Global Corporate Divestment Study

Consumer products watch

  • Share

According to our latest Global Corporate Divestment Study, the main driver for consumer products (CP) divestments is an off-trend product (58%). More than 40% of CP executives would consider selling if demand for a product was decreasing or it was losing market share.

“Any businesses that are a drag on revenue growth and gross margins (and hence dilutive to the group) are candidates for divestment; the strategic factor for our last divestment was that the business had limited international exposure.” — Executive at a UK-based consumer products company

Profitable brands flourish when non-core brands are shed

Consumer businesses have historically found it hard to let go of brands, but rapid changes in consumer tastes and fashions are prompting the sector to reassess its portfolios more strategically. Further, companies that have delayed divesting weak brands often realize a significant discount in sale value.

Many CP companies now recognize divestment as a valuable tool for focusing resources on core categories and premium performers.

Q: What factors have motivated you to consider a divestment?

EY – factors motivating divestment for consumer products companies

Q: What factors might limit your desire to divest a brand?

EY – factors limiting divestment for consumer products companies

Conduct frequent portfolio reviews

Portfolio reviews should be conducted regularly to determine the strategic path forward and whether markets shifted sufficiently to warrant a divestment.

However, executives remain reticent about brand divestments when they need to generate revenue growth. As a result, many CP companies allow less-favored brands to die off slowly, rather than monetize what could be valuable assets for a buyer prepared to invest.

Key concerns include:

  • How a divestment might affect the overall value of the parent, cited by almost half; 39% said they would be very reluctant to sell an iconic or legacy brand
  • Selling assets without a replacement earnings stream already lined up
  • Selling even declining, low-margin businesses may be earnings dilutive at a time of low interest rates, particularly if the business has been de-levered in recent years

While these are valid concerns, establishing a regular portfolio review process allows companies to address them effectively and take long-term, proactive decisions on which brands deserve further investments and which should be divested.

Act quickly to maximize value

Once the portfolio review provides compelling insight, management should not hesitate to act on it. Investors in companies that choose to sell non-core units in a low-growth category or with a weak competitive position view such decisions positively.

Even if a disposal is earnings dilutive in the short term, these assets are usually starved of both capital and management attention. Delaying a sale will likely erode value. Acting early to maximize value and reinvest capital in areas where it can be most effective often pays off over the long term.

Case study

Multinational beverage company

“We operate in different geographies and have a number of product lines across different subsidiaries,” observes the EMEIA-based Chief Strategy Officer (CSO) of a multinational beverage company. “So it is important for us to keep strategic reviews of our portfolio as an ongoing process.”

The company uses portfolio reviews principally to set unit-level targets. This gives an unbiased impression of subsidiaries’ performance down the line.

The company also looks at factors such as:

  • Current and future attractiveness of the markets in which subsidiaries operate
  • Units’ positions within different markets
  • How important different units are within the core businesses

A portfolio review process influenced the company’s last divestment, which generated a sale price 20% higher than expectations and improved the company’s valuation multiples.