During 2017, the Consumer Products industry exploded with significant merger and acquisitions (M&A) totaling approximately $136 billion dollars for the first half of the year. In April 2017, 7-Eleven announced that they will acquire the convenience stores and gasoline stations of Sunoco. During June 2017, Amazon announced that they would acquire Whole Foods, and Walgreens announced that they will acquire approximately 2,200 Rite Aid stores. The trend went into overdrive at the end of the year with the AT&T/Time Warner deal and the Meredith acquisition of Time, Inc.
So why now? Why do these companies now feel compelled to acquire or merge? Traditionally, large consumer brands have spent billions of dollars on research and development to find efficient ways to mass produce. However, today large retailers are leaving innovation to the start-ups and replacing research and development with M&A activity.
The impact of the industry transformation on consumers can both be positive and negative. The merger of two large companies may result in price increases. As the number of actors in a market declines, it allows the remaining players to “price coordinate.” However, it may also work to the benefit of the consumer if synergies can result in cost savings that are passed along to the consumer. Customer service may also be impacted. The focus on e-commerce and click-to-connect technology removes the human element. Declining resources could result in overwhelmed customer service staff and dissatisfied customers.
Post-merger, companies will unite the best of their skilled workforce and integrate facilities with the intent to improve the quality of goods produced.
Finally, mergers can impact variety of products, either resulting in a reduction to the number of options available as the company looks to decrease overhead and drive profits; or they may increase variety due to cost savings, a greater reach and additional resources.
We can expect to see business models changing in the future as a result of M&A activity. With the “anytime, anywhere” mentality, brick and mortar locations will no longer be sufficient. Adding e-commerce and technology-driven platforms will be a must in order to stay competitive. Touchpoints will be critical, allowing consumers to purchase via websites, mobile applications, text messages, and other social media sites.
In order to promote customer service, pick-up, returns, and exchanges should be offered via any option, regardless of how an item was purchased. Boardroom conversations will shift to the identification of innovative investments and what makes an organization distinctive. They will analyze whether the best way to move forward is a cross-border transaction or perhaps it will be discussion about current consumer trends and behavior and how it is influencing the industry. The overall mentality will emphasize consumer involvement, such as the use of crowdsourcing to develop and test new products. Finally, well-established companies will increasingly partner with early stage companies to create growth through new ideas.
Private equity firms are poised to invest, as the decrease in commodity and energy prices puts more disposable income in consumers’ pockets - making the consumer products sector attractive. With the need to reposition businesses and consolidate cost structures, private equity firms will be in a position to provide both equity and guidance.
With continued competition for consumers’ discretionary spending retailers need to evolve and change. This requires adopting the “challenge everything” attitude. There is a new normal and the recent and continued M&A activity is the industry’s way of responding to changing consumer behavior.
Please contact your Mazars USA LLP professional for additional information.