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The Impact of Changing Consumer Behavior on M&A

Home » Insights » The Impact of Changing Consumer Behavior on M&A

The Impact of Changing Consumer Behavior on M&A

by Khadija Tahir

The global pandemic has been driving exponential growth for some consumer brands. Captive audiences, with consumers having more time to shop online, or the market shift to direct from brand acquisition, mean that some brands have grown as much in just the last 18 months as was predicted over the next three years. So, has this growth led to an increase in M&A activity?

The simple answer is yes. The high levels of liquidity in private equity funds and the desire from large global players to engage with the consumer mean the volume of consumer deals is significant. However, appetite is on a limited number of subsectors, where valuations are at an all-time high. Acquirers are also cautious when considering acquisitions because of expectations around the growth in the consumer market in 2022.

Consumer behavior and valuations

There are several deals from the last six months that capture the valuation effect of changing behavior.

In April, we supported LDC in its minority acquisition of Le Mieux, an equestrian brand. This is a sub-sector historically by distributor and wholesale channels. A number of well-regarded UK brands have struggled to demonstrate the breadth of their brand due to limitations on Stock Keeping Units (SKUs) retailed through wholesale accounts.

The consumer trend to purchase directly from brands has been a significant market shift. It has allowed more brands to not only “own” their relationship with the consumer but to engage through social media channels and direct interaction with customers. The result has been significant growth at both revenue and margin levels for those brands.

Our expectation for the equestrian sub-sector is that the market shift. The growth in the demographic will lead to consolidation over the next three years. Brands that are well regarded with a strong hold on the UK consumer will be extremely attractive to international buyers looking to consolidate.

We expect similar trends in outdoor living, cycling, and direct-to-consumer food propositions. All of which have seen similar shifts in the channel mix and a revolution in consumer engagement. These sectors have also benefitted from the changes to lifestyles driven by lockdowns and a broader focus on well-being.

What’s next for consumer M&A?

UK consumer brands are seeing high levels of growth, including like-for-like growth against March – May 2020, the “COVID Period”. Nonetheless, the pandemic and Brexit have created significant challenges for 2021. Potential growth is being hampered by limited production capacity, challenges on import, and stock being locked in ports globally. Acquirers and investors may wait for these supply chain issues to be resolved which may delay some transactions.

There is a heightened appetite for brands to consider IPO as an option. We have seen several successful transactions in H1 2021, such as Parsley Box, In the Style, and Made.com.  Market valuations are at a high, driving overall valuations for private companies to increase. As a result, we anticipate a steady volume of brands coming to the listed markets over the next 12 months.

The UK’s large corporates are also reacting to the changes in consumer behavior.  Some of the UK’s largest retailers are likely to undertake transactions, either divestment of non-core brands or the acquisition of brands to improve their position in the direct-to-consumer marketplace. I predict several prominent names undertaking activity in the coming 12 months.

Focused investment appetite for consumer brands

For all the reasons I have explained above, the right brands in the right subsectors will see a strong investor appetite. H1 2021 has experienced a strong start for M&A activity. I am confident we will see a surge in private equity confidence. A growing appetite from trade to undertake transactions, and increased valuations for listed entities. All of which will create a landscape of high investment appetite over the next 12 months.

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