Consumer-Packaged Goods (CPG): A Q2 M&A outlook

Consumer confidence in the UK is down year on year; the macroeconomic landscape remains uncertain. As UK consumers continue to tighten their belts, manufacturers must rethink how they can achieve growth. Find out how in our M&A outlook for the Consumer-Packaged Goods (CPG) industry in Q2.

The first quarter of 2023 saw UK consumer confidence grow by +2.0 percentage point increase compared to the previous quarter, according to the latest Deloitte Consumer Tracker. This marks the second consecutive quarter of improving confidence, following five quarters of decline. Overall confidence was lifted by improved consumer sentiment towards job opportunities (+3.6 percentage points) and general health and wellbeing (+4.4 percentage points), against the backdrop of a strong labour market and the winter months coming to an end.

However, persistent inflation continues to impact levels of disposable income. Feeling vulnerable to ongoing economic headwinds, consumers have maintained some recessionary behaviours, including cutting down on unnecessary expenses and continuing to trade down and shop at cheaper stores. Driven by a growing awareness of the global climate crisis and the desire to make a positive impact, consumers are also becoming more mindful of their consumption levels and placing brands and products they purchase under scrutiny. Find out more in our report on consumers attitude to sustainability.

In 2022, most CPG companies reported positive top line growth and recovering margins on the back of the price increases they put through. Volumes, however, were mostly declining or, at best, flat vs. 2019 levels. As per Deloitte’s 2023 Consumer products industry outlook, 82% of CPG executives expect input costs to go up further this year whilst seven in ten think growing profit margins will be very challenging.

Yet the scenario is not all gloomy. The most successful CPG companies see the complex situation they currently face, offering as much opportunity as it does challenge. 85% of profitable growth companies think the current business environment is an excellent opportunity to grow market share, compared to 52% for all other companies.

The question we asked ourselves is: what are they doing differently to others?

Successful companies are first and foremost embracing the changing consumer. 93% of profitable growth businesses say that keeping up with consumer demands is a priority. Where possible, they are segmenting and polarising their offering to deliver a basic range, at a lower price point, and a premium range, with a clear point of differentiation. High-value product innovation, contributing towards the sustainability agenda, is the name of the game. They are also engaging their consumers in new ways, listening to their voice on social media platforms and adapting their offering to cater to their emerging needs. Large companies are also increasingly investing in direct-to-consumer (DTC) models and acquiring small, digital native companies. This M&A strategy allows them to both leverage their footprint to scale the newly acquired brands, and learn new, modern ways of engaging consumers (particularly younger demographics).

Successful companies are also mimicking consumers’ behaviour, becoming more mindful of their capital allocation decisions. They are simplifying their structure, their product range and brand portfolio, cutting unnecessary costs and ending value leakage. Yet, they are investing where it matters the most, supporting strategic initiatives to future-proof the business. They are optimising their footprint and near-shoring their supply chain to reduce logistical costs, environmental impact and risk of future disruption. They are investing in data analytics and digital capabilities to optimise their go-to-market strategy, pricing architecture, communication, product innovation. They are doing more with less, and at a much faster pace.

For more on our Q2 market outlook or anything else in this blog please contact a member of our team and see how we can help you discuss your organisation's 2023 digital transformation and M&A agenda.