingly under stress – but CP companies slightly less than the other sectors.
CP center of gravity is shifting
Global rebalancing and governmental changes are the two largest trends affecting business and acquisition behaviors in CP.
Among respondents from all sectors, the changing work expectations and war for talent as well as disruptive digital innovations are of main concern – trends that seem to be only of medium importance for CP companies.
Overall, M&A activity expected to increase, but individual firms holding back
M&A deals are expected to increase across all sectors, and CP is no exception. Of CP respondents, 61% expect an increase in M&A deal volumes and 47% are confident about the quality of opportunities, which is higher than six months ago and also higher than across all sectors.
However, the expectation to pursue acquisitions in the near future is slightly lower. CP firms are more concerned about the quantity of acquisition opportunities. Nevertheless, they are likely to do more and smaller deals than the other sectors.
Companies in all sectors – but especially in CP – seem to insufficiently execute due diligence, as overpaying for an acquisition and unforeseen liabilities are the most significant contributors to deals that fail to meet expectations.
Brazil is losing some importance across all sectors while the UAE is becoming a new hotspot for consumer products, now ranking as one of the top three investment destinations, preceded by China and the US.
Margin improvement is driving the boardroom agenda
Finding growth has become harder, and lessons learned from the global financial crisis mean that closer scrutiny on cost structures and operational efficiency is now the norm. For CP companies, there is an even stronger focus now on margin improvement than on growth.
Optimizing capital is the highest priority on the boardroom agenda for 52% of CP companies, up from 31% six months ago.
Shareholder activism may be a reason for the accelerated focus on margin improvement, since 59% of companies report that cost reduction has been the most significant issue from shareholder activism, compared to 47% across all sectors.
Focus on working capital management
CP respondents assuming that credit availability will improve have increased to 57%;
90% of CP executives see credit availability as stable or improving, while only 10% foresee a decline.
CP companies have a lower debt-to-capital ratio than the other sectors, but this may change over the next months. Companies will now prefer to use debt over cash for deal financing (49% will use debt, up from 35% six months ago) and to switch from retiring debt to extending maturity.
CP is less likely than other sectors to use equity for deal financing (10% in CP compared to 19% across all sectors).
While the other sectors will prioritize paying down debt with excess cash, CP companies will rather use it to pay dividends.