the Consumer

Global M&A trends in the Consumer sector Issue 3 Life after Brexit/August 2016

www.pwc.com/deals

Digging for treasureOur digital experts explore the potential value of turning information into real insight for the Consumer companies

Consumer sentiment surveyPwC’s latest survey assesses consumers’ views post Brexit

Brexit and the UK food sector The uncertainty of Brexit may at first seem unappetising, but can offer opportunities for those who are hungry

Online grocery shopping The appeal to the consumer is clear, but is the growing trend in online grocery shopping a model that delivers for the business too?

H1 2016 deals summaryA real “Pick and Mix” of deals in the first half of 2016...we look through the key Consumer deals and understanding some of the rationale behind them

Letter from the editorsBrexit is – unsurprisingly – raising a lot of big questions for our sector. What it might mean for exporters, what opportunities it could present both in doing deals and commercially, and whether it could lead to an economic slowdown in the UK.

We’ll be looking at these questions over the next few months, as what Brexit ‘means’ starts to become clearer. One consequence that’s clear for all to see is the fall in sterling. This is making UK exports more competitive, on the one hand, and UK consumer goods companies look good value for opportunistic foreign buyers.

Looking beyond Brexit, the M&A market was a bit of a mixed bag in the first half. We didn’t have another mega transaction, though there are still rumours of a Mondelez/Hershey deal, but there are some interesting trends bubbling under out there, which we explore in this issue.

We also look at how consumer goods companies are getting as good as the retailers at Big Data, and what opportunities this could open up. And finally we take an in-depth look at the online grocery market in the UK. Consumers love it, but the supermarkets struggle to make it pay. We look at why, and how that might be turned around.

‘May you live in interesting times’: so goes the old saying, and it’s safe to say we have ‘interesting’ months and years ahead. But change and uncertainty always bring opportunity, and consumer goods companies are both resilient and innovative. It’s going to be fascinating to watch how it all plays out.

To understand the Brexit implications for your company and understand how PwC can help, please contact a member of our team.

Neil Sutton and Neil Coomber

Editorial team Neil SuttonNeil Coomber

Contributors Antonia Burridge Emily Daw Inge Cajot Lisa Hooker Kien Tan Nigel Wilson Richard Hughes Thomas Sengbusch

Published by PwC 7 More London Riverside London SE1 2RT Tel: 020 7583 5000

The articles and content within this magazine have been prepared as general information on matters of interest only, and do not constitute professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this magazine and, to the extent permitted by law, the authors, sponsor and publisher accept no liability, and disclaimer all responsibility, for the consequences of you or anyone else acting or refraining to act, in reliance on the information contained in this magazine or for any decision based on it.

1

Thinking about your disposable income in the next 12 months do you expect your household will be...?

Key findings

• According to PwC’s latest survey, more people think they will be worse off next year than better off.

• However, consumer sentiment is still more positive than at any point between 2008 and 2014.

• PwC expects consumer spending to hold up next year…

• …although spending priorities will change, with consumers expecting to spend more on groceries and holidays.

During a recent survey undertaken by PwC in July, of over 2000 adults across England, Wales and Scotland, consumers were asked

whether they expected to spend more or less on different categories as a direct result of the EU referendum result. The only categories where the majority of consumers expected to spend more were groceries and holidays. This is good news for food producers and supermarkets planning to pass through inflationary cost increases, as it suggests that consumers already anticipate price rises to affect their weekly shopping.

While the early prognosis for consumer spending appears robust, it will be critical for consumer goods companies to keep watching consumer sentiment over the next few months for any signs of a change in heart, and be ready to respond with their go-to-market strategies accordingly.

PwC’s latest survey shows that consumer sentiment has declined since the EU referendum, but remains higher than any point between 2008 and 2014

Source: PwC consumer survey conducted on the 14 July 2016 *Note: n=2,027, July 2016

(70%)

(60%)

(50%)

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

30%

40%

Aug

200

8

Nov

200

8

May

200

9

Jan

2010

Jul 2

010

Dec

201

0

May

201

1

Dec

201

1

Sep

t 201

2

May

201

3

Jan

2014

Nov

201

4

Apr

201

5

Nov

201

5

Mar

201

6

% o

f res

pond

ents

Much better off than last year

Somewhat worse off than last year

Somewhat better off than last year

than last yearMuch worse off

Consumer sentiment: holding up post BrexitWritten by

Kien Tan Director Deals Strategy

Lisa Hooker Partner Transaction Services

3the Consumer – Life after Brexit

Our last issue was dominated by the huge $77bn merger between AB InBev and SABMiller, and there are still disposals arising from that. Instead, the first half of 2016’s activity was rather pick and mix, ranging from agriculture and homewares, to drinks, appliances, and health & beauty.

The initial attempt of Mondelez to acquire Hershey, would have dominated the deals in the period and would have totally reshaped the confectionery sector. But at the time of writing, that offer has been rebuffed.

Cutting the list another way, there was activity both from corporate buyers and PE houses, and more evidence of some key trends we’ve been monitoring for a while. Buyers in emerging markets continued to look for promising Western brands and businesses, as with Quingdao Haier’s acquisition of General Electric’s appliances business and Chinese cosmetics maker Shanghai Jahwa (Group) Co Ltd has reached an agreement to acquire Mayborn Group, the parent company of the largest British nursing bottles producer Tommee Tippee. The big conglomerates continued to hone their portfolios (with Unilever selling its AdeS soy beverage business in Latin America to Coca Cola), and the trend towards consolidation and ‘premiumisation’ in Health & Beauty also continued (as evidenced in Revlon’s acquisition of Elizabeth Arden and Johnson & Johnson buying the Vogue natural hair products

H1 2016 deals summary

Written by

Emily Daw Senior Manager Transaction Services

Richard Hughes Director Transaction Services

“In the second half of 2015, deals over $50m added up to $227bn; in the first six months of 2016 this had fallen to $76bn.”

Top 10 global consumer deals in H1 2016

TargetTarget Nationality

Target Description Acquiror

Acquiror Nationality

Deal Value (US $m)

Sharp Corp Japan Electronics Hon Hai Precision Industry Co Ltd; SIO International Holdings Ltd

Taiwan 7,984

General Electric Co (Appliance business)

United States Household appliances Qingdao Haier Co Ltd China 5,400

Sun Products Corp United States Laundry/homecare Henkel AG & Co KGaA Germany 3,600

Vogue International Inc United States Personal Care Johnson & Johnson United States 3,300

Birra Peroni Srl; Koninklijke Grolsch NV; Miller Brands (UK) Ltd; Meantime Brewing Co Ltd

Italy Beverages Asahi Group Holdings Ltd Japan 2,864

WMF Wuerttembergische Metallwarenfabrik AG

Germany Household appliances SEB SA – Groupe SEB France 1,919

Artsana SpA Italy Personal Care InvestIndustrial LP Italy 856

Elizabeth Arden Inc United States Personal Care Revlon Inc United States 835

Bakkavor Group Ltd United Kingdom

Food Baupost Group LLC United States 787

Societe Des Produits Marnier Lapostolle SA

France Beverages Davide Campari-Milano SpA Italy 762

Post-acquisition divestmentSource: Dealogic; Deals above US$50m; Acquired Stake 50%+ *Note: Deal value includes assumption of debt

Emerging markets acquiring western brandsPremiumisation in Health & Beauty

company). On the PE side, the most notable deal was probably the Baupost stake in private-label food producer firm Bakkavor, not least because Baupost are known to take a slightly longer-term perspective than is typical in PE. Likewise the privately held investment group, JAB Holdings continued its buying spree in food and drink retail, with the $1.4bn purchase of Krispy Kreme Donuts.

Looking ahead, what do we expect? Most obviously, more disposals from AB InBev/SABMiller merger: Peroni and Grolsch were very sought-after brands snapped up by Asahi, and there are likely to be further opportunities, especially in Central Europe. Beyond that, although some of the deals in this half were relatively small, they could signal some emerging trends. The Quingdao Haier deal, for example, could herald more transactions in the ‘whiteware’ area of home appliances, as Chinese firms look to move up the industrial value chain and apply their technical expertise to staples like fridges and washing machines. This could see Chinese manufacturers becoming serious competitors to the established dominance of Germany and Japan in this area. Homecare products is another interesting area, as the big conglomerates look to establish (or acquire) genuinely global brands in this segment. And last, but definitely not least, Brexit. In the wake of the referendum sterling has fallen significantly, and although it’s since recovered slightly, sterling-based assets could well be looking cheap to opportunistic overseas buyers.

the Consumer – Life after Brexit

Brexit and the UK food sector

5

“The uncertainty of Brexit may at first seem unappetising, but can offer opportunities for those who are hungry.”

Written by

The vote for Brexit has created significant uncertainty in the UK food and agriculture sector. The EU accounted for c.70% of UK food and non-alcoholic drinks imports and exports in 2015 although in value terms exports to the EU (£8.9bn in 2015) are far smaller than imports from the EU (£24.6bn).The farming sector has benefited from direct EU payments of £2.4bn in 2015 via the Common Agriculture Policy (CAP). This is all likely to change and the direction of travel is currently unknown. While we don’t have the answer to what the outcome will look like, we believe that a sensible approach is breaking down the Brexit impact into its constituent factors impacting the food producing sector in the short and long term.

Understand consumers, work with grocers and manage the cost base

In the short term, we see the three factors impacting company performance:

• The outlook for consumer confidence and the potential impact on consumer spending.

• The weakening of the £ which by 28 July declined by more than 12% versus the € and c.11% versus the $ since 3 January 2016.

• Access to labour and stability in the factories in the short-term.

Although we may see an impact on consumer confidence on overall consumer spending, food has historically been relatively insulated from such falls in spending. Historically consumers have broadly maintained their food spend during a downturn, as a result of which it may become a larger part of their overall household expenditure. However, it may prompt continued changes in consumers’ shopping behaviour through trading down in product and channel.

However, companies that demonstrate value to consumers and work closely with grocers, for example by launching innovative products and supporting category management, may be able to turn Brexit into an opportunity and win market share. We saw in the last recession that there are opportunities to differentiate more in difficult times.

The UK is a net importer across most food commodities apart from beverages where the export of whiskey drives a trade surplus. A lower £ is likely to increase raw material costs for food manufacturers which could call a halt to the recent deflationary food environment.

We believe that switching to local supply will not mitigate this impact as increasing local demand will result in higher prices. Scope for substitution can be limited, e.g. some bakeries need to buy Canadian wheat which varies in protein content from UK wheat.

In the short term companies that are dependent on importing commodities are likely to be hedged to some extent. Over the next 12 months we would however expect price increases to be passed on to consumers especially if commodity prices start increasing as well as Sterling remaining at relative low levels. Timing of this is unclear and price increases may be limited to specific categories given continued strong competitive pressures in the UK grocery market.

Managing the cost base becomes more important and options deemed unnecessary in better times need to be reconsidered. SKU rationalisation to get rid of unprofitable products, changing recipes without sacrificing value and re-engineering the supply chain can offer dramatic cost saving opportunities.

Longer term impact is unclear but likely to cause further disruptionIn the longer term the key factors resulting in change for the sectors are likely to be freedom of movement, foreign direct investment, regulation and subsidies.

Access to labour in particular is a key factor for the UK food manufacturing industry as around a third of the food manufacturing workforce are EU migrants, the highest of any sector and a full 8 percentage points ahead of any other sector. Greater reliance on UK workers could impact the wage costs. In the longer term, this could prompt food manufacturers to rethink their business models. It’s arguable that in sectors like agriculture, the availability of flexible and cheap migrant labour has meant that capital owners may have made fewer investments in productivity.

It is too early to comment on the outcome of potential negotiations between the UK and the EU about trade and associated topics. We believe, however, that any significant deviation from the status quo, whether it’s a Norway like model or a trade based on WTO rules, is likely to lead to disruption and increasing costs.

There is no recipe and magic cure for an external shock such as Brexit. Companies in the food industry need to focus harder to maintain market share and margins.

Thomas Sengbusch Director Deals Strategy

Neil Coomber Partner Transaction Services

the Consumer – Life after Brexit

Online grocery: Is it delivering?Written by

Inge Cajot Partner Deals Strategy

Emily Daw Senior Manager Transaction Services

Online has become an indispensable part of the offering for most of the big UK grocers in the last few years. The appeal to the consumer is clear, but is it a model that delivers for the business too?

The City analyst Philip Dorgan once famously said: “Ocado begins with an o, ends with an o, and is worth zero”. But not only has the business survived (and showing strong operating profit growth), but the idea that underpins it seems stronger than ever. Home delivery may only account for around 5% of the UK grocery market, but that percentage is rising, and there’s no getting away from the fact that consumers really value home delivery for groceries. The challenge is getting them to pay enough for it

to make it a genuinely profitable part of the supermarket business model.

If anything, this challenge has become harder, rather than easier, as consumer expectations have evolved. People now expect delivery within a tighter timeframe (usually an hour), which places even greater pressure on the logistics of picking, packing, and transport, and even more so for a store-based delivery operation, rather than one like Ocado. So while the grocers have been moving towards shifting cost onto the consumer within the store, most notably with the greater use of self-service checkouts, the home delivery part of the puzzle is, if anything, going in the opposite direction. The grocers have managed to introduce minimum spend criteria,

and delivery charges are now pretty much standard, but a price of around £5 is unlikely to be enough to cover all the costs involved. We say ‘unlikely’ because the big supermarkets don’t split out the profitability of this aspect of their operations, but the suspicion has to be that home delivery is a loss leader, which they have to offer to protect market share.

So what’s the answer? Step one would be for the grocers to ensure they have the data they need to assess the efficiency of the home delivery operation. Systems set up to manage in-store operations may not offer the necessary transparency on all the elements of the very different delivery dynamic, not least because in-store costs are mainly fixed, and delivery costs are primarily variable (order processing, picking of orders, delivery). The supermarkets were ahead of other sectors in the use of customer data, which goes all the way back to Tesco Clubcard in the 1990s, but they may not be fully exploiting the additional data that online shopping can give them, where it’s possible to monitor not only what people buy, but what they look at. That, in turn, allows for personalised advertising, and opens up the possibility of some profitable partnerships with the consumer goods companies.

There are also other ways to recoup more cost from the customer. Some are hoping to get more take-up of annual subscriptions, which helps both with budgeting and cashflow, and Ocado offers a ‘Smart Pass’ for customers to waive delivery charges with a monthly, bi-annual or annual charge. Amazon Fresh’s new grocery offer charges a monthly fee on top of the cost of Prime, but offers a limited range of goods, so it’s not yet clear whether people will be prepared to pay more for a narrow range that will require them to complete their shopping elsewhere – when it comes to online grocery, people do seem to want a ‘one-stop shop’. Click & Collect is another way to shift the transport cost element back to the consumer, although it seems to be a slightly less appealing option for consumers.

However, the challenge may be more fundamental than that. Consumer expectations (and behaviour) may have evolved in the last decade, but the home shopping model really hasn’t. That may well be because keeping a lid on costs is simply so difficult. And some elements of the digital revolution may actually make it even harder for the grocers to make money: automated ordering via a fridge connected to the Internet of Things may well make life easier for consumers, but it doesn’t solve the cost and logistics issues facing the grocers. That in itself may be a good reason to rethink the model altogether, and check out other more innovative ways to deliver, both to customers and for the bottom line.

7

Whilst the average basket value is smaller, the number of deliveries is on the rise, e.g. Sainsbury’s reported online sales up 9% and orders up 15% (2016 Annual Report).

Specialist suppliers have been offering home delivery for years – veg boxes and organics brands like Abel & Cole and Riverford have been operating for some time now. Many of these are now expanding their ranges, and in the last few months we’ve also seen the rise of the ‘dinner in a box’. Brands like Gousto and Hello Fresh (recently teamed up with Jamie Oliver) will deliver all the ingredients and instructions to cook a ‘special’ meal at home.

It is, in essence, a ‘premium picking’ service with recipes attached, but the way it’s positioned means that the price point is very different from what a consumer would be prepared to pay for the same ingredients in-store or from a supermarket delivery. There could well be scope for the big grocery players to offer their own versions of this, especially given the breadth of their own ranges.

Innovation: The ‘doorstep diet’

the Consumer – Life after Brexit 9

The words ‘consumer goods’ tend to turn up attached to ‘fast-moving’, but these days that adjective applies as much to the environment these companies operate in as it does to the type of products they sell. Digital technology is opening up new ways to market products, and reach customers. Both the agile niche players and the big conglomerates are learning from what the retailers are doing. This isn’t just sharpening up their operations, it’s helping to make them more attractive to potential buyers, who now expect to see greater analysis of product performance, and profitability by channel, customer, and SKU.

We all know what Big Data can do in principle, but how does it apply to consumer goods in particular? In essence, there are two things data analysis can do: first, assess what you’re selling now, which is about profitability; and second, help predict what you should be selling in the future, which is about innovation.

Digging for treasure

Nigel Wilson Partner Financial Decisions and Analysis

Antonia Burridge Director Financial Decisions and Analysis

Written by

Inge Cajot Strategy

The big retailers have been exploiting Big Data for years; now the consumer goods sector is catching up, and discovering the value of turning information into insight.

In essence, there are two things data analysis can do: first, assess what you’re selling now, which is about profitability; and second, help predict what you should be selling in the future, which is about innovation.

Other clients have had light-bulb moments of a different kind – in a number of cases we’ve been able to prove that the products they thought were the most profitable were actually earning lower margins. One client was confident their premium range made the most money, but the data told a different story. The key is to collect all the relevant cost data, and that can be complex, especially for companies that manufacture, finish and sell from multiple locations, and sometimes across different markets. You can only establish accurate profit figures in those circumstances if you factor in the costs of moving goods about in the ‘internal supply chain’.

Innovation where it matters

Data analytics of sales, customer behaviour, and channels can help focus R&D and product development resources where they will make the most difference. In a fast-moving environment, it can spot emerging consumer trends, alert you to disruptive new market entrants, and identify changes to competitors’ strategies. And social media analysis can give you an accurate real-time picture of how consumers feel about your brand. Having accurate and detailed data can also redress the balance of power between consumer goods companies and retailers, by providing the proof that their products are selling, and their promotions are working.

And contrary to popular opinion, Big Data needn’t be a big headache, or even a big project. Many companies are collecting data they aren’t using, and often don’t really understand. It’s all about making sure you’ve understood the question you’re trying to answer, and the value you’re trying to unlock. You can then collect the data you need to turn information into knowledge. That’s what leads to smarter decision-making.

Data analysis can tell you not just what you’re selling, but to whom, when, how, and possibly even why as well. It can pinpoint what attracted consumers to a product in the first place, and track its lifecycle so you can detect when it’s getting tired and manage its decline. And by identifying buying patterns, it allows you to fine-tune your marketing to the end-user and target it much more effectively. It can even help with that Holy Grail of marketing, return on investment. For example, by using real-time data analytics we were able to prove to one of our clients that their investment in TV advertising was indeed resulting in higher sales. Their gut instinct said it was; the numbers proved it.

Thomas SengbuschDirector Deals Strategythomas.sengbusch@uk.pwc.com +44 (0) 20 7212 7997 +44 (0) 7725 069448

Our consumer team

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2016 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

160720-164643-CN-UK

Nigel WilsonPartner Financial Decisions and Analysis nigel.wilson@uk.pwc.com +44 (0) 20 7213 5769 +44 (0) 7715 484979

Antonia BurridgeDirector Financial Decisions and Analysis antonia.burridge@uk.pwc.com +44 (0) 20 7212 2753 +44 (0) 7702 674080

PwC recent consumer credentials

Neil SuttonChairman Corporate Finance neil.sutton@uk.pwc.com +44 (0) 20 7213 1075 +44 (0) 7802 794770

Richard HughesDirector Transaction Servicesrichard.j.hughes@uk.pwc.com +44 (0) 20 7212 3685 +44 (0) 7715 484377

Neil CoomberPartner Transaction Servicesneil.coomber@uk.pwc.com +44 (0) 20 7804 8258 +44 (0) 7739 874245

Inge CajotPartner Deals Strategyinge.cajot@uk.pwc.com +44 (0) 20 7804 6651 +44 (0) 7764 235425

Shane HorganPartner Delivering Deal Valueshane.horgan@uk.pwc.com +44 (0) 20 7804 5617 +44 (0) 7921 107323

Emily DawSenior Manager Transaction Servicesemily.v.daw@uk.pwc.com +44 (0) 7725 633114

Wendy Giles Director Transaction Serviceswendy.s.giles@uk.pwc.com +44 (0) 20 7804 8965 +44 (0) 7729 226846

Editorial team

Contributors

Kien TanDirector Deals Strategykien.tan@uk.pwc.com +44 (0) 20 7212 3910 +44 (0) 7880 552726

Lisa HookerPartner Transaction Serviceslisa.j.hooker@uk.pwc.com +44 (0) 20 7213 1172 +44 (0) 7802 882562

MPM Pet FoodThe sale of MPM Pet Food, a UK manufacturer of high-quality pet food manufacturer, to ECI Partners

Advised by PwC

McCormick & Company, Inc McCormick & Co’s bid for Premier Foods Plc, a leading UK branded food manufacturer

Advised by PwC

R&R Ice-cream/NestleJoint venture between Nestle and R&R Ice-Cream, with annual sales of c.1.9 billion pounds and 15,000 employees

Advised by PwC

DE BanketgroepAcquisition of the Dutch pastry (waffles) group by Group Poult

Advised by PwC

L’Oreal/Founders FactoryL’Oreal’s investment in the technology startup incubator Founders Factory

Advised by PwC

Bakkavor GroupInvestment by Baupost Group in Bakkavor Group, the UK-based food supplier

Advised by PwC