Twice a year, Meridian Capital publishes its Consumer Newsletter, which focuses on key trends in middle market consumer M&A. In addition to covering general consumer industry trends, the Spring 2016 Snapshot provides in-depth analysis of four key consumer segments:
1) housewares, 2) food & beverage, 3) apparel, accessories and footwear, and 4) outdoor and recreation.
As we enter 2016, the underlying economic fundamentals remain solid despite a weak and promotional holiday season. The backdrop of the upcoming election and questions about further interest rate increases by the Fed will create uncertainty in the stock market, but that should not affect the appetite of strategic buyers, who still have very large cash reserves and no better options for growth apart from acquisitions. We expect that 2016 will be another solid year for M&A, with valuations holding up while interest rates remain relatively low and debt financing options abundant. Shareholders who have been considering growth, financing and/or ownership transition objectives should review them now, given a likely cyclical downturn in the next 2-3 years.
Key Industry Trends
Positive Economic Trends Drive Increased Consumer M&A Activity
During 2015, 3,323 consumer products transactions were announced in the U.S., representing an aggregate disclosed value of $376 billion. The number of transactions was up 4% compared to 2014 and aggregate disclosed value was up 13%. Notable consumer transactions in 2015 included the $55 billion acquisition of Kraft Foods by Heinz, the $28 billion acquisition of Lorillard by Reynolds, and the $19 billion acquisition of Jarden by Newell Rubbermaid.
Both strategic and financial buyers are seeking to capitalize on the growth in the consumer products industry and are highly acquisitive, driving strong valuations. Transaction motivations include increasing presence in high growth segments, expanding geographic reach, vertical integration, and access to new customers via strong, established brands.
Key Consumer Industry Trends
The Rise of Craft
In the wake of the global recession, consumers have exchanged their interest in massive brands for craft products, whether they be craft beer/spirits, goods from farmers markets or handmade items purchased online. Websites such as Etsy cater to this shift in consumer preferences. Large companies can also cash in on this trend, particularly in segments such as beer/spirits, where industry leaders own niche brands (for example craft beer brand Blue Moon, which is owned by Miller Coors). According to consumer trend consultant Jenny Zegler, “Niche is no longer a limitation, nor is it an opportunity reserved for small companies. We’ve entered an era where the power of the story and the authenticity of the connection supersedes any lofty moral aspirations such as ‘shopping small.’”
Internet of Things
One of the fastest growing industries in the consumer sector is the Internet of Things (“IoT”) ecosystem. Based on sensors which collect data and enable machines to talk to one another, the IoT trend is expected to have a significant effect on consumers in the coming years. Companies such as Nest are changing the way consumers interact with machines inside and outside of the home. Retailers are beginning to utilize IoT technology in stores by having in-store devices automatically ring up customers, track real-time shopping behaviors, and send tailored offers to customers. A recent study by McKinsey found that the uses of IoT in retail could have an economic impact of $410 billion to $1.2 trillion per year in 2025.
The Housewares market experienced a slight decline in M&A activity in 2015, with 71 housewares transactions announced globally, compared to 82 in 2014. Despite a slight decline in activity, 2015 was notable for Jarden’s $1.3 billion acquisition of Waddington, a maker of plastic food-service products such as single-use drinkware and dinnerware, and Jarden’s subsequent sale to Newell Rubbermaid for $15 billion. The combined company, to be named Newell Brands, brings together a complementary set of brands such as Newell’s Rubbermaid, Contigo and Calphalon brands and Jarden’s Oster, Crock-Pot and Sunbeam brands. The combination of these companies creates a $16 billion revenue business which will have more leverage with large customers such as Walmart.
Housewares Industry Trends
Blurring Boundaries between Housewares and Home Furnishings
As 20-somethings continue to postpone marriage or forgo the rite altogether, housewares manufacturers have had to adjust to a world with fewer wedding registries. One of the biggest shifts has been towards giftware and other home products. The clear increase in participation at giftware trade shows by traditional housewares companies is a good indication of this trend. Housewares brands are also relying on improved product packaging to stand out in an increasingly competitive market.
Rise of Shark Tank and Crowdfunded Products
Shark Tank and crowdfunding sites such as Kickstarter and Indiegogo are increasingly providing strong launchpads for new, niche housewares products. Scrub Daddy, a new kind of kitchen sponge, went from startup to $35 million in revenue in just over a year as a result of exposure on Shark Tank. Cooler company Coolest raised more than $13 million in donations on Kickstarter in only 52 days, helping the founder realize his vision of creating a premium cooler with extensive functionality such as a built-in blender, Bluetooth speaker, and USB charger, among other innovative features.
Food and Beverage Spotlight
M&A activity in the Food and Beverage sector was up in 2015, with 370 announced transactions in the U.S. compared to 341 in 2014. Aggregate disclosed transaction value was up more than 60%, growing from $63 billion in 2014 to $100 billion in 2015, primarily as a result of the acquisition of Kraft Foods by Heinz for $55 billion. Other notable transactions include the $12 billion acquisition of the remaining 58% stake in Miller by Molson Coors, and the $14 billion acquisition of Keurig Green Mountain by JAB Holdings, the investment vehicle of the Swiss-based Joh A Benckiser family. JAB also owns controlling interests in Peet’s Coffee and coffee chain Caribou Coffee.
Food and Beverage Industry Trends
Growth of Plant Based Protein
Plant based proteins have surged in popularity as health concerns and the rising cost of animal-based proteins have pushed consumers towards plant based diets. The global protein market was expected to reach $24.5 billion in 2015, and the fastest growing sector is plant-based proteins. These products are considered more sustainable than animal-based proteins and have become increasingly popular as more consumers are concerned with their health. The Paleo diet has also contributed to this trend through its advocacy of lean protein. Products such as pea protein and hemp proteins are becoming popular, and more products continue to come to market which offer the balance of health benefits and sustainability which consumers are craving.
Movement Toward Dairy-Free Milk and Creamer Alternatives
The movement of consumers away from dairy toward milk alternatives and other dairy-free products continues to be a major trend. Dairy has been on a multi-decade decline, with consumers increasingly choosing to opt for dairy-free options as a response to lactose intolerance as well as general health purposes. The past several years have seen a decline in soy-based products and a rapid increase in almond and coconut products. Brands such as Nutpods, which makes a dairy-free creamer from almonds and coconuts, are growing rapidly as the healthy dairy-free creamers proliferate and take shelf space from traditional creamer brands such as Coffee-Mate and International Delight.
Apparel, Accessories and Footwear Spotlight
M&A activity in the Apparel, Accessories and Footwear sector was up in 2015, with 93 announced transactions in the U.S. compared to 81 in 2014. Notable transactions included the acquisition of women’s specialty retailer Ann Inc. (Ann Taylor) by Ascena Retail Group (Lane Bryant, Dress Barn) for $2.2 billion and the acquisition of women’s footwear company Stuart Weitzman by Coach for $575 million. The acquisition of Ann Inc. positions Ascena as the largest women’s-focused specialty retailer and broadens its brand mix to cover women of all ages and sizes. The acquisition of Stuart Weitzman by Coach is a way for the brand to diversify away from its core handbag business, which has suffered in recent years at the hands of rivals such as Michael Kors and Kate Spade.
Apparel, Accessories and Footwear Industry Trends
Athleisure Still Going Strong
The multi-year trend towards athleisure shows no signs of slowing down, with more and more brands creating athletic-inspired parts of their lines in hopes of capitalizing on the trend. As athleisure products proliferate, we expect the most authentic brands such as Lululemon, Athleta, prAna and Beyond Yoga to continue to dominate, as consumers gravitate towards established, trusted brands.
Wearable Tech Is The Next Frontier In Fashion
If you haven’t included a biometric sensor in your clothing or footwear yet, you’re living in 2013. Wearable tech is the next big fashion trend, and both apparel and tech companies are racing to capitalize on it. Companies such as Fitbit have built a large business around people’s obsession with measuring their every step, heartbeat and sleep cycle to improve health and well-being. Apple’s collaboration with Hermes on the special edition Apple Watch is a perfect example of how technology companies acknowledge they need to partner with fashion brands to make products relevant to brand-oriented consumers. One of the big questions in wearable tech is when, and if, smart watches will replace fitness tracking devices, or whether they can truly coexist.
Licensing/Brand Management Companies – The New Strategic Acquirers
Licensing and brand management companies continue to succeed in taking established, in some cases tired brands, and reinvigorating them for the masses. Companies such as Iconix and Authentic Brands have greatly increased the options sellers have by providing a viable alternative to traditional strategic acquirers. Ideal targets for these companies are brands which have some relevance and name recognition to the mass market, and ideally still have some cachet to be leveraged. Even VF Corp. has gotten into the game, acquiring denim company Rock & Republic, known for its $200+ pairs of premium denim, and subsequently doing an exclusive deal with Kohl’s where R&R’s products now sell for $50 or less.
Outdoor and Recreation Spotlight
M&A activity in the outdoor and recreation sector increased in 2015, with 50 transactions announced in the U.S. compared to 41 transactions in 2014, although aggregate announced transaction value decreased from $521 million to $424 million. Notable transactions in 2015 included Confluence Outdoor’s acquisition of stand up paddle brand Boardworks, Dutch conglomerate PON’s acquisition of Santa Cruz mountain bikes, and sleeping bag manufacturer Exxel Outdoors’ merger with American Recreation Products, owner of backpack brands Kelty and Sierra Designs.
Outdoor and Recreation Industry Trends
Racing and Water Sports Leading Growth
Participation in racing, particularly adventure racing and off-road triathlons, has increased significantly over the past three years. These two activities have seen the largest increases in participation of any outdoor activity, growing 38% and 34%, respectively. Adventure racing includes long distance team events such as the Ragnar Race and has some overlap with the rapidly growing obstacle race sector, which includes events such as Tough Mudder and Spartan Race. The increase in participation in off-road triathlons seems to correlate with the rise in adventure racing.
Interestingly, the waning of the “barefoot” trend in footwear and increased interest in thick soled product produced by brands such as Hoka One One has coincided with the large increases in racing participation.
Stand up paddling (“SUP”) and kayak fishing have also seen large increases in participation over the past three years, growing 31% and 20% respectively. SUP has been the fastest growing sector of outdoor for several years and shows no sign of slowing. SUP has been somewhat limited in its ability to grow by the difficulty of storing large boards, particularly in Europe and Asia, but the rise of inflatable models appears to have bridged that gap in the eyes of consumers. There has also been a large increase in kayak fishing (and SUP fishing), a trend which has tapped into consumers’ desire to avoid crowded fishing spots and get into the water faster and with less cost.
Camping and snow sports have seen the largest decreases in participation in recent years, declining 3-5% during that time. A decreased interest in camping by young adults has driven the decline, as consumer electronics technology such as smartphones and tablets have led to a decreased interest in being outdoors. A lack of snowfall the past several seasons has hurt the snow sports industry.