Large consumer goods companies have been losing out in the race for growth, and M&A is high on their agenda as they seek to reignite top-line performance.

Despite overall annual market growth of 4% from 2012 to 2019, the 30 largest consumer goods companies grew less than 1%, a growth gap further widened by Covid-19. Meanwhile, prior to the pandemic, insurgent brands captured more than 30% of the growth across the categories in which they exist, despite accounting for only 3% of the market share.

Growth is key to boosting shareholder returns in consumer products. Our research shows that every additional percentage point of growth acquired is rewarded by higher enterprise value (EV).

That’s why large consumer goods companies are buying small, high-growth brands in record numbers. These growth-focused scope and capability deals now account for 75% of M&A volume among top consumer goods companies, up from less than 50% a decade ago. This increased activity is driving greater competition for attractive assets.

Tapping into insurgent brand growth

With high-growth synergies baked into the deal thesis of small-brand acquisitions, acquirers often are disappointed with post-acquisition growth rates. We analysed the performance of 56 insurgent brands that were acquired between 2014 and 2019 and found average growth rates slowed by 50% post-acquisition.

While that slower average growth still represents 15 times that of incumbent brands, it falls short of what acquirers expect. Some of the slowdowns are natural as brands become larger. Much of it, however, is preventable. When done right, we see these deals generate substantial value and improve an incumbent’s core organic growth profile.

The successful acquirers of small high-growth assets have a tried-and-tested approach that focuses on getting a few key things right: They recognize how insurgent brand deals are unique, they tailor their M&A playbook accordingly, and they build the repeatable capabilities to do those deals frequently and successfully. We’ll walk through each of these elements.

Recognizing that insurgent brand deals are unique

First, the deal thesis is predicated on growth. Assessing and delivering revenue synergies is much harder than doing so for cost and requires having unique parenting advantages in place

Second, the acquirer needs to embrace the mission of the insurgent brand and gain a deep understanding of its growth model before it can design a suitable value creation and integration plan. Growth ambitions must balance the desire for aggressive expansion with the need for sustained brand health. Overexpanding the target’s brand too quickly to benefit from the parent’s distribution advantage often results in lower long-term growth.

Third, talent and culture are critical to any deal, but they can be hard to assess. Identifying key talent to retain is particularly critical in capability deals in which that talent forms the core of the deal thesis. Understanding the longer-term intentions of the founder and how critical they are to the success of the business is key. Broadly communicating the reasons for the acquisition and the integration plan going forward helps avoid unwanted talent churn.

Finally, insurgent brand deals often are more complex and don’t tend to follow a typical deal process. For example, a small brand’s shorter track record means that performance data availability may be limited (and often in untracked alternative channels), requiring creative diligence techniques and data tools to compensate, such as Pyxis for online performance analytics. Increased competition from other buyers, such as private equity, and the availability of other forms of investment, such as initial public offerings and corporate venture capital, have led to higher multiples and therefore the need for greater conviction to make a deal work.

Tailoring the M&A playbook

To account for these differences, successful acquirers have tailored their traditional M&A playbook across each element of the value chain.

M&A strategy must be grounded in a future-back view of how the sector will evolve in order to determine the right portfolio play, assess a target’s potential to meet new consumer needs, and defend against emerging competitors in the long run.

The deal thesis should be tailored to the uniqueness of insurgent brands. Clarity on the distinctive parenting advantage is critical to unlocking value creation.

Top-line growth synergies and expectations for capability transfers need to be defendable, and costs associated with scaling small-brand supply chains must be considered. The target’s culture, purpose, and strategic values in areas such as environmental, social, and corporate governance must fit with the acquirer’s own. There should be a clear plan for the founder’s future role as well as what should be integrated and what should be kept separate.

Due diligence must stretch beyond the traditional financial boundaries to test a target brand’s long-term growth potential and scalability.

The value creation plan should set realistic growth expectations to avoid the risk of overpaying and overstretching the brand to compensate. Acquirers need to apply the insurgent growth model, which includes an emphasis on driving velocity and not just distribution. This requires planning for how capability transfer can improve the base business—and what it will take. And margin expectations must be managed, recognizing that there may be higher initial costs and that price pressures will come into effect as distribution scales.

Building repeatable M&A capabilities

Consumer goods companies that are frequent acquirers outperform their peers, with twice the sales growth rate, 1.8 times profit growth, and 1.2 times total shareholder return (TSR) growth than the industry average. The benefit to building repeatable M&A capabilities is even more true for acquirers that are generating a regular flow of small deals.

Given that many insurgent deals are part of a series of acquisitions to build a broader portfolio, creating those repeatable capabilities pays off over time. Winning acquirers establish learning loops and regularly reassess to improve their M&A performance.

Ultimately, at a time when the growth gap is widening, incumbent brands need small-brand deals to recapture top-line growth and boost TSR. While challenging to get right, these acquisitions can deliver substantial value. Success requires a clear understanding of what makes insurgent assets unique; an updated M&A playbook; and new, repeatable capabilities.

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