6 minute read 15 Feb 2019
Consumer companies are racing to divest non-core assets in their search for growth

Consumer companies are racing to divest non-core assets in their search for growth

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.

6 minute read 15 Feb 2019

Divestments will play a critical role in delivering required transformation.

The race to divest non-core assets is gathering momentum as consumer businesses focus on innovative solutions in their search for growth, including pursuing direct-to-consumer (D2C) options. Change has been sweeping through the consumer sector for the past decade, from the rise in online retailing to next-day deliveries and now subscription-based services offering everything from shaving equipment to gourmet meal kits. Growth in the sector is sluggish, margins remain tight, consumer preferences are heading in multiple directions and digital channels are being redefined as quickly as they are established.

According to the EY Global Corporate Divestment Survey, companies need to transform themselves, either through portfolio optimization or cost-structure changes. Divestment ticks both boxes: selling off non-core assets not only tightens the portfolio, but also releases capital for re-allocation where it will most address what companies need to do to be relevant to the consumer’s changing expectations.

Companies are therefore re-assessing their portfolio assets more frequently and in greater depth than in previous years. According to the EY Global Capital Confidence Barometer, for example, two-thirds (67%) of consumer businesses are now reviewing their portfolios at least every six months.

Frequency of portfolio reviews

67%

of consumer businesses are now reviewing their portfolios at least every six months; 60% expect to initiate a divestment over the next 12 months, while 82% expect to divest within the next two years.

Consumer businesses recognize the importance of divesting non-core assets and are using divestments in their pursuit of growth. Over the next 12 months, 60% expect to initiate a divestment, while 82% expect to make such a move within the next two years. 

For example, Kellogg is exploring divesting its cookies and fruit snacks units, apparel maker VF Corporation is spinning off its iconic Lee and Wrangler brands and Campbell Soup announced its strategic intent to divest its Campbell International and Campbell Fresh units.

Cut out the non-core: Companies in the sector are confident about their ability to monetize their non-core assets, while analysts are also aggressively asking how portfolios are being shaped to meet new consumer demands and changes in the retail environment. Against this backdrop, companies are increasingly divesting non-core brands and hoping to take advantage of all-time-high sector multiples.

Operational factors are also a consideration: Companies are looking more critically at their long-term offerings in light of omni-channel sales strategies. Some may decide to divest businesses that require significant financial support and use the funds raised to invest elsewhere.

Show resources

Dedicate resources for divestment success

A fundamental lack of resources is holding consumer companies back from making these increasingly important divestment decisions.

Of those that are not reviewing their portfolio more frequently, 81% cite the lack of overall resources as the reason, while more than half (56%) of all consumer executives are still concerned that they lack the resources to prioritize divestments.

Resource constraints

56%

of all consumer executives are still concerned that they lack the resources to prioritize divestments.

This may come down to experience: while acquisitions in the sector are relatively common, divestitures tend to be few and far between, outside of multinationals with dozens of brands. Companies in the sector may not have the in-house expertise to execute portfolio change through divestments. Furthermore, carving out a small business that is heavily integrated in a larger organization creates significant one-time complexity.

A lack of resources may also be preventing consumer businesses from gathering the data and producing the analytics they need to conduct more effective portfolio reviews, as cited by 58% of executives in the sector.

Consumer businesses need to dedicate the right resources to manage portfolio reviews and implement divestment decisions.

Where best to invest?

While most agree on the importance of divestments, companies often have internal debates over how to invest divestment proceeds. Disagreements over business model integration are one potential source of tension. For example, small, high-growth brands make attractive targets for consumer companies but they can be difficult to integrate.

Identifying target geographies is also a challenge. The highest levels of growth are taking place in emerging economies, where population growth, rising GDP and an expanding middle class continue to drive consumer demand. Yet according to the latest EY Capital Confidence Barometer, for the first time in five years, no BRIC (Brazil, Russia, India and China) country was selected as a top-five investment destination for the sector.

Factors in play here include the attraction of developed markets in uncertain times and the fact that the most innovative small companies are more likely to be found in developed economies.

It’s all about the consumer

Consumers are front and center in divestment decisions, with consumer preferences, consumer transparency and future consumer needs now the top three drivers. Streamlining portfolios and re-allocating capital helps consumer companies focus on the things that matter most to consumers, including immediate responsiveness and “micro-moments” — impulse-driven searches bringing consumers face-to-face with brands.

Factors like these underpin the rationale for divestments: 72% cite changing consumer preference; 72%, operational complexity; 68%, consumer-centered portfolio adjustments. 

The data also suggests consumer companies have come a long way in addressing some of the existential challenges facing the sector: the ability to adapt to rapid retail transformation is ranked sixth in criteria that impacts the decision to divest.

Double down on data

Data is the main factor driving deeper portfolio reviews, but consumer companies have room for improvement if they are planning to tap into future consumer trends.

  • Deal with data gaps. Digital consumer channels can optimize return on investment but consumer companies may be limiting themselves; companies may not have in-depth experience analyzing broad data sets or may hold the data in silos, leading to poor decisions and missed trends.
  • Focus on talent. Consumer companies may focus on brand marketing and product development yet data skills will become increasingly important to reinvent delivery and revolutionize products with rise of D2C models.
  • Prepare for the future consumer. Consumers are willing to share data across ecosystems — so long as it is transparent and offers a clear exchange in value. Consumer businesses need to work out how to inventory and protect that data, use it to make decisions and invest in the right technology, while respecting regulatory constraints such as the EU’s General Data Protection Regulation (GDPR).

Use divestments to boost efficiency and unlock growth

Consumer businesses are re-deploying capital from divestments to improve the efficiency of their business models and maximize growth.

  • Organic: Focus continues on overhauling business models rather than achieving growth per se: nearly one-in-three (30%) point to investing in model efficiencies as their highest priority, on par with last year’s findings. Secondary organic goals include investing in product development (the top priority for 13%) and building D2C capabilities (cited as the highest priority by 11% and a high priority by 53% — more than product development).
  • Inorganic: Acquiring new products in growth/new markets is the highest priority (26%), followed by the acquisition of new products in core markets, mentioned by 21%. Nearly one in five consumer executives say investing in improved product development through acquisition is their higher inorganic priority — in other words, acquiring tools and IP to transform their existing offerings. The proportion citing this as the highest priority has risen from 13% last year to 18% now.

Summary

The EY Global Corporate Divestment Study focuses on how companies should approach portfolio strategy, improve divestment execution and future-proof their remaining business.

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.