Market Spotlight: Is Europe's Consumer Sector Heading For More Consolidation?

September 25, 2022 | Blog

To say the consumer industry has been through the wringer over the last couple of years is an understatement – few sectors suffered the vicissitudes of the COVID-19 pandemic quite so starkly or have had to adjust so much in the wake of that crisis. Lockdowns froze bricks-and-mortar consumer players. Those in subsegments that could quickly pivot to e-commerce were better able than others to weather the storm.

But even once restrictions on movement eased, it became clear that consumer behaviors had changed and retail footfall has not recovered to pre-pandemic levels. So far, 2022 been defined by further challenges, from ongoing supply-chain issues to inflationary pressures and rising energy prices. Amid these problems, it seems increasingly likely that many consumer businesses will struggle to stay afloat later this year and in 2023.

Changing conditions
This tumult raises the prospect of high levels of distressed dealmaking in Europe’s consumer space. According to professional services firm RPC, in the UK only two distressed M&A deals came to fruition in H2 2021 and Q1 2022. Then, in Q2, conditions began to change noticeably, with four acquisitions of distressed retailers announced.

And per our latest Deal Drivers: EMEA HY 2022 report, the consumer sector saw the most material weakness in activity yoy: deal volume fell to 382, a 35% decline, and value saw a 12.6% dip to €29.2bn versus €33.4bn last year. The sector is also expected to see the third-highest volume of deals for the remainder of the year, after TMT and industrials and chemicals.

It seems increasingly likely that many consumer businesses will struggle to stay afloat later this year and in 2023

The European Distress Index, published by law firm Weil, Gotshal & Manges, affirms this darkening outlook. According to the June update to the index, corporate distress across major European markets rose to its highest level since August 2020, with German and UK businesses feeling the most stress. Regarding sectors of concern, retail and consumer goods was identified as the largest driver of distress, reflecting poor investment levels, volatility in equity markets, and the overall decline in household discretionary spending.

Private equity eyeing things up
One deal recently saw convenience-store chain McColl’s bought out of administration by supermarket group Morrisons, which is owned by PE giant Clayton Dubilier & Rice.

Similar transactions in which larger and well-capitalized players gobble up small and medium-sized outfits are likely to become the order of the day. In this consolidation boom, PE firms in particular, with their mountains of dry powder, can be expected to eye up these distressed assets.

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