Consumer Q1 2024 Outlook: A Balancing Act

Consumer Report

Q1 2024 QUARTERLY REPORT

Summary & Outlook

Measured economic optimism and expanding health and wellness trends continue to drive growth in consumption; however, these factors are mitigated by the significant increase in credit card delinquencies as well as headwinds resulting from election-year uncertainty Consumers, nearly half of them Gen Z or Millennials, are feeling the pinch This combination of forces has disquieted investors too, with Consumer Staples and Consumer Discretionary underperforming other S&P 500 indices.

These headwinds and high interest rates have tempered dealmaking activity in the Consumer space. However, rising valuations are driving more founders and sponsors to become sellers. We expect dealmaking to accelerate in the Consumer sector, particularly in the middle and lower middle market Based on our conversations with strategics and sponsors alike, and on our own deal pipeline, Food & Beverage and Personal Care in particular should be a bright spot in 2024.

Consumer M&A is a story of conflicting forces in 2024. On the positive side the US economy remains surprisingly strong, attracting FDI and international talent, further boosting our currency and economy This optimism is further bolstered by the growing focus on health and wellness that has fueled a significant shift in demand across consumer categories. Additionally, private equity firms with a massive $2.5 trillion cash pile are being pressured by their LPs to realize investments and deploy more capital, which is expected to further boost M&A activity. PE spent the better part of the past 18 months managing existing investments and focusing on add-ons. It appears as though the prospect of falling interest rates will trigger a resumption of their search for new platform investments

However, this potential rebound in M&A faces pockets of turbulence: 2024 is an election year and geopolitical instability across the world remains a drag on global trade. Furthermore, M&A continues to compete for capex dollars with R&D, namely in the fields of innovation and sustainability. Environmental and social responsibility considerations cannot be ignored, prompting companies to invest more in sustainable practices and eco-friendly packaging These competing priorities will continue to impact M&A, both by diverting resources and by triggering strategic dealmaking.

Consolidation and Niche Opportunities

While we do not expect a return to 2020-2021 volumes, we do anticipate a significant uptick in 2H24. There is reason for optimism in several sectors of the Consumer industry, both in staples and discretionary Renewed private equity involvement, together with ongoing consolidation in the middle market could lead to a surge in M&A activity. Companies aligned with the health and wellness trend are also likely to remain attractive targets, as are co-pack and co-man companies that benefited from the rise in private label activity, that tend to be less susceptible than brands to market fluctuations.

Overall, 2024's Consumer M&A landscape will likely be defined by a balancing act While economic optimism and a thematic shift towards health and wellness create opportunities, election-year jitters and competition for investment dollars present challenges. However, strong private equity pressure and a focus on middle-market consolidation in specific sectors could still lead to a positive year for M&A activity.

“[B]usiness trends continue to reflect a normalization in spending patterns where consumers are remixing their spending back into services and entertainment outside of their homes This normalization, combined with the cumulative impact of higher prices on consumer budgets, is resulting in continued soft trends in discretionary categories, most notably in home and hardlines.”

Brian Cornell (CEO, Target)

Category Insights

APPAREL

After a strong performance in 2022, the apparel and footwear industry faced headwinds in 2023-24, led by geopolitical uncertainty and inflation. Casualwear and sportswear continues to dominate the category. The expansion of new regulations and renewed consumer focus on health and wellness has accelerated innovation Technical innovations emphasizing performance and design have boosted the popularity of crossover exercise and streetwear across demographics

“HOKA and UGG remain two of the most admired and wellpositioned brands […] each with a robust innovation product pipeline designed to win global customers. ”

-Dave

Powers, CEO Deckers Brands

Source: McKinsey

FMCG

In 2023, the FMCG sector saw nearly 10% global sales growth, driven mostly by price increases which accounted for 95% of growth in the US and Europe (as opposed to volume growth) Declining volumes, consumer pushback and political pressures are causing companies to streamline production portfolios and face growing competition from private labels. We expect more capex to be directed to M&A and R&D

“[W]e expect the environment around us to continue to be volatile and challenging, from input costs to currencies to consumer, retailer and geopolitical dynamics.”

-Andre Schulten, CFO P&G

Source: Bain, VML

HEALTH & WELLNESS

Consumers are increasingly prioritizing wellness solutions across categories, with 82% of US consumers considering it a top priority Emerging trends include the rise of at-home diagnostic tests, wearable health devices, sexual wellness consumables and devices and - more generally - a marked shift towards clinically proven products. The self-care space has also benefited from an increased focus on mental health and well-being

“We see consumers continuing to look for science-based, efficacious solutions to take care of themselves and their loved ones.”

-Thibaut Mongon, CEO Kenvue

Source: McKinsey

BEAUTY / PERSONAL CARE

The main growth drivers remain science-based efficacy and, to a lesser degree, natural ingredients. Technology pervades the category, including AI and AR for custom-blending and virtual try-ons After fits and starts in recent years, men’s grooming continues to grow, driven by social media trends and representation at Ulta, whose Men’s Section is anchored by three main brands and a handful of smaller ones. In terms of M&A, Q1 saw 65 deals, most of them early-stage financings and a total of seven brand failures

“The amount of capital required to launch a brand is as little as it has ever been. However, the amount required to scale is as high as it has ever been.”

-Rich Gersten, Co-Founder/Partner True Beauty Ventures

Source: Beauty Matter, Exploding Topics

FOOD & BEVERAGE

Rising food prices and changing consumer spending habits are disrupting this sector. Investors continue to prioritize volume sales as price elasticity increases. Ethnic and frozen foods, combined with a renaissance in the beverage space, are creating opportunities for newcomers to rapidly seize market share With inflation easing and prospective interest rate cuts expected in Q3 2024, we anticipate momentum in M&A activity to accelerate.

“Our approach of investing capital, building capabilities and consolidating the network will result in more reliable and efficient operations, delivering enhanced margin performance.”

-Gary Pilnick, CEO Kellogg’s

Source: Kroll

LUXURY

Core and aspirational luxury buyers continue to fuel demand for the best of the best While demand appears inexhaustible, supply is not; leading some maisons to integrate artisanal suppliers vertically. Despite surprising softness in some corners (e.g. Kering’s Gucci), US and Chinese consumers continue to buy luxury at an unprecedented pace Some iconic brands significantly increased pricing and were rewarded for it, with several also investing billions in real estate. Evolving technology and the booming resale market continue to expand the market.

“It takes us up to 14 months [to create a new product]; the fashion brands do not have the luxury of this time.”

-Damien Bertrand, CEO Loro Piana

Source: Cegid

Consumer M&A Summary

Consumer Price Index

Unemployment Rate

Consumer Deal Volume in the Americas

Consumer Indices

At the start of 2024, Consumer Discretionary (CD) was positioned to benefit from tailwinds such as stable interest rates and rising real wages that would potentially boost consumer spending and long-term earnings growth However, consumer data now shows a slowing appetite for consumer spend as unemployment claims rise, consumer sentiment has weakened and missed GDP estimates point to a potential slowdown. Some point to dwindling savings that have left many tight for cash, that said rising wages may lighten this blow

M&A Deal Volume (Americas)

Consumer Valuation Data (HVA Index)

Harbor View Index

Public Trading Statistics (Harbor View Index)

APPAREL

BEAUTY & PERSONAL CARE

Public Trading Statistics (Harbor View Index)

FMCG

FOOD & BEVERAGE

Public Trading Statistics (Harbor View Index)

HEALTH & WELLNESS LUXURY

Notable Transactions

SPORTS MEMORABILIA

UNDISCLOSED APR 2024 ACQUIRED BY

Source: ESPN, Sports Collectors Daily

€512m FEB 2024 TAKEN PRIVATE BY

Source: FashionDive

$2.7bn MAR 2024 ACQUIRED BY

Source: Campbell’s

Sports memorabilia is a legitimate asset class, with thousands of items trading hands monthly for 6- and 7-figure sums. Recognizing the continuing growth and eager to cement its leadership at the high end of the market, eBay acquired Goldin from Collectors Holdings (co-owned by the Mets' Steve Cohen) for undisclosed terms. Goldin, with over $1.2 billion in sales, is a key player, having attracted investments from high profile firms and individuals in recent years to expand its ecommerce infrastructure and accelerate sales. After selling its vault to Collectors, which already owns leading card grader PSA, this move allows eBay to capture more high-value transactions and creates a "seamless" experience for investors, with eBay's vault transitioning to PSA for grading Combined with PSA's massive market share (~78% with over 13 million items graded in 2023), eBay's instantly creates the undisputed leader of the sports memorabilia market.

LUXURY

Tod's is once again going private, this time with the backing of L Catterton. The founding Della Valle family will retain majority control This move coincides with the appointment of Matteo Tamburini as the new creative director. Delisting allows for greater flexibility, streamlining decision-making and reducing costs. Boasting strong results (€1.13 bn in revenue, up 11 9% YOY) and free from public market constraints, the company can navigate the future with renewed focus and agility. This deal illustrates three truths: (1) L Catterton remains in a league of its own as the world's top Consumer-focused PE firm; (2) amid rumors of declining demand (especially in Asia and online) most luxury brands continue to perform strongly; and (3) private markets can provide ample liquidity without the exigencies of public exchanges, which are ill-suited for most middle market companies

FOOD & BEVERAGE

Campbell Soup Company recently wrapped up its acquisition of Sovos Brands for $2 7bn in an all-cash deal. This strategic move strengthens Campbell's Meals & Beverages division, creating a perfect complement to their underperforming Snacks division. Sovos Brands generated approximately $1bn in 2023 net sales with a basket of premium products centered on Rao's pasta sauces, which account for ~78% of total revenues. With 25% organic YOY growth, adding this portfolio of premium products injects some welcome dynamism to Campbell's sleepy portfolio As part of this transaction, Campbell's will create a premium products group called "Distinctive Brands " In addition to boosting top line growth, management anticipates annualized cost synergies to reach approximately $50 million over the next two years

Select Consumer M&A Transactions

Select Consumer M&A Transactions

“Consumer spending has been robust over the past several quarters, even as high interest rates have weighed on housing and equipment investment. Improving supply conditions have supported resilient demand and the strong performance of the U.S. economy over the past year.”

Jerome Powell, Chair of the Federal Reserve May 1, 2024 Press Conference

Source: PitchBook, Data as of 5/16/24

Consumer Expertise

Buy-Side Advisory Health & Wellness (USA)

Transactions*

Fairness Opinion Luxury (France)

Sell-Side Advisory Juvenile/Apparel Zorbit (UK)

Kitchen Equipment (France, USA, Mexico)

Sell-Side Advisory

Capital Raise Juvenile/Fashion (France)

Programmatic M&A

(Pan-European)

Sell-Side Advisory Personal Care (France, Ireland)

*Includes engagements executed with previous firms

Our Consumer Team

Sehnaoui Managing Director

Anthony heads the Consumer practice at Harbor View Drawing on his international background, he has executed transactions in 15 countries In addition to his extensive M&A experience as a banker, Anthony also has considerable industry experience as a business operator

Capital Raise Edutainment (USA) Area 1

Capital Raise Food & Beverage (USA)

About Harbor View Advisors

Operating at the intersection of investment banking and consulting, we partner with inspiring companies, and private equity firms to help them design and execute their strategies for growth or exit. With years of experience as investment bankers and management consultants, and operators, we help growing teams improve their opportunities for success. We provide Sell-side and Buy-side advisory to innovative companies and specialize in five key industries: B2B

Industrials, and Consumer.

The material in this report is for information purposes only and is not intended to be relied upon as financial, accounting, tax, legal or other professional advice. This report does not constitute and should not be construed as soliciting or offering any investment or other transaction, identifying securities for you to purchase or offer to purchase, or recommending the acquisition or disposition of any investment. Harbor View Advisors does not guarantee the accuracy or reliability of any data provided from third party resources. Although we endeavor to provide accurate information from third party sources, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.