Driving growth in consumer goods through programmatic M&A

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Over the past decade, consumer goods companies have pursued M&A to compensate for stagnant organic growth. However, not all acquisition strategies generate the same returns. Programmatic M&A, defined as two or more small or midsize deals a year, demonstrates the highest value creation, as shown by McKinsey’s research across industries.1How one approach to M&A is more likely to create value than all others,” McKinsey Quarterly, October 13, 2021. Recent trends have only increased its importance within the consumer goods sector.

Sizable available assets in consumer goods became both scarce and prohibitively expensive over the past four years, forcing companies to chart a different course for M&A compared with previous periods. Our most recent research, which covers 2019 to 2021, indicates a fundamental and accelerating shift from portfolio consolidation (deals primarily within a consumer goods company’s core categories) to an increased focus on challenger brands, data and tech capabilities, and adjacency plays (deals to gain access to new categories).2The next wave of consumer M&A: Executing for value,” McKinsey, October 21, 2019. Furthermore, an emphasis on health and wellness, a trend we saw accelerating prior to the pandemic, continues at pace.

Both M&A strategy and execution matters. Executives who believe there is no formula for success risk putting significant value at stake. Our analysis identified the common strategies of winning programmatic acquirers: they incorporate their ability to add value to the target company into their value creation theses, choose a suitable integration model, build a programmatic M&A engine, and learn from their mistakes. This path requires companies to invest in new capabilities and skills and build the institutional knowledge and organizational muscle necessary to improve long-term performance.

Why programmatic M&A matters

The importance of programmatic M&A is well established.3How one approach to M&A is more likely to create value than all others,” McKinsey Quarterly, October 13, 2021. We reviewed 2,000 companies with a market cap of more than $2 billion in revenues across all sectors on December 31, 2009. Of the 100 largest companies, ten years later, 53 had primarily engaged in programmatic M&A to grow. Eight relied on large-deal M&A. Only 14 were successful in retaining their top-100 status with organic growth.

Within consumer goods, our analysis combines research on TSR from 2013 to 2018 across both deal archetypes and M&A practitioner type with observations on deal archetype flow from 2019 to 2021. The conclusion: programmatic M&A continues to be a winning strategy for consumer goods companies.

Our analysis of approximately 370 deals made by about 120 consumer goods companies from 2013 to 2018 reinforced the link between programmatic strategies and positive TSR (Exhibit 1).4The next wave of consumer M&A: Executing for value,” McKinsey, October 21, 2019. We segmented M&A deals into four categories by dominant strategic intent:

  • Portfolio consolidation: Expand the portfolio with established brands to build scale, grow in new geographies, and diversify the portfolio.
  • Adjacency plays: Place a bet on companies adjacent to the acquirer’s core competencies.
  • Data and tech capability enablement: Add capabilities in data or technology to support growth.
  • Challenger brands: Snap up fast-growing companies in the acquirer’s core categories to accelerate growth.
Programmatic buyers of challenger brands tend to generate better returns.

During this period, the companies with the best returns took a programmatic strategy to M&A. Those acquirers had a median TSR of 6.4 percent, a figure that rose to 8.3 percent when they focused on challenger brands.

Changing deal composition

Since 2019, we have continued to focus on tracking the specific deal archetype flow in consumer M&A, given the unique and shifting market characteristics in the period. A couple of patterns have emerged.

First, companies have increasingly trained their sights on smaller deals: the average deal size dropped from $1.3 billion in the 2013 to 2018 period to $625.0 million from 2019 to 2021, a decrease of roughly 50 percent.

Further, the type of consumer deals has changed dramatically in recent years (Exhibit 2). An increasing number of consumer goods companies have focused on acquiring smaller, innovative brands with the potential to jump-start growth and scale quickly. From 2013 to 2018, portfolio consolidation accounted for nearly two-thirds of all deals, a share that was cut in half by 2021. Meanwhile, companies increasingly focused on acquiring challenger brands, which rose from 17 percent of all deals in 2019 to 25 percent just two years later. An additional trend across consumer categories was in health and wellness, which became a clear M&A focus with approximately 22 percent of deals from 2019 to 2021.

Adjacency, challenger, and capability-focused deals have become increasingly  relevant in consumer goods over the past three years.

Recipes for successful programmatic M&A in the consumer sector

The move toward smaller, more frequent deals reflects a growing awareness that programmatic M&A is a winning strategy. Our analysis draws on our firsthand experience with consumer goods companies, augmented by in-depth interviews of executives at several successful acquirers. We identified four components of successful programmatic M&A in the consumer sector.

Shift from what you gain to what you give

Executives should recognize that a deal is about not just what a target can do for them but also what they can do for the target. M&A strategy grounded in an acquirer’s contribution to a target is critical. These elements can be the resources, funds, or broader distribution to help scale brands; front- and back-office capabilities to professionalize the target’s operations; or other attributes. For example, a global consumer packaged goods company helped to stabilize the supply chain of its newly acquired juice company. One executive noted, “They had an old plant with bad co-packers; we had capacity down the street—it was a good synergy to bring them into our facility.” Similarly, in a trans-Atlantic food integration, the acquirer had a clear long-term vision of how its best-in-class R&D capabilities could refresh and refurbish the target’s product offering in line with its brand heritage.

Consumer goods companies need to be realistic from the outset about what they are trying to accomplish. Executives should try to clearly understand the competencies they are purchasing—for example, new-product-development capabilities or a culture of innovation. These considerations can help to confirm the right path forward.

Choose the right integration model

Consumer goods companies have several options for the type of integration they pursue. Several questions can help determine the best integration model for meeting the strategic objectives of the acquisition, including the following:

  • To what extent does the target’s growth plan depend on the acquirer?
  • To what extent will the consumer goods acquirer be able to directly harness the target company’s capabilities for its own portfolio?
  • Will the small brand’s “source of success” be adversely affected by integration?
  • How similar is each company’s culture and ways of working?

We have seen four models emerge, each with its own benefits and drawbacks (Table 1).

Consumer goods companies can choose from four approaches to programmatic integration of smaller brands.

When buying smaller companies, experienced integrators often agree that partial integration can provide the right level of collaboration and coordination while enabling the small brand to safeguard its “secret sauce”—the elements of the target that make it unique. These elements can include not only innovation, digital-marketing capabilities, and sales relationships but also intangible elements such as culture, mindset, and employee affiliation to a brand or vision. Integrators often note, “It’s difficult to assess passion during the diligence phase. Purpose is as important as profitability.”

Successful acquirers are cautious in assessing how they can use their scale and experience to amplify the needs of smaller brands. Common approaches include assigning supply chain capacity, selectively harnessing the acquirer’s broader set of sales relationships, and using the acquirer’s scale to amplify brand-led innovation. For example, the brand might continue its independent R&D, with the acquirer providing insights and analytics to enable pilots. Some successful integrators suggest refraining from seeking operational efficiencies in the first few months (such as by integrating sourcing and logistics) until the growth drivers of the business have been truly understood and appropriately strengthened. Almost all executives agree that back-office functions can also then be integrated and systems harmonized.

Successful partial integrations of smaller brands are typically enabled by a single accountable leader in close collaboration with HR. These two can be proactive in retaining pivotal brand talent (such as the CEO and chief marketing officer [CMO]), selectively placing acquirer talent, and navigating culture issues. One leader observed, “I spent 50 percent of my time protecting the team we acquired.”

Every deal, large or small, is different, and each one has its own strategic rationale, guiding principles, and competing priorities.

Every deal, large or small, is different, and each one has its own strategic rationale, guiding principles, and competing priorities. While we have observed full and partial integrations to be the most common integration approach, executives should consider the advantages of each to determine what is best for each specific deal.

Build a programmatic M&A engine

Consumer goods acquirers that aspire to become programmatic need to build an M&A engine to proceed in a strategic, proactive, and disciplined way. This capability has several foundational elements (Table 2).

The best programmatic acquirers have distinctive capabilities across the M&A stages.

First, the strategy and sourcing function establishes a disciplined approach for screening and identifying prospective targets. As part of this effort, the function either develops or relies on next-generation consumer preferences and ecosystem insights that allow acquirers to predict trends reliably and rapidly. An M&A blueprint is imperative to delineate the boundaries of the buying playing field; to avoid wasting time on incoming deal offerings, having clarity on what will not be pursued is as important as knowing the potential target archetypes. The M&A blueprint informs the road map for how multiple transactions over three- to five-year periods support the overall corporate strategy.

On due diligence and deal execution, successful companies, especially those eyeing challenger brands or adjacency players, set aside enough time to become more familiar with their target’s culture. Striking the right balance between flexibility and discipline is also critical to uncover promising prospects while being able to close deals efficiently.

If companies plan to acquire multiple assets over a five-year period, they should consider developing in-house integration planning and execution capabilities. A cross-functional integration-management organization (IMO) establishes the company’s playbook for integrations and contemplates all areas of the business. The IMO can also be tasked with conducting assessments of talent and culture that are just as rigorous as those for finance, legal, and tax. A robust HR capability for M&A proactively identifies, excites, and retains top talent and gets ahead of any cultural issues or frictions that can be a hurdle to the success of the integration.

Last, it is important to establish and implement governance for both decision making and execution for M&A. Having a scorecard to measure deal performance uniformly across the organization allows for a fact-based method to learn from past mistakes.

Learn from past mistakes

Consumer goods companies can generate more value from foundational M&A capabilities by building on what worked and avoiding what didn’t. Many consumer goods acquirers learn this the hard way: in its haste to capitalize on a newly acquired challenger’s secret sauce, one multinational food company rapidly integrated the brand into its cereal portfolio. Sales decreased by half, and the magic has yet to be rekindled. The food company’s subsequent acquisitions of smaller targets have been handled more carefully: an acquired energy bar brand has retained its independence—and its growth trajectory.

Our discussions with executives revealed poor outcomes often result from a lack of discipline in M&A fundamentals. A focus on the following areas can increase the odds of success for acquirers:

  • Understand in which areas the acquirer’s more mature organization and functions can spark the target’s business.
  • Dedicate the required resources to achieve the success of the deal in the execution phase.
  • Identify the secret sauce and implement safeguards around the integration.
  • Support the continued growth of the target company by maintaining the autonomy of its key growth drivers and use scale and experience to amplify the target’s advantages.
  • Accelerate growth drivers, capture savings opportunities, embed change management efforts over time without eroding value, and further integrate functions.

Getting started

Companies that embrace the fundamental proposition of programmatic M&A should prepare for multiple deals over the long haul. Executives need to determine the required financial firepower needed to execute it before they go shopping. A holistic approach to the balance sheet would consider other strategic priorities, investor commitments and ratings agency requirements, and potential divestments.

A three- to five-year journey is the appropriate time horizon for a programmatic acquirer. In the initial 12 to 18 months, consumer goods executives would seek to adopt the programmatic M&A strategy, divest misaligned brands in their portfolio, and start building their playbook with the first one to two deals, irrespective of size. Once the foundation is in place, acquirers can then aim to undertake two to three deals a year on a consistent basis.

This journey is additive, meaning organizations accumulate capabilities and skills with each deal. Over the next several years, companies can build their integration muscle and fine-tune their strategy to become best-in-class acquirers, including honing deal-sourcing capabilities and maintaining a repository of integration playbooks.

M&A is an important source of growth for consumer goods companies. While tricky to execute, successful acquirers have demonstrated a proven path to value through programmatic M&A. Strategy, integration planning, and execution are all foundational elements, but acquirers must also adopt a mindset of true mutual partnership with target companies to protect what made them successful and help them grow.

Moreover, consumer goods companies should consider building organizational capabilities around M&A. Considering broader consumer trends, this strategy is not a one-and-done game.

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