Investors do not like uncertainty. And 2023 was a year rife with it. Inflationary pressures, rising interest rates and slowing discretionary spending put pressure on consumer and retail companies as margins were squeezed and growth slowed. At the same time, geopolitical and economic uncertainty  - combined with rising financing costs  - put a damper on dealmaking. Uncertainty ruled. 

The global C&R M&A market contracted 5 percent year-over-year to reach 5,192 deals worth US$176.8 billion (a 22 percent decrease year-over-year in value). The decrease in volume was fueled by slow activity in Europe (which fell 11 percent year-over-year to 1,899 deals) and ASPAC (a 4 percent decline year-over-year to 1,753 deals) which, together, make up 70 percent of all deals worldwide. 

The decline in value was largely due to a 24 percent decrease in the number of large deals (more than US$100 million) in the sector. Meanwhile, Private Equity  - which usually accounts for more than 15 percent of all deals in the sector  - saw volumes drop 4 percent as dealmakers refocused onto the mid-market. 

Amongst sub-sectors, food and beverage (both brand owners and retailers) saw stable year-over-year M&A activity, contributing 30 percent to deal volumes, on the back of the health & wellness boom. Consumer products M&A declined by 4 percent year-over-year with just 1,150 deals. And retail deals suffered the highest volume declines, contracting 14 percent, led by a 54 percent decline in deals involving eRetail (internet and catalog retailing), likely due to some perceived mismatches between valuations and profitability.  

Expect the latter half of 2024 to deliver a slight uptick in M&A activity in the sector. Many of the indicators that sewed uncertainty are starting to normalize. Some expect interest rates to start falling in the second half of the year which should both reduce the cost of capital and make deals more attractive. Other indicators are also improving  - the Food Price Index, for example, trended downwards throughout 2023, which should help rebuild margins for some companies. 

We also expect to see pockets of strong activity. Some categories  - such as luxury goods, pet care, and beverages (particularly health and wellness drinks)  - are expected to be of higher interest to strategic and financial investors. Divestments will also drive activity as companies sell categories that are environmentally unsustainable or unhealthy. Expect divestment activity in the gum, confectionary and carbonated drinks segments, for example. 

Another strong driver of deal activity will be the pursuit of omni-channel capabilities. M&A activity is expected to rise as online businesses look to interact with their customers in physical store settings, while brick-and-mortar entities leverage digital capabilities to better understand and predict consumer behavior. We also expect to see an increase in the volume of spin offs, carve out and distressed assets coming to market as players refine their portfolios.

However, we are not forecasting an end to uncertainty in 2024. Far from it. Indeed, we expect to see continued geopolitical and economic uncertainty as many countries (more than half the world's population) hold elections and as inflation proves more stubborn than expected.

In this environment, dealmakers and investors will need to move cautiously. At KPMG, we help consumer and retail organizations on the buy side and sell side to create sustainable and quantifiable value through the deal process. Contact one of our member firms to find out how we can help your organization grow through uncertainty. 

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