Deal values in the consumer sector have continued to rebound in the first half of 2021, with activity driven by ample sources of capital and the acceleration of long-term shifts that were already evident before the pandemic started. There has been an increase in capability-driven M&A as companies seek to acquire critical capacity to meet changing consumer preferences, whether by outright acquisition or alternative M&A solutions such as partnerships, strategic alliances and minority interests. Deal activity has also reflected increased awareness of environmental, social and governance (ESG) matters among consumers and investors. With M&A increasingly acknowledged as a key factor in building agility and resilience and facilitating economic recovery, we can expect to see lively deals activity in the coming months. In this post we look at how PwC’s recently published global M&A insights are mirrored by developments in Switzerland.
As described in previous M&A insights, three main themes continue to drive M&A in the consumer, retail and leisure markets: constant redefinition of the core, buying into the new rule breakers, and building in super-resilience. Let’s first look at how these trends are developing.
Constant redefinition of the core
Portfolio redefinition remained a key driver of M&A activity in the first half of 2021, as it had been in during 2020. Large-scale players in the consumer markets have proven their resilience, and are still concentrating on value-creation strategies to take them into the future. For these companies, M&A deals are a means of creating value, either by acquiring capabilities in growing categories, channels and markets or disposing of non-core business and potentially exiting non-strategic markets.
In addition to portfolio reviews and carve-outs there’s been an increase in corporate M&A prompted by value preservation strategies as companies examine their strategic options for creating competitive advantage in the long term. Corporates with deep pockets and private equity firms with capital at their disposal will be seeking opportunistic M&A deals that meet these requirements.
Buying into the new ‘rule breakers’
Over the past 18 months we’ve seen a number of macro trends intensify and accelerate. They include digitalisation, direct-to-consumer sales, convergence of technology with in-store experiences, contactless delivery/payment options, ESG, and diversity and inclusion (D&I). New entrants or rule breakers have for some time been developing capabilities and business models that exploit these trends to disrupt the traditional retail, consumer, hospitality and leisure businesses landscape. Now we’re seeing established businesses that did not necessarily have pre-existing capacity to grow through innovation and disruption trying to build capabilities of this sort by acquiring rule breakers.
Disruptors are potentially attractive acquisitions for corporates, private equity firms and the fast-growing category of SPACs (special purpose acquisition companies), and we expect such deals to continue to be a big part of the sector’s M&A activity over the rest of 2021 and into 2022.
Building in super-resilience
To avoid becoming obsolete, distressed, or potential takeover targets, retail, consumer, and leisure companies have been forced to make their business models more operationally and financially resilient. They continue to use M&A as ways of preserving and creating value as conventional business models come under threat. This might involve deals designed to diversify supply chains, integrate vertically, boost digital transformation and preserve liquidity. Restructuring is another alternative companies are opting for to build resilience.
Online and physical consumer shopping experiences continue to converge, with a growing number of e-commerce and physical operators using M&A transactions to grow market share, access consumer data and acquire new channels. Partnerships – as opposed to outright acquisitions – have also become a popular means of accessing new markets and channels and boosting digital capacity. We expect to see activity continue, in the form of both traditional mergers and acquisitions and alternative arrangements such as strategic alliances and partnerships.
What about M&A in the Swiss retail and consumer sector?
As the industry has adapted to the Covid situation with all its implications and measures, we’ve also seen an acceleration in various structural changes, many of which were initiated before the pandemic. They include a focus on online shopping and distribution channels, and the digitalisation of consumer business models in terms of marketing, sales and distribution. In line with this, non-food retailers have continued to downsize their store networks while applying heavy discounting to reduce inventory levels and incentivise consumers to return to the stores. At the same time, online retail volumes have continued to reach record levels. For the remainder of the year, we expect a continuation of these trends, limited possibly by supply shortages in certain non-food durables like furniture, sport, home and leisure equipment, luxury goods or mobility-related products – leading to growth in second-hand retailing models.
Food retailing continued to do well during and after the lockdown, as the restaurant and food service industry is only recovering slowly, mainly owed to the persistence of homeworking set-ups, namely in urban agglomerations with large corporates in the service and pharma industry.
We have also observed an increased need among consumers for healthy, more environmentally-friendly products, as Millennials and Generation Z consumers in particular become more conscious of the environment and society. We assume that the offering of plant-based meat and dairy products, as well as vitamins, minerals and supplements, will increase. These trends will clearly spur the growth of start-ups in those sectors with a first phase of consolidation.
This translates into a highly active Swiss M&A market in the retail and consumer space, with many companies ‘right-sizing’ or growing their operations and others accelerating the transformation of their business models by means of deals.
To summarise: M&A in the consumer industry playing a pivotal role in economic recovery
The full impact of the COVID-19 crisis has yet to unfold. The pandemic has adversely affected large swathes of the retail, hospitality and leisure sub-sectors, some of which have enjoyed temporary relief in the form of government support and aid packages. Companies that take this opportunity to redefine their business models and accelerate the transformation that was already under way will emerge stronger. In some instances, we expect there to be a further increase in restructuring-led M&A activity, particularly during the second half of 2021, as the relief measures come to an end.
The impact of the pandemic goes beyond the direct effects. It’s been an accelerator of large-scale disruption in the retail, consumer and leisure businesses, driving increased digitalisation, innovation, direct-to-consumer sales and ESG awareness. There’s been a realisation that mergers and acquisitions are a crucial part of enabling businesses to stay agile and build resilience to preserve and create value.
As 2021 progresses we expect high liquidity levels to continue driving deals activity along the three main themes described above to facilitate collaborations and partnerships, and to result in more IPOs, SPAC mergers and an increase in restructuring-led M&A activity.
“Retail and consumer is at the leading edge of post-pandemic recovery. With a pressing need for right-sizing or accelerating business model transformation, we can expect an abundance of M&A activity going forward.”