In the ever-evolving landscape of mergers and acquisitions (M&A), the consumer sector stands at a crossroads, navigating through a series of global events that have led to a significant slowdown in M&A activity. As of 2022, there has been a 16% decrease in volume and a 32% decrease in value in consumer-related M&A deals, reflecting a cautious approach among investors. In this article, we consolidate the insights and frameworks that stem from our recent report, “Accounting for Consumers in M&A Decisions” where we discuss how consumer panel data can help assess demand-side performance during consumer-centric deal sourcing and due diligence.
Consumer-Centric Deal Sourcing
To lay the groundwork for successful M&A transactions in the consumer space, large portfolio companies and investment firms must understand the intricate dynamics of the consumer universe. This understanding goes beyond identifying specific acquisition targets; it involves comprehending the headwinds and tailwinds created by shifting consumer habits.
Lifestyle Flux and Emerging Trends
Identifying emerging trends hinges on recognizing moments of lifestyle and population flux. Seemingly insignificant shifts can escalate into significant behavioral changes in consumer preferences. Take, for instance, the recent adoption of GLP-1 medication for weight loss, initially designed for type-2 diabetes. This medication has reshaped approaches to health and wellness and raised questions in the investment community about its long-term implications for various food categories.
As investors and strategy teams encounter tangible shifts in consumer lifestyles, the crucial question arises: What new opportunities have arisen that will grow in the next 5-10 years, and where are the gaps in our existing portfolio?
The Omnichannel Imperative for Trend Discovery
Effective trend discovery necessitates holistic and robust data. Adopting an omnichannel view into consumer purchasing enables investors and strategy teams to confidently identify opportunities across sectors. The beauty industry serves as a prime example, experiencing a significant decline due to COVID-19. However, categories such as makeup and skincare, previously anticipated to face headwinds, have exhibited faster growth than hair and bath & body products in 2023. However, this is only the case when the beauty channel is included.
The beauty channel, contributing over $1.5 billion of growth separately to makeup and skincare, has propelled both categories to exceed their absolute dollar values from 2019. This underscores the importance of comprehensive omnichannel data in leveraging trends effectively.
Adding Consumer Performance Measures for Emerging Brands
Gaining insight into emerging categories and brands from a consumer perspective is indispensable. While corporate financials provide an overview of business health, they fall short in breaking down the drivers of growth and the retailers contributing to success. We found that only 1 in 10 emerging brands demonstrated consistent growth over four years. Understanding why consumers are not consistently driving growth is pivotal for stability.
Three Consumer Principles to Brand Due Diligence
Establishing a foundation for understanding consumer interactions with the target acquisition unveils a pathway to growth and aids in shaping an understanding of potential valuation.
To navigate the M&A landscape with a consumer lens successfully, investors and business leaders should focus on three fundamental principles–Brand Net Value, Brand Strength and Brand Future.
Brand Net Value
Before investing in a brand, understanding how it interacts with the portfolio and category is crucial for driving value creation. If the brand's volume primarily comes from within the existing portfolio, there is a risk of cannibalization and reduced topline portfolio growth. However, not all cross-interactions are detrimental, and if it contributes to premiumization, the benefits could outweigh the detractors. Thoroughly analyzing the sources of a brand's volume, along with those of its competitors, can determine whether the brand brings net new value to the table.
Among the top 100 fastest-growing CPG brands in 2023, 7 in 10 dollars of brand growth originated from either new category shoppers or existing shoppers spending more in the category. Thorough analyses of the sources of a brand's volume can determine whether the brand is truly bringing net new value to the table.
Loyalty to a brand is quantified through measures such as consumer sentiment, consecutive repeat rate, and customer lifetime value. These measures capture specific aspects of brand health and guide investors and strategy teams in generating long-term value from each consumer.
Understanding the perception of brand value and fit with the investment thesis is crucial. Consumer sentiment measures, such as brand perceptions and purchase intent, provide insights into brand equity strengths and vulnerabilities. Investors should use purchase-verified samples to capture accurate consumer sentiments, as traditional survey samples may be inflated.
In fact, when we asked about repurchasing a fast-growing energy drink brand through our purchase-verified sample compared to a traditional survey sample, the differences were stark. The positive response in likelihood to purchase was a nearly 40-percentage point difference between traditional and verified buyers.
Consecutive Repeat Rate:
This rate, indicating how often consumers repurchase a brand at their next immediate category purchase, is a strong leading indicator of market share performance and better defines loyalty.
Customer Lifetime Value (CLV):
CLV calculates the quantifiable value of the financial relationship between a business and a customer over a designated period. It helps determine the strategy for maintaining relationships and understanding engagement across a category.
Envisioning the future of a brand involves exploring three constants: Penetration Feasibility, Demographic Fit, and Promotional Effectiveness.
Grounding aggressive valuations against realistic household growth targets is crucial. Investors must assess whether they are prepared to make the necessary investments to acquire new consumers.
A CPG manufacturer in the health space reached out to Numerator to validate whether a target could reach $1B quoted by the brand over a set timeframe. What Numerator found was that for the brand to reach the estimated revenue, the manufacturer would need to continue the brand’s share growth and triple US household penetration–the amount equal to nearly 4.5 times the number of households in New York City– while also maintaining its currently high buy rate. Only one brand had managed to grow penetration within the CPG health space at that rate since 2017. The question Numerator brought forward to the manufacturer was, “Are you prepared to make the necessary investments to acquire that many new consumers?”
Aligning a brand with demographic trends helps determine its long-term growth potential. Psychographic analyses, beyond census-based definitions, provide insights into whether a brand fills a lucrative need state within the current portfolio.
Understanding how a brand promotes itself is essential, considering the high costs associated with trade promotions. While Numerator has shown a positive relationship between promotional share and market share, promotionally driven revenue and share gains come with potential implications on margins and long-term sustainable growth. Investors should analyze promotional data to identify whether a brand is overpromoting in context to category or inflating short-term sales and subsidizing existing consumers.
Consolidating Insights for Informed Investments
In the dynamic consumer goods and investment landscape, leveraging consumer data for M&A decisions is indispensable. Modern, robust consumer data equips executives with insights to identify emerging trends and evaluate brand performance for potential acquisitions. Additionally, investors and strategy teams must also ensure they have the level of consumer visibility needed at both channel and brand levels, considering the underlying consumer interactions with the brand on a trip-by-trip standpoint.
By evaluating target acquisitions based on consumer incrementality, equity, and potential, investors can make informed decisions aligned with long-term consumer trends. As the consumer sector continues to evolve, strategic investments grounded in consumer-centric data will be the key to sustainable growth and value creation.
If you are interested in learning more about how you can incorporate consumer data and insights into your M&A planning, reach out to your Numerator account partner or contact us.