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In the coming months, dealmakers will be driven less by passive motivations and more by purposeful intentions, such as:
seeking cost efficiencies through scale
accessing technology for improved CX, or
vertical integration to secure supply chains.
As a result, particularly in more discretionary categories, we expect most M&A activity will involve trade players, as opposed to private equity (PE) firms (many of which are focusing on optimising existing portfolio companies instead).
Australian consumers are generally dialling down their discretionary spending. Demand is quieter in several categories including clothing and accessories, restaurants and cafes, and home furniture and appliances (the latter coming off a COVID-high). Consumers are also switching to lower cost products and services (which are typically lower margin).
Still, investors with their ears to the ground will be monitoring certain subsector trends, such as health, beauty and wellness, baby, and pet food and pet care. The margins of these businesses are generally robust, giving them room to move when it comes to cost inflation, and making them attractive prospects within the R&C marketplace.
Sustainable and ethically sourced products, as well as health-based foods, are having their moment. We also anticipate more resilience for businesses that cater to younger (<25-year-old) and older (55+) adults who are less exposed to mortgage rates and rent increases than adults between these ages. As such, we expect to hear some positive noises in certain areas of travel and tourism, and categories that cater to digitally native brands.
Given the challenging market conditions, there will likely be some M&A arising from distressed retailers, particularly towards the end of 2023. For dealmakers with capital to deploy, these opportunities will require the agility to move fast.
In the coming months, proactive dealmakers will be alive to opportunities in public-to-private transactions (e.g. the recent acquisition of Blackmores), as well as corporates divesting non-core brands.
Given the challenging market conditions, there will likely be some M&A arising from distressed retailers, particularly towards the end of 2023. For dealmakers with capital to deploy, these opportunities will require the agility to move fast (and possibly to move despite imperfect or incomplete information).
Technology continues to rewire the R&C sector, and proactive dealmakers are keeping a close watch on these developments.
The costs of digital marketing will increase in the coming months, as retailers and digital brands race to comply with enhanced customer data and privacy protections. To gauge the likely impact on individual assets and companies, it’s worth considering how and where the cost of customer acquisition has risen in overseas jurisdictions (e.g. in response to the GDPR laws in the EU).
Dealmakers are also beginning to see the impact of generative AI in the consumer landscape. Businesses that harness this technology wisely could make themselves highly attractive to investors; while the reverse may be true for those that fail to adapt to the risks and opportunities.
The softening economy presents a chance for retailers and consumer brands to rethink their current strategies, stabilise, and reset for future growth – including, in some cases, to transact to transform. This, in turn, spells opportunities for dealmakers, and we’ve compiled three ‘no regrets steps’ for doing deals in the current climate:
For retailers and consumer brands, we’ve pinpointed five proven tips for thriving, not just surviving, during the current downturn. Whether you’re planning to transact in the short-term (or not), it’s good discipline to: