Baker McKenzie predicts consumer spending, buoyed by ongoing real disposable income growth, online shopping and strength in the labor market will lead to a  significant uptick in M&A activity in the Consumer Goods sector  in the second half of  2017 and into 2018.

The Firm's annual Global Transaction's Forecast, a joint report with Oxford Economics, predicts Consumer Goods M&A will peak at US$504 billion in 2018 after a flat next 12 months given an overall global environment of geopolitical uncertainty, with overall M&A activity dropping to US$2.5 trillion in 2017 from US$2.8 trillion in 2016.

Baker McKenzie's 2016 Q4 M&A Index highlights  that organic, local, additive and cruelty-free are the labels that consumers crave – particularly millennials. And they are willing to pay a premium for them. This move to meet changing consumer demand was a key factor in deal making in the FMCG market in 2016. There were 312 FMCG cross-border deals in 2016, worth a total of US$57.5bn* – volume is down on 2014 and 2015, but up on every year between 2009 and 2013. Notably, the beauty/personal care sub-sector deal value was up 68% from US$6.5bn to US$10.9bn.

Although the forecast for 2017 is the lowest since 2013, the Firm anticipates a pick up later this year with a peak at US$504 billion in 2018 and then a predicted significant drop, as consumer spending growth eases in 2019 and 2020.

Alyssa Gallot-Auberger, Global Chair of Baker McKenzie's Consumer Goods & Retail Industry Group commented on the new consumer trends we can expect in the next year: 

"Looking ahead, there will certainly be continued activity as a result of the megadeals from 2015 which spurred consolidation, integration, corporate reorganization and divestiture activity, although we should expect this to settle out during 2017; I am hopeful that toward the end of 2017 and 2018 we will see a return to strategic acquisitions unrelated to divestiture activity.

"We will likely continue to see growth in all things digital and notably digital products that interface with the consumer directly, wearable technology and the like, together with targets related to ecommerce activities. There will also most probably be continued growth in the beauty and personal care sector, with larger groups seeking to incorporate smaller independent brands to round out their product portfolios and attract and expand their client base, notably to capture younger customers.

Consistent with what we have seen recently, there will also be, in my view, a continued focus on sustainability, and as such, targets with highly sustainable products should be prime acquisition material, helping large groups appeal to a younger client base that places value on ethical conduct and sustainability in business."

Why?

According to the Global Transactions Forecast,  in 2016 the windfall from cheaper energy and improvements in the European and US labor markets helped accelerate consumer confidence and therefore spending growth to pre-crisis rates. This boosted turnover and profitability for consumer goods companies, and supported deal appetite in the sector, even as the wider economic and political environment deteriorated.

Looking ahead, the general outlook for consumer goods M&A in the medium to long term remains positive as wages are starting to rise more quickly across advanced economies and unemployment falls to levels consistent with wage growth.

At the same time, households in commodity-producing economies where currencies have depreciated are likely to experience greater price stability in coming years, supporting this consumer confidence.

The overall M&A context

After a year of political uncertainty, the forecast in association with Oxford Economics, predicts an overall uptick in transactional activity over the next four years. This is based on a gradual pickup in global economic growth in the years ahead, with GDP rising to 2.6% in 2017, and 2.8% in 2018. As threats to the stability of the global economy ease, and dealmakers regain confidence in the market, their apprehension should turn into appetite. 

As Paul Rawlinson, Baker McKenzie's global chair explains, "We are clearly still in volatile times but deal-making is there to be done. Strong corporate balance sheets, cheap finance and moderate growth across markets and key sectors all point to an improving M&A run-rate later in 2017, after a cautious first quarter, and a significant uptick in 2018. The caveat is we need a benign Trump on trade and a soft-ish Brexit. Will we get that? Let's see."

The forecast is based on the anticipation that EU and UK officials will make progress in forging a new relationship in 2017, and that the new US administration adopts a pragmatic stance on international trade and immigration, and sets out plans for fiscal stimulus. Also assumed is that China continues to manage its transition to a mature economy and the Eurozone continues its economic recovery, as well as financial markets continuing to hit new highs and investor confidence rising.

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