It’s no secret that large consumer goods companies are searching for the growth formula that works. As smaller brands—many with a digital bent—show double-digit growth, incumbents try to regain their luster in the eyes of consumers.
In addition, scale no longer provides the advantage it used to give large companies. Digital technologies allow competitors of all sizes to virtualize the value chain, bypassing the barriers many smaller firms used to encounter as they tried to scale. Add to that equation the recent spate of massive buyouts with aggressive margin plays and you have established consumer goods players attempting to rapidly right the ship.
The consumer goods industry is not alone. Digital technologies have disrupted industries across the board. But in the consumer goods industry particularly, we see large companies increasing their M&A activity for digital reasons. Mainly, they are trying to buy digital capabilities to leapfrog other large competitors. Of the most active companies across industries (those that have completed five or more deals in the past two years), more than half of their deals were related to acquiring digital capabilities.1 The Holy Grail comes in the form of the insights, disruptive business models and better value chains digital provides. Building those capabilities solo would take consumer goods companies too far from their core mission, not to mention taking longer than is wise.
Buying and partnering take off
While the reasons for consumer goods acquisitions vary, Accenture Strategy research shows that acquiring new capabilities (47 percent) and the need for next-gen technologies (35 percent) are on par with traditional triggers such as expanding into new industries (43 percent) or geographic markets (37 percent).2 That said, digital deals are still a small portion of total deals, around 15%. But, they are rapidly gaining share (more than five points over just a few years).3
Not all consumer goods companies are buying, though. Some are partnering to take advantage of digital capabilities. For example, a company offering augmented reality (AR) for beauty brands has partnered with a larger consumer goods company so consumers can visualize face enhancements. Another tech-based company provides a large consumer goods manufacturer with digital vision tools to observe activity in stores around its products.
M&A strategy with a digital lens
To win in this changed environment, consumer goods companies need to do a few things right when crafting an M&A process for the digital world.
- Start with an explicit strategy that defines how digital will fit in. For example, is the goal to have digital products and services? Create digital wrap-arounds for enhanced experiences? Better leverage information for insights? Digitize elements of the value chain? Or, is it to create a disruptive play altogether?
- Retool the search process. Target ideas may come from research universities, patent searches, partners at venture capital firms and many other non-traditional channels. Increasingly, the technologies are new, highly specific, and not yet fully tested for viability. Small brands may be hyper-local. Finding these opportunities is not as simple as developing deals with other well-known large companies.
- Tailor approach to valuation. Traditional valuation models can break down because they were not built for digital assets, and competitors may be in a position to apply the capability more broadly. This can potentially force a fallback to strategic value, grounded in the vision for the broader play the organization is making. It can also indicate when partnering might be more appropriate, at least as a first step.
- Map the value in multiple plays. Plays into an emerging space are rarely a one-and-done event. Rather, they usually require stringing together multiple acquisitions into one coherent capability for the acquirer. Be strategic when mapping forays into emerging areas.
- Don’t underestimate the importance of the right human capital. Keeping entrepreneurial types engaged is a key element to healthy M&A innovation. There is no one-size-fits-all approach that works, so look to tailor to fit aspirations and skillsets.
M&A has always been an exciting space, but it is particularly so for consumer goods companies now. While it has always been important to get your M&A strategy right,
now that task needs to be done in a compressed timeframe or key opportunities will be snapped up by competitors. With more than one-fourth of consumer goods
acquirers describing themselves as a traditional company acquiring a digital company,4 there is no time to lose.
1 "Accenture Strategy, M&A Research, 2017”Accenture Strategy, 2018
3 Accenture Analysis: Dealogic Global M&A Review: Full Year 2016
4 "Accenture Strategy, M&A Research, 2017”Accenture Strategy, 2018