CPG Makers and Sellers Active in M&A
By Pan Demetrakakes
Food and beverage manufacturing and consumable goods retailing took leading roles in U.S. merger and acquisition activity in the third quarter, according to the latest report from PwC.
The quarterly “U.S. Retail and Consumer Deals Insights” report looks at deal activity in retailing and consumer goods manufacturing. The total for mergers and acquisitions for the third quarter in that sector was $34.5 billion. Of that total, $14.18 billion was in food and beverage manufacturing, and another $5.27 billion was in grocery, drug, discount and mass retailing. These two subsectors were the largest, accounting for 56 percent of the total between them.
This dominance was partly due to several megadeals, led by Danone’s $10.4 billion acquisition of WhiteWave Foods. But food and beverage has been the leading subsector in deal volume in the past four quarters, and is consistently among the top subsectors. There are several reasons for this, says Dominic Ricketts, PwC’s deals leader, U.S. retail and consumer products.
“Large, diversified food companies may be threatened by smaller, more focused enterprises that are able to better cater to changing consumer preferences,” Ricketts says. “As a result, some of these companies are splitting themselves into smaller businesses in order to better focus on how they go to market, while others are making strategic acquisitions for product or category adjacency, geographic expansion, consolidation, innovation, and accessing capabilities.”
Among consumable goods retailers, the biggest single deal was Alimentation Couche-Tard’s acquisition of CST Brands for $3.7 billion. Ricketts suggests that in this subsector, channel blurring may be a driver for M&A.
“As competition in this subsector continues to accelerate and retail channels for CPG continue to blur, business consolidations through mergers and acquisitions have been part of the strategy for many food and drug retailers, particularly those in the mid-market, allowing them to focus on core assets and improve operations,” he says.
One of the report’s conclusions is that, as online shopping takes hold, retailers and manufacturers will increasingly look to take advantage of the lower operating costs of online commerce, resulting in the outright sale or closing of brick-and-mortar locations. Ricketts suggests that in many cases, surviving brick-and-mortar stores will have to accommodate online operations, often in a smaller footprint.
“Many established brick-and-mortar retailers are choosing to enhance their reduced footprint with new initiatives such as buy-online and pick-up in store, as well as utilize their stores as rapid fulfillment, distribution and return centers for online customers,” he says.
The report notes that consumer confidence is at an all-time high since the 2007 recession, which could be a significant factor driving the consumable-goods industry forward. This is mostly due to a strong labor market.
“Unemployment is a major factor contributing to an increase in consumer confidence,” Ricketts says. “Improvements in the labor market may suggest economic expansion, which would drive an uptick in consumer confidence. Confidence did decline slightly in October, but overall the outlook on the economy and consumer confidence remains positive.”
To access the PwC report, click here.