Consumer goods companies eye supply chain and deal uncertainty

The task of transitioning supply chains, even portions of them, can be a multiyear, expensive endeavor. As a result, many companies, especially those in the middle market that have built strong relationships with single-source manufacturers, do not have the resources to evaluate new manufacturing hubs. However, amid geopolitical risks that show no sign of abating, it is time for companies to begin this review if they haven’t already. 

When it comes to mergers and acquisitions (M&A) activity in the consumer products space, 2023 will be a year to forget, as closed deal activity fell to the lowest level since prior to the pandemic; the robust deal market of 2020 and 2021 feels like a distant memory.

Economic uncertainty, underscored by an inconsistent recessionary outlook, led to sustained higher interest rates from the Federal Reserve’s inflation-busting campaign, as well as valuation gaps between buyers and sellers. All were key drivers of deal activity contraction last year.  

In the first quarter of 2024, themes that began to emerge in the second half of 2023 appear to be taking hold, including increases in earnout arrangements and the use of existing credit agreements to drive add-on deal activity. Further, notable shifts in buyers’ attitudes around growth projections emerged as investors continue to fight for high-performing assets and take a more cautious approach on lower-quality ones that will require significant operational attention.  

We expect 2024 will see some interest rate easing, with rate cuts likely to begin in May or June—welcome news for investors. However, with the 2024 U.S. presidential election, investor concerns will shift to political uncertainty in the second half of the year, which may cause them to further delay dipping their toes back into the deal market.  

Add-on acquisitions are continuing to account for a larger share of recent deals. These acquisitions remain attractive for buyers given their cost-effectiveness, especially during periods of elevated borrowing costs. Consumer services businesses, including those focused on home improvements and renovation, are embracing add-ons, as are med spas and other discretionary consumer health and fitness facilities. The ability to quickly scale the number of locations while centralizing back-office operations and marketing support is making these assets particularly attractive to investors. Expect to see more of this trend in 2024 as sellers evaluate exit opportunities and other transition options for long-held businesses. 

Consumer goods activity shows signs of stress, especially for businesses catering to mass-market, cost-conscious consumers; deal closings remained on a downward trajectory through the second half of 2023. The sector continues to navigate a challenging macroeconomic environment, as the buying habits of lower-to-middle-income consumers have shifted toward private-label goods or discount shopping. Even with strong retail and consumer spending results throughout the 2023 holiday season, investors have been cautious about purchasing home products and apparel companies.   

That said, the most active M&A sectors have been home services and consumer health. Investors have continued home services platform roll-ups, and have expanded from HVAC and lawn maintenance to roofing, plumbing and garage door providers. We expect 2024 activity to be largely driven by home services transactions as baby boomer investors look to exit private family companies and capitalize on strong multiples.  

Lastly, strong beauty brands—especially those that successfully diversified into brick-and-mortar locations—will garner investor interest.