Twice a year, Meridian Capital publishes its Consumer M&A Snapshot, which focuses on key trends in middle market consumer M&A. In addition to covering general consumer industry trends, the Spring 2015 Snapshot provides more in-depth analysis on three key consumer segments. In this issue we spotlight the housewares, children’s products and food and beverage segments.
As we enter 2015, the improving economic environment has bolstered consumer confidence, creating an attractive landscape for consumer products companies. The favorable market conditions have driven an upswing in M&A activity with both private equity and strategic buyers paying record multiples for middle market acquisitions. Buyers are seeking quality targets with solid contribution margins, broad geographic and channel reach, efficient manufacturing capabilities and strong brands. Given the strong valuations in M&A markets, we believe 2015 is an opportune time for shareholders to review growth, financing and/or ownership transition objectives.
Key Industry Trends
Positive Economic Trends Drive Increased Consumer M&A Activity
Over the past twelve months, 3,061 consumer transactions have been completed within North America, representing an aggregate disclosed value of $464 billion. This marks an increase of 36% over the prior twelve months. Transaction motivations include increasing presence in high growth segments, expanding geographic reach, vertical integration, and access to new customers via strong, established brands. Despite global concerns, strategic and financial buyers continue to be encouraged by the stable and growing domestic and Asia-Pacific economies, improved corporate balance sheets, record stock market prices, improving employment statistics, and the significant “dry powder” that has yet to be deployed. These positive dynamics combined with the favorable debt markets provides us with a number of reasons to expect an upswing in consumer M&A activity in 2015.
Key Industry Trends
Direct-to-Consumer Critical to Brand Development
Shoppers engage with consumer products across a variety of mediums: in a physical store, on a website or mobile app, via social media or on the phone. Successful consumer products companies have found ways to ensure that each touch point is seamless, consistent and complementary. The most successful consumer products companies have implemented direct sales channels that have boosted sales, increased cross-selling opportunities and decreased transportation costs. Consumers often find buying direct to be more convenient and satisfying, resulting in higher customer spending. Additionally, direct-to-consumer allows companies to control the brand message and more effectively collect valuable consumer feedback. The Tie Bar and Proactiv are examples of companies that have utilized direct-to-consumer sales channels to achieve rapid growth.
Online Concept Testing is Driving More Efficient Product Development
Historically, product testing has been a time consuming and expensive process. Companies rely on a combination of field surveys, interviews, focus groups and other qualitative methods to evaluate consumers’ responses to new products. Online retailing, particularly through Amazon, allows consumer products companies to receive more immediate and relevant product and consumer feedback. The “Amazon Effect” has reduced the required product testing window from months to weeks. Online testing allows products to come to market faster and helps reduce the working capital and inventory risk often associated with new product cycles. The transition has pushed consumer products companies to review their online channel presence and product development timelines.
More Mindful Consumer Buying Decisions
Many economists believe that the recession permanently changed consumers’ priorities and led people to focus on family, friends and health rather than consumption. Consumers are moving to “mindful” consumption, increasingly purchasing goods and services from companies that reflect their standards and values. Successful retailers and consumer products companies are able to differentiate their marketing messages and promotional behavior between consumers who are price conscious and those who are more mindful of buying a recognized brand. Products emphasizing sustainability and ethical sourcing continue to attract significant attention from consumers. In recent years, made-in-USA products have also made a resurgence as consumers seek to promote U.S. job creation and support the U.S. economy. Consumer products companies are responding by building or buying brands that resonate with the post-recession consumers.
The housewares market experienced a noticeable increase in M&A activity in 2014. Over the past twelve months, 21 housewares transactions were announced globally. Transactions were largely motivated by improving consumer sentiment and companies looking for acquisitions to drive growth and adapt to changing consumer trends. According to Forbes Insights, two-thirds of executives in the housewares space expect strong sales performance in the next year.
Housewares M&A and Industry Trends
Strong Private Equity Presence
PE activity in housewares remains strong based on multiple financial investors achieving successful exits of high profile portfolio companies in 2014. This is evidenced by CID Capital’s investment in Chef’n, a manufacturer and distributor of innovative kitchen gadgets. CID invested in the company in 2011 and achieved a fruitful exit to Taylor Precision Products in 2014. North Castle Partner’s sale of Ignite Holdings to Newell Rubbermaid in July 2014 also showcased the attractive exit opportunities available to private equity firms. Ignite Holdings, a leading supplier of beverage containers sold under the Contigo and Avex brands, experienced 35% compound annual sales growth for the four years prior to its sale to Newell Rubbermaid for $313 million.
Private equity firms that are actively making platform investments in housewares include Acon Investments, which acquired Igloo Products in 2014, and Centre Partners, which acquired Taylor Precision Products in 2012.
Many other investors with a consumer products focus are seeking housewares platform investments in an effort to capitalize on the industry’s strong performance. Given the volume of capital flowing into the housewares industry and the broad range of consumer products private equity firms, entrepreneurs and shareholders have a wealth of transaction options to meet their personal and business goals.
Private Label Attracting Increased Investment
Historically, investors interested in the housewares market have been focused on branded products due to the ability to gain customer loyalty, achieve strong margins, and create a defensible market position. Although this trend continues, recent activity suggests investors are increasingly interested in companies with private label exposure. Select investors are attracted to the insulation against changing consumer preferences, lower marketing costs, and the manufacturing efficiencies that the private label model provides.
Valuation drivers for private label consumer companies are consistent with their branded counterparts – namely a strong distribution presence, differentiated manufacturing and unique product development capabilities. For example, private label companies that engage in collaborative design processes with customers add more value and create higher switching costs.
Lifetime Brands’ January 2014 acquisition of Thomas Plant, a U.K.-based housewares manufacturer and supplier of exclusive private label products highlights strategics’ interest in acquiring private label housewares manufacturers to drive profitability across existing brands.
Children’s Products Spotlight
The children’s products market has experienced strong M&A activity over the past year with over 45 transactions closing. With industry revenue forecasted to grow to $23 billion by 2016, a 15% increase from 2013, both strategics and private equity firms are actively seeking acquisitions to enhance product development capabilities, expand distribution and enter fast growing product categories. Similarly, international manufacturers are seeking to gain a stronger foothold in the U.S. market and are vertically integrating to create supply chain efficiencies and increased economies of scale.
Children’s Products M&A and Industry Trends
Domestic Growth Expected to Improve
After hitting an all-time low in 2011, U.S. birth rates have started to rebound and are projected to increase 0.5% annually through 2019.
The children’s products market is also expected to benefit from an increase in family disposable income, driven by an aging parent population and a growing percentage of dual income households. The number of women having children in their thirties has increased significantly, with the number of first children being born to women over the age of 35 increasing from 1% in 1970 to over 15% in 2012.
Diversified consumer products companies see the growth potential of this segment and are actively increasing exposure to the space through acquisitions. Newell Rubbermaid, for exampled, doubled the size of its juvenile products segment with the December 2014 acquisition of Baby Jogger, a premium strollers and accessories company.
Innovation Remains Key to Success
Product innovation and development continue to be critical to the success of children’s products brands. With parents conducting greater online research prior to purchases, online reviews are essential to differentiating a brand at retail. The need to continuously develop and bring to market safe and creative products tailored to the changing lifestyle trends of consumers has motivated many firms to pursue acquisitions.
Onaroo, an award-winning brand of night lights and alarm clocks for children with a track record of developing innovative products, was acquired by Patch Products, Inc., a portfolio company of Topspin Partners, in November 2014. Mattel’s acquisition of MEGA Brands, a supplier of construction toys, games, puzzles and crafts, in April 2014 was also driven by product development capabilities and category leadership. MEGA Brands is the second largest player in the fast growing $4 billion construction building sets market.
International Strategics Motivated to Vertically Integrate
In 2014, several leading international manufacturers pursued brand acquisitions to enhance marketing capabilities and gain stronger North American distribution. Companies with strong relationships across distribution channels proved to be attractive acquisition candidates to manufacturers seeking to create more competitively priced products for the North American market by leveraging existing R&D and production resources.
International manufacturers have also been looking to build strong global brands capable of capitalizing on the increasing disposable income of consumers in the Asia-Pacific region. Demand for toys and games in Asia-Pacific is forecasted to grow 6% annually through 2018. In 2014, Hong Kong-based Blue Box Holding acquired California-based Infantino, a supplier of baby toys, carriers and travel accessories, and China-based Goodbaby International acquired Ohio-based Evenflo, a supplier of child transport systems. Both of these transactions demonstrate the manufacturers desire to vertical integrate in order to achieve cost efficiencies and to expand U.S. brands into the fast growing Asian markets.
Food and Beverage Spotlight
Throughout 2014 and into 2015, the food and beverage segment has continued to experience impressive M&A activity. In the past year, 285 food and beverage transactions have closed with an aggregate disclosed value of $81 billion.
Food and Beverage M&A and Industry Trends
Natural and Organic Goes Mainstream
Growth in the natural and organic segment continues to outpace the broader food and beverage market. Organic food and beverage sales grew 12% in 2013, three times the growth rate of conventional food sales. As a result, many companies are reengineering food products to fit a more natural image. Nestle USA recently announced it will be removing artificial coloring and flavorings from over 250 candy products. Other companies are actively acquiring established natural brands. The purchase of Annie’s, Inc. by General Mills demonstrates the company’s desire to gain a foothold into the natural and organic segment in order to drive future growth. General Mills plans to grow its organic segment from $600 million to $1 billion by 2020, indicating acquisitions will likely continue to be an essential part of its strategy.
“Free-from” attributes, such as gluten-free and non-GMO, have become key components of product labeling. This year saw substantial interest in “free-from” brands from both domestic and international strategics, including the acquisition of Enjoy Life, a U.S.-based maker of allergen-free snack products, by Mondelez International. Strategic players have a continued appetite for better-for-you and free-from brands and are willing to pay premium valuations in order to gain access to these brands’ discriminating customer bases.
Constrained Growth for Conventional Grocery Retailers
Conventional supermarkets continue to see fierce competition from the discount, specialty food store, and warehouse, club and supercenter channels. In this challenged growth environment, the conventional supermarket segment has seen continued consolidation, most recently with the acquisition of Safeway by Albertson’s.
As conventional retailers look for margin expansion opportunities, it has become even more challenging for small brands to grow into this channel. These retailers require substantial slotting and promotional spends to bring new products in, making it difficult for smaller businesses to compete with larger packaged food conglomerates.
One bright spot for growth in the conventional and mass grocery retail segment is with natural and organic products. While the overall channel saw minimal growth in 2014, natural and organic both saw double digit revenue growth (52-weeks ending October 5, 2014). As retailers continue to expand this segment, there is a compelling opportunity for niche food and beverage companies to enter this channel.
Ongoing Strategic M&A Fuels PE Investment Activity
The strong ongoing levels of strategic M&A activity in the food and beverage space has attracted a number of private equity and growth capital investors. These investors are deploying capital to build middle market companies to a scale at which strategic investors become acquisitive. Financial investors often provide the necessary capital to help companies accelerate growth prospects whether through geographic expansion, extension into competitive conventional retail channels, product line expansion, marketing or other initiatives. Over the past year, many of these investors have had successful exits through sales to strategic players enabling them to raise new funds and seek new investments in the next wave of emerging companies. With strategics paying upwards of 3.0x revenue for attractive targets, PE firms are able to offer attractive revenue multiples to smaller businesses, while still maintaining strong return upside.
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Apparel and Accessories
Food and Beverage
Health and Beauty
Housewares and Gift
Outdoor and Sporting Goods
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