Update on consumer products mergers and acquisitions: Recovery remains elusive – The Real Economy Blog

Consumer products and their mergers and acquisitions have experienced a challenging landscape with a long-awaited rebound in deal volume still out of reach. Data compiled from PitchBook reveals that uncertainty around interest rates, weak consumer demographics, and inflationary pressures have continued to impact transaction activity, especially in the second half of last year. Additionally, the uncertainty surrounding the presidential election and its potential effects on the regulatory environment likely delayed transactions.

As the balance of power in Washington changes, expectations of a more business-friendly regulatory environment could provide a boost to deal activity and a loosening of the IPO market. This optimistic outlook is particularly good news for private equity investors eager to exit long-held investments. Hold periods across various consumer products sectors, such as apparel and household goods, have been significantly long, with some extending over six years.

However, despite this optimism, investor enthusiasm has been dampened by policy uncertainty, leading to a slower start in deal activity this year. One of the biggest obstacles has been the uncertainty regarding interest rate expectations. With the Federal Reserve evaluating the impact of anticipated policy decisions, there is no immediate relief in sight as the 10-year Treasury yield remains around 4.5%. Moreover, anticipated U.S. tariff actions and responses from trade partners have caused investors to exercise caution until the consequences of these decisions become clearer.

Add-on acquisitions are expected to remain a prevalent strategy for investors looking to close gaps and achieve economies of scale. Particularly in home services and consumer services sectors, buyers have been looking to rapidly build scale through acquisitions, primarily targeting businesses owned by individuals seeking to exit after decades.

Corporate acquisitions are likely to gain traction as companies seek to expand market share, especially in the United States where pricing elasticity is being challenged. While larger transactions are expected to improve, acquirers will also focus on strategic smaller acquisitions and the reevaluation of brands, further fueling the carve-out trend that started in the second half of last year.

In a landscape marked by uncertainty, the use of earn-out provisions is anticipated to play a vital role in bridging valuation gaps and aligning post-close interests between buyers and sellers in an ever-evolving market environment.

The food and beverage sector, on the other hand, experienced a modest decline in activity due to macroeconomic pressures on food companies. Elevated input costs, such as eggs, coffee beans, and cocoa, are expected to continue to weigh on earnings this year. To counter these challenges, businesses are focusing on improving efficiency to drive margin expansion and earnings growth, particularly through the acquisition of distributors by larger companies seeking control over the value chain and cost structure. Corporate acquirers are poised to be active in the middle market as they shore up product portfolios and drive efficiency.

The consumer goods sector also saw a decline in deal activity, with ongoing uncertainty around consumer spending habits and policy shifts affecting investor interest. Pricing pressures for lower-to-middle consumers and a shift towards private label or discount shopping have emerged as key themes. Retail bankruptcies and questions about the sustainability of wholesale channels have compounded these challenges. Uncertainty surrounding tariff policies is likely to continue impacting consumer goods, with locally sourced products potentially becoming more desirable as companies transition their supply chains post-pandemic.

Despite these challenges, there is hope for a rebound in certain categories like apparel and beauty and personal care products that have remained stagnant for the past two years. Beauty and personal care companies are also reevaluating their product portfolios in response to disruptions in traditional sales channels.