Dive Brief:

• The consumer packaged goods (CPG) and retail sectors will experience "significant" merger and acquisition activity (M&A) in 2019 due to "a large supply of dry powder, falling asset prices, divestiture of non-core assets of strategic companies, and a continuous search for growth," A.T. Kearney said in a report that was emailed to sister publication Food Dive. The group found 88% of the more than 100 C-suite executives surveyed expected M&A in 2019 to be "equal or better than 2018 levels." CPG and retail M&A fell to $308 billion in 2018 from $392 billion a year earlier due largely to the absence of megadeals.
• The consulting firm said companies will increasingly prioritize growing their portfolio through the acquisition of local assets. A.T. Kearney said adding these operations will increase their presence in growth markets by getting close to the consumers they are targeting. In addition, legacy companies also will look to purchase key business components that they are missing, such as digital, analytics, e-commerce and supply chain.
• "A.T. Kearney is bullish as we look to the consumer and retail M&A market in 2019, and so are the executives surveyed for this report," the group said. "Armed with significant capital resources and realizing the need to rapidly integrate key capabilities into legacy companies, investors will be on the lookout for deals that can help them both remain competitive in the short term and grow over the long term."

Dive Insight:

As large CPG companies look to expand their reach into faster-growing segments, M&A is often viewed as a quicker and more cost-effective way to do it. Despite a drop last year, 2018 was full of companies bulking up through acquisitions, a trend that isn't expected to slow down this year.

Last year, Campbell Soup spent close to $5 billion on snacks maker Snyder's-Lance, and Hershey added Amplify Snack Brands, parent company of SkinnyPop, for $1.6 billion. Both of these deals were the largest in each company's history. General Mills entered the natural pet food space with an $8 billion purchase of Blue Buffalo Pet Products. Conagra Brands doubled-down on the resurgent frozen sector with its $10.9 billion purchase of Pinnacle Foods. 

Other deals were just as meaningful in 2018, including Coca-Cola's acquisition of U.K. coffeehouse purveyor Costa Coffee for $5.1 billion. PepsiCo pivoted away from sugary drinks with its $3.2 billion buy of SodaStream and Nestlé paid $7.15 billion to Starbucks to sell the coffee chain's coffee and tea in grocery stores and other outlets. Countless other smaller brands were acquired, too, including Tate's, Bare and Pirate Brands. 

A.T. Kearney noted that investors are focusing on legacy companies increasing their capabilities through the purchase of smaller, disruptive businesses. The value is less on size and more on what the companies do and how their work meets growing consumer trends. The "size and market share mean less and less, (and) small companies are, on average, valued at higher multiples than midsize ones," the report found. 

Still, the consulting firm noted that large CPG deals will remain relevant if "they are targeting new routes to market, exploring adjacencies and new capabilities." A.T. Kearney cited the tie-up between Keurig and Dr Pepper in 2018 that combined the popular in-home coffee and tea brewer with the ready-to-drink manufacturer of Sunkist, Bai, 7UP and Hawaiian Punch.

Another area that is expected to remain strong in 2019 is divestitures, A.T. Kearney said, as sellers are eager to sell non-core assets ahead of a possible economic downturn. This week, Kellogg said it would sell a range of brands including Keebler and Famous Amos to Ferrero for $1.3 billion. In addition, Kraft Heinz is reportedly looking to sell household staples like Maxwell House and Breakstone's, while Campbell Soup is on the verge of selling off some of its cookie and biscuit brands to Mondelez. 

Looking ahead, A.T. Kearney said global political tension, Brexit, trade wars and a potential recession, among other factors, are weighing on the business climate. Still, its report found that despite these uncertainties "M&A remains an accretive strategy for CPG and retail companies." It noted that 65% of "respondents believe M&As will continue creating value this year, and the resilience of the CPG industry to market conditions makes such companies strong investment candidates."

In February, executives attending the annual Consumer Analyst Group of New York conference in Florida said M&A remains part of their recipe for growth. They echoed the findings of A.T. Kearney, noting the focus is likely to be on smaller deals that give the food and beverage makers scale, entrance into new markets or faster-growing categories to complement their existing portfolios.