CPG M&A Drivers Shift From Scale To Consumer-Experience Capabilities

News of CPG acquisitions and divestments seems to be ever more frequently in the headlines.

Latest example: Yesterday’s announcement of The Kellogg Company’s $1.3-billion sale of the Keebler, Mother’s, Famous Amos and other cookie/biscuit brands to Ferrero Group, the Italian confectionary company.

By no coincidence, that deal exemplifies several of the shifting trends and drivers laid out in A.T. Kearney’s latest, just-released Consumer & Retail Merger & Acquisitions Report. The global management consulting firm’s analysis is based on transactional data for 2018 and an opinion survey of more than 100 C-level CPG, retail and private equity executives.

Before looking at specific examples, here's a rundown of some of the report’s main insights, with added input from a talk with Bahige El-Rayes, a partner in Kearney’s consumer and retail practice and the study’s lead author.

The big picture: Legacy CPGs and retailers know that the key to breaking out of years of minimal growth is differentiating themselves by “taking control” of the consumer experience or journey.

This has driven a shift away from recent years’ focus on acquisitions for the sake of economies of scale, rather than organic growth. Instead, they’re seeking strategic acquisitions or partnerships that fill in gaps in capabilities critical to deepening their understanding of and relationships with consumers.

They're also looking for acquisitions that give them access to new customer/prospect pools via new geographic markets (local companies that know their consumers and markets) or to new business sectors (aka  “adjacencies”) that lend themselves to cross-marketing.

This in turns means more acquisitions of smaller to midsize companies — often startups — that can act as change agents and capabilities providers in three areas in particular, says El-Rayes: digital capabilities that are increasingly driven by artificial intelligence (including customer data management and analysis, category management, robotics and IT); e-commerce and mobile shopping platforms; and cost-effective last-mile-of-delivery solutions for ecommerce.

2018’s M&A stats reflect these trends, reports Kearney. There were no CPG or retail “megadeals” ($30 billion and up). The combined value of the two sectors’ M&As actually declined last year, to $308 billion from $392 billion in 2017, but their combined volume remained steady. The volume of midsize deals fell 4%, but their value increased 6%. Total CPG-only deal values were $196 billion — down 30% from 2017’s $279 billion — and CPG deal volume declined 19%.

And divestiture volume in these segments is at its lowest point in more than a decade.

But 88% of the surveyed CPG and retail executives expect M&A activity to be stronger or as strong as last year, driven by the new customer-focused capabilities imperative and the need to strengthen their portfolios before an expected economic downturn or recession in Q4 2019 or Q1 2020 (caused by Trump’s China trade war, inflation and/or a market correction).

“All CPGs and retailers are reassessing their portfolios,” and many are actively rebalancing them, confirms El-Rayes.

Selling off “non-core” businesses not contributing to a company’s honed strategic focus is, of course, one way to help finance investment in “disruptive” acquisitions bringing new capabilities or new businesses — or to reduce debt in the service of the same ultimate consumer-focused goals. And on the buy side, CPG companies’ “resilience to market conditions” makes them strong investment candidates, notes Kearney.

The top three factors driving M&As, according to the surveyed executives, are: accessing new customers; broadening geographic reach; and expanding product portfolios.

Another spur to M&As: Investors increasingly view 2019 as potentially “the last good year” to divest before a recession, says El-Rayes.

M&A Trends at Work In CPG Sector

It’s not hard to spot the parallels in the Kellogg/Ferrero deal.

In fact, in the deal’s announcement, Kellogg chairman/CEO unambiguously stated: “This divestiture is yet another action we have taken to reshape and focus our portfolio, which will lead to reduced complexity, more targeted investment, and better growth.”

The release also stated that the businesses being sold generated nearly $900 million in sales, but operating profit of just $75 million.

So (as noted by reporters cited in a round-up piece on the deal by MediaPost’s Thom Forbes), rather than continue to pump up investment to try to compete in the crowded cookie category, Kellogg decided to concentrate its resources on its more profitable, growing cracker, salty snacks, “wholesome” snacks and pastries brands, including Pringles, Cheez-It, RxBar and Pop-Tarts.

For Ferrero — which has expanded rapidly in the U.S. via recent acquisitions of Ferrara Candy Co. and Nestle’s U.S. candy business, with plans to drive their brands’ growth via investment in innovation and quality — the Kellogg acquisition represents an adjacency move, AlixPartners Marco Eccheli told Reuters. Biscuits account for “a significant portion of consumption of sweets outside the meal, a sector next to Ferrero’s core business,” he summed up.

Kearney’s report (available with registration) cites a number of other recent M&As that demonstrate various trends identified — including the blurring of the CPG and retail segments and channels as a result of consumers’ mobile and omnichannel buying and the need for companies to connect more meaningfully with consumers.

Nestlé’s 2017 acquisition of the artisanal Blue Bottle coffee café chain gave it entry to the growing, higher-margin “third-wave specialty coffee” market, points out Kearney. In addition, Nestlé’s 2018 acquisition of the rights to market most of Starbucks’s CPG and foodservice products globally help it identify trends and enhance the experience for consumers of the various coffee brands in its portfolio.

2018 also saw Coca-Cola’s acquisition of the U.K.’s leading coffee company, Costa Coffee. That deal served to expand Coca-Cola’s addressable coffee market from $0.8 trillion (its RTD coffee and tea brands) to $1.5 trillion, by adding the hot beverages market.

All of these strategic shifts represent "a marked departure from years past, when 'break-even' brands were tolerated as long as they were marginally cash-positive and where many manufacturers and retailers sought analysts’ approval by building scale rapidly through acquisition rather than focusing on healthy organic growth or deepening their relationships with consumers," sums up the report.

In other words, CPGs, like other types of companies, are relearning the original business commandment: Make the customer happy, and the sales and profits will follow. 

1 comment about "CPG M&A Drivers Shift From Scale To Consumer-Experience Capabilities".
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  1. Nina Lentini from MediaPost Communications, April 3, 2019 at 9:20 a.m.

    Nice report, Karlene. And I love the last graf. Never truer than today!

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