Deal activity in consumer and retail decline as inflation worries hit confidence

Consumer and retail sector M&A took a backseat in 2022. A total of 226 deals were announced in the US year-to-date, a 34 percent drop compared to the first half of last year. Aggregate deal value dropped by an even steeper rate to US$22.1 billion, a 60 percent shortfall on H1 2021.

The more challenging deal conditions in the consumer and retail sector this year can be seen not only in the drop in the value and volume of deals but in the abandoned M&A process for department store chain Kohl's. The retail chain had been in sale talks with Franchise Group but pulled the deal in late June, after cutting its outlook for the second quarter.

The easing of pandemic constraints in Q1 helped consumer businesses, but this welcome reprieve was shortly offset by a worsening macroeconomic outlook. Spiraling inflation—the consumer price index reached a post-1970s high of 9.1 percent in July—has seriously dented consumer and investor confidence.

Rising interest rates will increase unemployment—this means that Americans are tightening their belts and reining in discretionary spending where possible. In June, the University of Michigan Consumer Sentiment Index fell to an all-time low, although the index edged up slightly in the July survey.

34% Percentage decrease in the volume of deals targeting the US consumer sector in H1 2022 compared to H1 2021

The value of 226 deals targeting the US consumer sector in H1 2022

Not all doom and gloom

There are still pockets of opportunity, however, that are benefiting from strong secular trends. ESG is a major motivator for deals, as is health and wellness, as consumers take better care of themselves. In the largest deal of the year so far, Nasdaq-listed Mondelēz International, the owner of Oreo and other iconic snack brands, picked up Clif Bar & Company for US$2.9 billion. Clif specializes in energy bars that use organic ingredients, aimed at fitness enthusiasts who are mindful of what they put in their bodies.

Consumer demand for ESG presents an excellent opportunity for investment and acquisitions into sustainable brands. Companies that are socially conscious and promote diversity and inclusion (D&I) will also receive considerable interest from potential buyers.

For now, the macro environment may not be conducive to major retail acquisitions, particularly those involving listed groups exposed to recent market volatility. But private consumer companies with star products are still very much on the menu, as strategics and sponsors look to reposition their portfolios for future growth.

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