2 minute read 27 Nov 2018
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Consumer industry executives temporarily slowing plans for M&A

By

Jeff Wray

EY-Parthenon Consumer Products and Retail Leader

Passionate leader focusing on large scale opportunities in retail and consumer products. Fascinated about how products get to market. Excited about the breadth and depth of knowledge within EY.

2 minute read 27 Nov 2018

M&A should improve, however, as the consumer industry battles disruption by entering new markets and acquiring new technology.

This article is part of our M&A report Global Capital Confidence Barometer, 2nd half 2018.

Consumer industry executives appear to be temporarily slowing plans for M&A, according to our latest Capital Confidence Barometer, as the sector adjusts to uncertainty over geopolitical issues and trade, and changing consumer preferences continue to disrupt the sector.

The percentage of consumer industry executives who expect their company to actively pursue M&A in the next 12 months fell to 42% in the fall 2018 survey, the lowest level in four years and below that of global peers overall.

While consumer executives are confident that global growth in the next 12 months will remain solid, they report a less favorable view on their own sector, as 84% of consumer respondents expect improvement at a global level versus 53% expecting improvement within the consumer industry.

Industry growth

53%

of consumer respondents expected improvement within their industry.

Recent changes and increasing volatility in trade, tariffs and competition rules have increased uncertainty and are now cited together as the biggest challenge to dealmaking (49%). They are also seen as the second biggest risk to growth of the core business (28%), behind only disruptive forces such as technology and sector blurring. Consumer industry companies continue to see disruptive forces such as technology, digital, sector blurring and changing consumer behavior as the top industry challenges, with 32% citing these forces.

Companies are adapting to technology and other disruptive forces in several ways. For example, retailers are partnering with technology companies (rather than acquiring a company outright) to build robotic fulfillment centers.

On the trade front, consumer companies are shifting their sourcing locations and the flow of inventory due to tariff uncertainty, as many struggle to offset the cost of tariffs through higher pricing.

Companies are also shifting where they are looking for deals. This is the first time in five years that no BRIC country has been included as a top five investment destination. This notable change could be due to companies looking for the security of developed markets in uncertain times, while the technology leaders and innovative startups they seek are also found in developed markets.

Meanwhile, portfolio reviews are also becoming more frequent. The number of consumer industry companies reviewing their portfolio at least every six months has doubled over the last half year to 67%. The reviews most often result in divestment of underperforming assets and operations that are at risk from technology, digital and customer disruption.

Portfolio review frequency

67%

of consumer respondents are reviewing their portfolio at least every six months.

While some consumer industry executives are pausing when it comes to M&A, we would expect the pause to be temporary. Most industry executives (72%) expect the deal environment to improve in the next 12 months, and M&A remains one of the fastest ways to enter the new markets and acquire the new technologies companies seek as they battle industry disruption.

M&A outlook

72%

of consumer respondents expect the deal environment to improve in the next 12 months.

Summary

Despite a temporary pause in M&A activity, executives in the consumer industry expect improvement in the deal environment. As companies battle industry disruption, M&A remains one of the fastest ways to enter new markets and acquire new technology. Download the full report (pdf).

About this article

By

Jeff Wray

EY-Parthenon Consumer Products and Retail Leader

Passionate leader focusing on large scale opportunities in retail and consumer products. Fascinated about how products get to market. Excited about the breadth and depth of knowledge within EY.