Battling the bubble

Backing the right company in a hot market

Monday 21 February 2022

Article

Welcome to Consumer M&A in 2022. Valuations are at record highs, and trade and private equity are fighting fiercely for the best deals. With everyone gunning for the same growth areas, how do you ensure you’re not backing a bubble?

The combat zone

From gourmet treats for lockdown pets to bespoke garden furniture, there are six hot growth areas:

1. Plant-based

Environment, health, and animal welfare concerns have boosted consumer demand for meat alternatives.

2. Value-added ingredients

Growing subsectors, such as functional foods, rely on specialist ingredients

3. Pets

The elevation of pets to family member status is driving the premium end of the pet market.

4. Wellness

Consumer focus on health and wellness is increasing the use of vitamins and mineral supplements, as well as fortified foods.

5. Hobbies & home living

Lockdowns have rekindled consumer passions for pastimes, such as gardening, crafting, and gaming, as well as home improvement.

6. Co-manufacturing

This in-demand yet sometimes fragmented market holds plenty of opportunities for consolidation.

The tactics

Deploy these tactics to see past valuations and uncover true value:

1. Look beyond brands

In 2022, winning doesn’t necessarily mean owning the fastest-growing household brand. Companies with reliable growth can be found across the entire value chain, in areas such as private label and specialist ingredients production.

Co-manufacturers, for example, have enabled the rapid growth of sectors such as free-from and wellness. These third-party production centres are an attractive way to access growth categories in which individual brands have prohibitively high multiples and uncertain future success.

2. Target unique technology or IP

Unique technology or IP sets a company apart. This is particularly relevant for 2022’s growth areas, many of which require specialist ingredients and manufacturing techniques.   

Case study

Technology on top

Israel-based Redefine Meat uses 3D printing technology to produce meat alternatives, setting it apart from existing extruded products that often struggle to mimic the distinctive texture of meat.

3. Target new routes to market

Prior to the pandemic, consumer goods companies were exploring new routes to sell to digital natives, including direct to consumer (D2C) and pureplay models. Multiple lockdowns have accelerated this trend across all categories, in particular bringing in older consumers who have become more digitally savvy.

Case studies

Pampered pooches

Premium pet food has all the necessary traits for a successful D2C model: high value, repeat purchases, and (as anyone with a fussy pet will tell you) brand loyalty.

There are 17 million pet-owning homes in the UK, 3.2 million of which were lockdown buyers – Pet Food Manufacturers’ Association.  Moreover, these new additions are seen as members of the family to be treated with premium products when possible.

We estimate the European D2C petfood market alone to be worth c.€0.1bn with c.14% indicative growth. Nestlé bet on this in 2018, with a majority stake investment in Tails.com, a leading D2C brand that sells food tailored to a dog’s breed, health, and weight.

Posher patios

The pandemic has also shaken up the route to market for household items, such as premium outdoor furniture, which was previously the remit of garden centres. Online catalogues resolve the cost of expansive showrooms, whereas innovative use of technology, such as AR, enables internet shoppers to imagine furniture in situ.

A slew of online pureplays are driving this market with leading brands such as Moda Furnishings seeing rapid pre-pandemic growth accelerated by lockdowns in which consumers splashed out on outdoor living.       

4. Target flexible manufacturing

Could today’s pea protein be tomorrow’s mushroom? Food trends come and go, which is why producers need to be able to switch manufacturing capability to the next big thing or adjust scale as necessary.

Case study

the white stuff

Hain Daniels has shown the value of being an agile co-manufacturer in the fast-growing plant-based milk market, allowing it to grow without needing to hitch its wagon to a specific brand.

With brands looking to stand out to consumers and retailers, innovation and new product development are more critical than ever. Flexible manufacturers are stepping in to provide a sprinkle of stardust to established brands through format innovation or new tastes and textures. This might mean producing a vitamin brand in gummy format or improving the texture of a protein bar.

Mission essentials

Whichever category you target, you need to establish the following:

Is your target company thinking about ESG?

Consumer concern about the environment coupled with increasing government regulation mean that a strong ESG policy is no longer optional:

• Ensure your target asset has a record of improvement against ESG metrics and a clear plan to improve.
• Ensure that ESG figures in decision making and management reporting.

Is your target asset exposed to post-Covid disruption?

There’s no doubt that the pandemic has shaken up consumer spending habits, but how many of our new behaviours will be permanent? Will a meal-kit business perform as well when people go back to work? Have we reached peak pet? Ask yourself the following:

• ­How will a reversion to pre-Covid consumer behaviour impact performance?
• How much post-pandemic change will stick?
• Could disruption allow you to take advantage of a previously stable competitive dynamic?

The consumer goods M&A market is hot for a reason: there are incredible opportunities in several new and growing categories. We hope this short guide will help you cut through the hype and identify the true value players.

Interested in discussing these growth opportunities further? Please don’t hesitate to get in touch – we would love to discuss with you.

 

Barney Wallace, Partner

Duncan Simmonds, Partner

Dan Zubaida, Associate Partner