Consumer Products Transactions Insights

2016 review and a look ahead to 2017

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After a record year in 2015, when total disclosed deal value reached $289b, 2016 saw a plunge to $75b, the lowest level since 2009. This equated to a 74% decrease — although volumes fell by only 3%.

The disappointing performance was partly driven by a sharp decline in megadeals (greater than $5b), which fell to two in 2016 from nine in 2015 (including AB-InBev-SABMiller and Kraft Heinz) and eight in 2014. But the deals in 2016 also generally tended to be smaller. Median value fell 28% year-over-year, and average value, excluding the top five deals, declined by 42%.

There were a number of factors:

  • Companies that had made significant purchases in 2015 pausing to digest their acquisitions and pay down debt
  • Uncertainty about the outcome of the US presidential election and UK “Brexit” referendum
  • Gap between seller and buyer expectations (cited by 36% of consumer products and retail executives as the reason for deals being canceled or not completed; see EY Capital Confidence Barometer, October 2016)
  • Issues uncovered during due diligence (cited by 17% of consumer products and retail executives as the reason for deals being canceled or not completed; see EY Capital Confidence Barometer, October 2016)
  • Companies buying brands for their platform or acquiring assets that regulators required to be sold after the AB-InBev-SABMiller deal

Many companies turned their focus toward growth: Danone acquired WhiteWave Foods, and Dr Pepper Snapple purchased Bai Brands, both in the high-growth organic/health and wellness category, while SCA bought BSN Medical to take it into wound care and orthopedics.

Looking ahead

While companies are keen to acquire, they are struggling to identify targets that will live up to their promise, and they are skeptical about getting into auctions where they are likely to pay unsustainable premiums.

And although US election-related uncertainty is now behind us, it is still unclear what the new administration will do in many crucial areas, including tax policy, trade and border taxes.

However, there are signs that 2017 will see more large transactions, with two already agreed: Reckitt Benckiser’s takeover of US baby formula maker Mead Johnson to drive growth in Asian markets, and BAT’s $47b merger with its US partner Reynolds American. Meanwhile, Kraft Heinz dropped its $143b offer for Unilever in mid-February.

Trends

1 | Emerging markets
The huge differential between the rate of growth of emerging markets and that of mature markets has narrowed considerably. This, coupled with the fact that the most appetizing acquisition targets are privately or family owned and not for sale, means more companies are likely to stay closer to home and concentrate on trimming underperforming brands from their portfolios.

2 | Building capability through acquisition
Companies are investing to build capabilities, as evidenced by Unilever’s acquisition of Dollar Shave Club and Walmart’s purchase of Jet.com. Such moves gain access to e-commerce technology and insights into how consumers replenish products. In the months ahead, we expect to see more companies being smart about what capabilities they need to build out.

3 | Internal venture capital funds
As companies struggle to successfully develop new products and capabilities organically, internal venture capital funds are growing in prominence. Campbell Soup, Kellogg and General Mills were among those that launched VC funds in 2016. Whether companies can successfully commercialize and scale such investments remains to be seen. But they will continue to use this mechanism to monitor new ideas out in the start-up world, and get in on the action early.

4 | Health and wellness
Health and wellness, an important and ongoing trend, has evolved from a straightforward focus on organic products and healthier eating into more specific subtrends. For instance, consumers now want products that are local, authentic, traceable, transparent and ethical (LATTE), while there is also a growing demand for plant-based food and drinks; healthy eating for everyone (not just the affluent); products for nighttime consumption; and convenience and traditional formulations. Companies are likely to target acquisitions that can help them build these types of specialist capabilities.

5 | Alternative protein
Protein has been a key part of the health and wellness trend the last few years. Going forward, alternative protein source companies will be hot properties as the world population continues to grow. Insect protein will join plant protein in becoming mainstream — although it poses an interesting marketing challenge.